The Oddness: Thanks to the US Government, I payed only 60% of my Goverment fine

Hi Everyone,

Sorry for the absence but I am back at last.

Have you ever wondered why the fines assessed to companies never really seems to change anyone’s behavior? It could have something to do with the fact that in many cases, the fine is considered a tax-deductible business expense. That doesn’t make much sense to me.

In the US, tax code 162(f) forbids the deduction of ‘‘any fine or similar penalty paid to a government for the violation of any law.” On the face of it, companies (and people for that matter) should not be able to deduct their fines. The section quoted above has been ruled to affect only punitive fines, so fines with the primary purpose of restitution or remedial payments are tax-deductible.

In many settlements the nature of the fine is explicitly declared non-punitive as a requirement of the settlement along with no admission of guilt from the company. This means that they can deduct the penalties from their taxable income.

This leads to situations like the following:

In 2006 Boeing settled a criminal and civil investigation by the Department of Defense into contractor improprieties for $615 millions dollars (tax-deductible of course)

When the Exxon Valdez crashed they were fined $1.1 billion dollars by the US government but the after tax cost was reportedly only $524 million.

For a more complete idea of state of tax treatment I recommend you read Robert W. Wood’s Cleaning Up: Tax Deductions for Restitution, Fines and Penalties.

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