Payments for restitution may be deductible if not in lieu of a fine.

• Author: Gleason, Joseph
• Position: Brief Article

Sec. 162(a) allows a deduction for ordinary and necessary expenses paid or incurred ... in carrying on any trade or business." In the case of litigation, ordinary and necessary expenses include legal fees, court costs and amounts paid in settlement of litigation, as long as the costs are in connection with the taxpayer's business. However, Sec. 162(f) specifically denies a deduction for "any fine or similar penalty paid to a government for the violation of any law."

But what if, in lieu of paying a fine or penalty, a taxpayer makes a charitable contribution? Rev. Rul. 79-148 held that an amount paid to a charitable organization in satisfaction of a condition of probation was not deductible under either Sec. 162 or 170. In the ruling, the amount of the contribution was equal to the maximum fine that could have been imposed. Because the payment was made solely to avoid the fine, the IRS held that the payment was not deductible as either an ordinary business expense, or a charitable contribution.

The treatment of restitution made in lieu of paying a fine is not as clear. The Ninth Circuit, in Waldman, 850 F2d 611 (1988), concluded that the payment of restitution to a victim was a fine or penalty paid to the government for a violation of law; it was thus not deductible under Sec...