Tax Treatment of Fines and Penalties: The Elephant in the Room

The federal government has become more aggressive in extracting fines and penalties for alleged corporate malfeasance, with a few jaw-dropping examples becoming headlines. Missing from most accounts, write King & Spalding attorneys Abraham N.M. Shashy Jr. and Nathan E. Clukey, is the tax treatment of the fine or penalty. What that treatment is varies widely, but it can be as high as 35 percent of settlement or judgment. When faced with serious allegations, corporate counsel need to weigh “not only the risks and hazards of litigation, but also determine early on whether any portion of a possible settlement might be deductible.” The authors discuss the facts, circumstances and possible strategies that can affect that determination.