Deductibility of Illegal Payments, Fines, and Penalties, written by Christopher G. Stoneman, Esq. and Thomas D. Sykes, Esq., explores the requirements of §162(c) and (f), which specifically address the deductibility of bribes, kickbacks, other illegal payments, fines, and penalties.  

This Portfolio briefly describes the general requirements that are applicable to all expense deductions, including those for bribes, kickbacks, illegal payments, fines, and penalties. It also considers the extent to which expenditures must be capitalized, deducted as a loss, treated as cost of goods sold, or treated as something other than a currently deductible expense.

Deductibility of Illegal Payments, Fines, and Penalties explores the meaning of “ordinary and necessary” under §162(a) (trade or business expenses) and §212 (investment or tax-related expenses). It also considers the extent to which expenditures must be capitalized, deducted as a loss, treated as cost of goods sold, or treated as something other than a currently deductible expense.

Deductibility of Illegal Payments, Fines, and Penalties allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.

Detailed Analysis

I. Deductibility of Illegal Payments, Fines, and Penalties: Background and General Principles

II. Deductibility under § 162(c)(1) of Illegal Payments to Foreign and Non-Foreign Government Officials and Employees

Introductory Material

A. Illegal Payments to Foreign Government Officials or Employees

B. Illegal Bribes or Kickbacks to Government Officials or Employees Who Are Not Officials or Employees of a Foreign Government

III. Deductibility under § 162(c)(2) of Illegal Payments to Persons Other Than Government Officials or Employees

Introductory Material

A. The Requirement That the State Statute Be “Generally Enforced”

B. Violation of Federal Law under § 162(c)(2)

C. “Other Illegal Payment”: Payments Illegal in and of Themselves

D. Burden of Proof under § 162(c)(2)

IV. Deductibility under § 162(c)(3) of Kickbacks, Rebates, or Bribes under the Medicare or Medicaid System

V. Deductibility of Fines and Similar Penalties under § 162(f)

VI. The “All-Inclusiveness” of the Public Policy Considerations Set Out in § 162(c), (f) and (g)

A. Public Policy Considerations as Applicable to Deductions under § 165 and § 212

B. Public Policy Considerations as Applicable to Inclusions in Basis under § § 263A and 1012

C. Public Policy Considerations as Applicable to Exclusions from Gross Income

VII. Overview of General Requirements for an Expense Deduction

A. Introduction

B. Expense Deduction under § 162

1. Expense Must Be Incurred in Carrying on a Trade or Business

2. Expense Must Be Ordinary and Necessary

3. Expense Must Be Reasonable in Amount

4. Expense Must Be Paid or Incurred During Taxable Year

5. Expense Must Be Paid by Person to Whom Services Are Rendered

C. Expense Deduction under § 212

1. Introduction

2. Expense Paid or Incurred in Connection with the Production or Collection of Income

a. Production or Collection

b. Distinction between Disposition of Property and Collection of Income

c. Distinctions between Acquisition, Perfection of an Undefined Income Interest, and Collection of Income

d. Expense Incurred in Involuntary Dispositions

e. Treatment of Expense Where Sale Not Consummated

3. Expense Paid or Incurred in Connection with the Management, Conservation, or Maintenance of Property for the Production of Income

4. Expense Paid in Connection with the Determination, Collection, or Refund of Any Tax

D. Expense Must Not Be Personal Expense or Capital Expenditure

1. Personal Expense

2. Capital Expenditure

3. Origin-of-the-Claim Test

E. Allocation of Expenses That Are Partly Personal and Partly Capital

Working Papers

Table of Worksheets

Worksheet 1 Senate Report to the Tax Reform Act of 1969 (H.R. 13270), S. Rep. No. 552, 91st Cong., 1st Sess. p. 274 (1969), 1969-3 C.B. 596

Worksheet 2 Senate Report to The International Anti-Bribery Act of 1998, S. Rep. No. 277, 105th Cong., 2d Sess. (July 30, 1998)

Worksheet 3 Aerospace Industry Coordinated Issue Paper - Deductibility of Illegal Bribes, Kickbacks and Other Payments

Worksheet 4 Internal Revenue Manual (IRM), MSSP Training Guide

Worksheet 5 Field Service Advice 200128004

Worksheet 6 Technical Advice Memorandum 200502041

Worksheet 7 General Counsel Memorandum 38547

Worksheet 8 General Counsel Memorandum 39465 - Deductibility of Legal Fees Incurred by Corporation in Defending Its Employees Against Civil and Criminal Charges

Worksheet 9 General Counsel Memorandum 39596

Worksheet 10 Technical Advice Memorandum 200629030

Bibliography

OFFICIAL

Legislative History:

Treasury Rulings:

Cases:

UNOFFICIAL

Periodicals:

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