U.S. Corporation Cannot Deduct Fine Paid to Commission of European Community.
(Parker Tax Publishing August 8, 2014)

In determining if a fine paid to the Commission of the European Community was deductible, the phrase "government of a foreign country," as used in Reg. Sec. 1.162-21(a) denying deductions for fines paid to governments, may refer both to the government of a single foreign country and to the governments of two or more foreign countries. Guardian Industries Corp. v. Comm'r, 143 T.C. No. 1 (7/17/14).

In 2008, Guardian Industries Corp., a U.S. corporation, paid a fine to the Commission of the European Community (Commission) for participating in a price-fixing cartel that violated the competition provisions of European Community (EC) law. Guardian Industries subsequently claimed a deduction for the payment on its 2008 federal income tax return. The IRS disallowed the deduction under Code Sec. 162(f) on the basis that the Commission is an instrumentality of the government of a foreign country within the meaning of Reg. Sec. 1.162-21(a).

Under Code Sec. 162(f), no deduction is allowed for any fine or similar penalty paid to a government for the violation of any law. Reg. Sec. 1.162-21(a)(1) provides, in part, that no deduction is allowed for any fine or similar penalty paid to the government of a foreign country. Reg. Sec. 1.162-21(a)(3) provides that no deduction is allowed for any fine or similar penalty paid to a political subdivision of, or corporation or other entity serving as an agency or instrumentality of the government of a foreign country.

Guardian Industries did not dispute that the payment it made was a fine or similar penalty or that the payment was made for the violation of a law. Its central argument hinged on its assertion that the phrase "agency or instrumentality" does have a plain meaning and, thus, the common sense reading of the term demonstrates that such term encompasses only entities acting as divisions or subsidiary branches of a government. According to Guardian Industries, an entity qualifies as an "agency or instrumentality" of a foreign government only if it, (1) is controlled by that government, (2) acts exclusively on behalf of that government, and (3) is subordinate to that government. Based on this test, Guardian Industries argued the Commission qualified as an agency or instrumentality of a foreign government.

The Tax Court disagreed and held that the phrase "government of a foreign country," as used in Reg. Sec. 1.162-21(a) may refer both to the government of a single foreign country and to the governments of two or more foreign countries. According to the court, the Commission is an entity serving as an instrumentality of the EC member states within the meaning of Reg. Sec. 1.162-21(a)(2) and (3). As a result, the court concluded that Guardian Industries could not deduct the fine it paid to the Commission.

For a discussion of fees and taxes that are nondeductible, see Parker Tax ¶83,145. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker's Tax Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker's Tax Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker's Tax Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker's Tax Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com