Forfeiture payment under a deferred prosecution agreement is not deductible

Plain-English summary

A taxpayer made a payment to the government in lieu of criminal or civil forfeiture under a deferred prosecution agreement. Chief Counsel advised that the payment was a fine or similar penalty and therefore was not deductible as a business expense under section 162. The agreement settled the taxpayer's potential liability for conduct violating criminal statutes, which brought the payment within the regulation covering settlements of actual or potential fine or penalty liabilities. Neither the absence of a guilty or no-contest plea nor the government's intention to use forfeited funds to compensate victims changed the payment into deductible restitution.

Ruling snapshot

• Question: Could the taxpayer deduct a payment made in lieu of forfeiture under a deferred prosecution agreement?
• Outcome: Advice given, the payment was not deductible
• Key authorities: IRC §§ 162(a) and 162(f); Treas. Reg. § 1.162-21(b)

Full text (IRS public release)

ID: CCA-10202014-14 [Third Party Communication:

UILC: 162.21-01 Date of Communication: Month DD, YYYY]

Number: 201513003
Release Date: 3/27/2015
From: -----------------------
Sent: October 20, 2014
To: ----------------
Cc: --------------------
Bcc:
Subject: IRC 162(f) Issue

We have reviewed the documents you submitted regarding the taxpayer’s payment to
the government in lieu of forfeiture and discussed the various issues. We have
concluded that the payment is not deductible under section 162(a) based on the
exception contained in section 162(f) and the regulations thereunder. Specifically, the
code and regulations state that no deduction shall be allowed under section 162(a) for
any fine or similar penalty paid to the government of the United States. Treas. Reg.
section 1.162-21(b)(1)(iii) states that a fine or similar penalty includes an amount paid in
settlement of the taxpayer’s actual or potential liability for a civil or criminal fine or
penalty. The deferred prosecution agreement (DPA) states that the taxpayer has
violated several criminal statutes and provides for a forfeiture payment in lieu of
proceedings that would result in criminal and/or civil forfeiture under 18 U.S.C. sections
981 and 982 and 28 U.S.C. section 2461(c). The DPA is a settlement for purposes of
the regulation as it is an agreement between the taxpayer and the government that
resolves all issues associated with the taxpayer’s criminal conduct in exchange for
certain consideration outlined in the DPA, including a payment in lieu of forfeiture. It is
the Service’s longstanding position that a monetary forfeiture under the U.S.C. sections
the taxpayer violated, as well as the sections referenced above, is a civil or criminal fine
or penalty for purposes of the regulation. As such, the money paid in lieu of forfeiture
pursuant to the DPA resolves the taxpayer’s actual or potential liability for a civil or
criminal fine or penalty and is not deductible under section 162.

The taxpayer argues that Treas. Reg. sections 1.162-21(b)(1) and (2) do not prohibit it
from deducting the forfeiture payment because (1) it has not pled guilty or nolo
contendere in any court proceeding and (2) the forfeiture payment is earmarked for
restitution to the victims of the fraud. The first argument requiring a plea of guilty or nolo
contendere has no merit, as a settlement of the taxpayer’s actual or potential liability is
included under section 1.162-21(b)(1)(iii). Likewise, the taxpayer’s second argument
that the forfeited funds will be used to compensate victims has no merit, as the DPA
specifically states that the payment is in lieu of criminal and/or civil forfeiture. The DPA
2

is a negotiated settlement between the government and the taxpayer that specifically
requires a forfeiture payment rather than requiring that part or all of the payment be
allocated as restitution. The Department of Justice has the authority to use forfeited
funds at its discretion for various uses including payment to victims. DoJ’s stated
intention for the use of the funds does not change the character of the payment from a
non-deductible forfeiture to a potentially deductible restitution payment.

I have attached some filed briefs from an ongoing case involving similar issues. These
briefs should be instructive as to the service’s position and case law on this
subject. Please let me know if you have any questions or would like to discuss this
further.

Regards-

Attachments: Joseph P. Nacchio and Anne M. Esker v. United States of America,
No. 12-20 T (Court of Claims)

(1) Motion of the United States for Summary Judgment;
(2) Plaintiffs’ Opposition to the Motion of the United States for Summary Judgment and
Plaintiffs’ Cross-Motion for Partial Summary Judgment;
(3) The United States’ Reply Brief in Support of its Motion for Summary Judgment and
Response to Plaintiffs’ Cross-Motion for Partial Summary Judgment;
(4) The United States’ Supplemental Brief in Support of its Motion for Summary
Judgment