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Thursday, October 30, 2014

Damages: Deductible?

It's a fact of life that businesses get sued. Even if they win, there are legal and related fees. What if they lose and have to pay compensatory and perhaps also punitive damages? Perhaps also some fines to the government?  What is deductible for tax purposes? A recent case from the First Circuit Court dealt with an action involving the False Claims Act with total damages of just over $486 million!

I've got a short article in the AICPA Corporate Taxation Insider about the case, Fresenius Medical Care Holdings, Inc., No. 13-2144 (1st Cir. 8/13/14).  I also had a blog post (8/29/14) about this case a few weeks ago, noting the challenging vocabulary used by the judge and a few quotes from Shakespeare he included.

This topic also raises an important consideration for tax reform purposes.  Should any of these damages be tax deductible?  Arguably, compensatory damages (for making the injured party whole), seem to be a part of business - accidents will happen, mistakes will be made.  But should all mistakes be deductible or would it be greater punishment to deny a tax reduction for the damages?  I note two legislative proposals at the end of the article.  On a related topic, President Obama proposes to deny a deduction for punitive damages (FY2015 Greenbook, page 101).

Here is the article:
  To be or not to be compensatory, AICPA Corporate Taxation Insider, 10/30/14

What do you think a business should be allowed to deduct and not deduct regarding various damages?

1 comment:

Greg Karnos said...

My vote is no, for the same reason fines and penalties paid to the government aren't deductible. . . I don't like my tax dollars subsidizing the kinds of behaviors that give rise to punitive damages.