"The question is whether the $ amount that Taxpayer paid to the three plaintiff states should be considered an ordinary business expense or a non-deductible penalty. The answer to this question turns on whether the payment was meant to cover the actual damages that the plaintiff states allegedly incurred through the defendant’s conduct, or if the payment is meant to be a punitive measure to discourage future anti-competitive behavior."
"The settlement document does not explicitly allocate the money into one category or the other. However, the Federal statute as well as the State X statute that the suit invoked speak only of fines, not of damages. Additionally, the amount that Taxpayer paid was below the maximum that either act allows for a penalty. Presumably, then, all settlement money that flowed to State X is non-deductible, all of it having been paid as penalty. State Y and State Z law are less clear about whether an anti-trust monetary judgment is a penalty or simple damages. However, the fact that those states also filed their complaint under federal anti-trust statutes, and the amount that Taxpayer paid was well within the penalty limits of that law, means that the payment can reasonably be treated as a penalty."
"Furthermore, the plaintiffs’ complaint specifically requests civil penalties, at paragraph 51, while it does not specifically request compensatory damages anywhere. It would be inconsistent with the relief requested to assume that the Taxpayer’s $ amount 1 payment constituted deductible damages."
"Taxpayer may argue that the payment was compensation for damages in the three states, or that it was an amount paid outside of anti-trust law to settle the suit. It may point to the fact that the settlement does not admit any wrongdoing on the company’s part. The admission of wrongdoing is not necessary for IRC 162(f) to apply; all that is necessary is that the payment be most properly characterized as a penalty. Here, Taxpayer paid $ amount 1 to settle anti-trust allegations, and had Taxpayer been found liable for these allegations, it would have been subject to a fine of up to $10 million."
You can read the guidance here.
