In this blog post, Natasha Goldvug discusses a recently released internal IRS memo prohibiting an FCPA defendant from deducting the disgorged amount. The memo explains that "a payment imposed primarily for purposes of deterrence and punishment is not deductible under section 162(f)." According to the memo, it depends on the facts of each case whether or not a disgorgement payment is primarily punitive or compensatory. Goldvug points out that the SEC and the IRS have not always been consistent in their treatment of these payments noting, "the SEC has historically viewed disgorgement as only an equitable remedy that may not be imposed if it is 'punitive.'" A taxpayer potentially subject to disgorgement may argue to the SEC that disgorgement should not be imposed because, for tax purposes, disgorgement would be treated as "punitive." If disgorgement was imposed, the taxpayer could argue to the Service that the amounts disgorged should be deductible because they are equitable, not "punitive," in the eyes of the SEC."
The memo is not precedential but may have serious implications for taxpayers. Goldvug points out that it may reflect the position that could be taken in audits of other taxpayers who have made disgorgement payments to resolve FCPA enforcement actions. "If the Memorandum reflects a movement by the IRS to challenge deductions of disgorgement payments in FCPA cases, the question is largely a factual one. Taxpayers still have an advantage over the IRS for ensuring favorable facts are memorialized at the time the FCPA case is resolved."