The foreign country filed an indictment charging the taxpayer and other participants, including the taxpayer's subsidiary, with conspiracy to commit a felony in violation of the laws of the foreign country. The indictment charged that the subsidiary paid various foreign government officials in exchange for favorable contracts.
No trial was not held on the charges. Instead the taxpayer and the foreign country entered into a settlement and non-prosecution agreement resolving all matters relating to the criminal charges contained in the indictments.
The agreement specifically stated that the taxpayer was to make the payment “in consideration of the withdrawal of the Criminal Charges and the other promises” and that the parties put their disagreement with respect to the charges aside “to avoid the burden, inconvenience and expense of further protracted and costly litigation.”
The agreement specifically stated that the taxpayer was to make the payment “in consideration of the withdrawal of the Criminal Charges and the other promises” and that the parties put their disagreement with respect to the charges aside “to avoid the burden, inconvenience and expense of further protracted and costly litigation.”
The Chief Counsel's Office advised in 20154702F that the exception in §162(f) states that no deduction is allowed for any fine or similar penalty paid to the government of a foreign country, and that a “fine or similar penalty” includes an amount paid in settlement of a taxpayer's actual or potential liability for a civil or criminal fine or penalty. According to the Chief Counsel's Office, the settlement amount payment is therefore a fine or similar penalty paid to a government for violation of law, and the taxpayer's deduction for that payment is prohibited under §162(f).
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