Rev. Rul. 80-211
Rev. Rul. 80-211; 1980-2 C.B. 57
- Cross-Reference
26 CFR 1.162-1: Business expenses.
- Code Sections
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
ISSUE
Are amounts paid as punitive damages that are incurred in the ordinary conduct of the taxpayer's business operations deductible as an ordinary and necessary business expense under section 162 of the Internal Revenue Code?
FACTS
X, a domestic corporation, deducted a payment identified as punitive damages as an ordinary and necessary business expense. X's obligation to make such payment arose as a result of a civil lawsuit in which X was sued by Y, another domestic corporation, for breach of contract and fraud in connection with the ordinary conduct of its business activities. Judgment was rendered against X by the court.
LAW AND ANALYSIS
Section 162 of the Code provides that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.
Section 162(c) of the Code provides that no deduction shall be allowed under section 162(a) for any illegal payment, bribe, kickback, or rebate when made under any of the circumstances or to or by any of the persons described in section 162(c).
Section 1.162-1(a) of the Income Tax Regulations provides that business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business.
In applying these provisions, the courts and the Service have recognized that payments made in settlement of lawsuits are deductible if the acts which gave rise to the litigation were performed in the ordinary conduct of the taxpayer's business. See, for example, Rev. Rul. 78-210, 1978-1 C.B. 39; Rev. Rul. 69-491, 1969-2 C.B. 22; Kornhauser v. United States, 276 U.S. 145, T.D. 4222, VII-2 C.B. 267 (1928); Mulgrew Blacktop, Inc. v. United States, 311 F. Supp. 570 (S.D. Iowa 1969); and Cochrane v. Commissioner, 23 B.T.A. 202 (1931), acq. X-2 C.B. 14 (1931).
The Senate Finance Committee in S. Rept. 91-522, 91st Cong., 1st Sess. (1969), 1969-3 C.B. 423, 597, stated that the additions to section 162 of the Code made in section 902 of the Tax Reform Act of 1969, 1969-3 C.B. 10, 147, denying deductions for the following expenditures were intended to be all inclusive (Emphasis added): fines or similar penalties paid to a government for violation of any law, a portion of treble damage payments under the antitrust laws, bribes to public officials, and other unlawful bribes or "kickbacks".
In the present situation X was sued by another corporation for fraudulent acts and contractual violations perpetuated in the ordinary conduct of its business activities. Therefore, payment of the judgment by X, including amounts identified as punitive damages, is an ordinary and necessary cost of doing business. Further, the action against X is not based upon any of the prohibited activities described in section 162(c) of the Code.
HOLDING
Amounts paid as punitive damages incurred by the taxpayer in the ordinary conduct of its business operations are deductible as an ordinary and necessary business expense under section 162 of the Code.
- Cross-Reference
26 CFR 1.162-1: Business expenses.
- Code Sections
- LanguageEnglish
- Tax Analysts Electronic Citationnot available