Posted: 16 Jun 2015 12:56 PM PDT
By John R. Fleder –
When companies and individuals are “asked” (or told by a court) to pay money to FDA/DOJ as part of a resolution of a civil case, the sting of making the payment can be severe. A question many ask is, “Can we deduct on our federal tax return any monetary payment we make to the government?” Obviously, a yes answer to that question means in many instances that the IRS would return to the defendant via a tax deduction a share of the money paid out to the government.
Under Section 162(f) of the U.S. Tax Code, no tax deduction is allowed for any fine or similar payment paid to the government for a violation of a law. Treasury Reg. 1.162-21 has interpreted that statutory provision by defining a “fine or similar penalty” to cover among other things: (1) money paid in a criminal proceeding for commission of a crime; and (2) a civil penalty imposed by federal or state law. That regulation states that compensatory damages paid to the government are not a fine or penalty.
In FDA cases, there have numerous situations where corporations and others have made monetary payments to the government where the deductibility of the payments is a major issue for the person making the payment. FDA and DOJ will almost certainly give no guidance to the person regarding whether the payments will be tax deductible.
Last year, the United States Court of Appeals for the First Circuit ruled, in Fresenius Medical Care Holdings, Inc. v. United States, that a company could deduct $127,000,000 paid to resolve a federal False Claims Act case. The court rejected the government’s position that the company could not deduct the amount of the payment, absent an agreement with the government regarding the deductibility of that amount. However, until recently, we do not believe that either the IRS or a court has ever publicly issued any ruling on this issue in the context of an FDA case.
As we recently learned from FDA News, that changed when on January 26, 2015, the IRS’s Office of Chief Counsel issued aruling (released on May 22, 2015) involving an unidentified drug company. In that matter, the company entered into a cGMP Consent Decree with FDA and DOJ whereby the company agreed to make a payment for what the IRS called was “equitable disgorgement of profits for alleged violations of the FDC Act.” The IRS concluded that although the evidence of FDA’s “intent” regarding whether the FDA considered the payment to be deductible was ambiguous, the amount paid by the company was indeed tax deductible. The parties had a provision in the Consent Decree stating that all monetary payments by the company pursuant to the Consent Decree were “not a fine, penalty, forfeiture, or payment in lieu thereof.” Clearly, the company was trying to establish that the payments would therefore be tax deductible. The IRS noted that because this language did not explicitly address the tax consequences of payments to be made to the government under the Consent Decree, the language was ambiguous because there was no evidence that the language was “intended to address tax consequences.” Nevertheless, the IRS did find that the monetary payments in that matter were tax deductible, largely relying on the conclusion that FDA did not intend to punish the taxpayer.
What are companies and individuals to do to maximize the chances that monetary payments will be tax deductible? When defense counsel are negotiating with FDA and DOJ, tax experts should be consulted so that any final agreement not only contains the most favorable terms possible on FDA issues, but also the most favorable language possible to support the deductibility of any payment under the agreement, consistent with applicable law.
When companies and individuals are “asked” (or told by a court) to pay money to FDA/DOJ as part of a resolution of a civil case, the sting of making the payment can be severe. A question many ask is, “Can we deduct on our federal tax return any monetary payment we make to the government?” Obviously, a yes answer to that question means in many instances that the IRS would return to the defendant via a tax deduction a share of the money paid out to the government.
Under Section 162(f) of the U.S. Tax Code, no tax deduction is allowed for any fine or similar payment paid to the government for a violation of a law. Treasury Reg. 1.162-21 has interpreted that statutory provision by defining a “fine or similar penalty” to cover among other things: (1) money paid in a criminal proceeding for commission of a crime; and (2) a civil penalty imposed by federal or state law. That regulation states that compensatory damages paid to the government are not a fine or penalty.
In FDA cases, there have numerous situations where corporations and others have made monetary payments to the government where the deductibility of the payments is a major issue for the person making the payment. FDA and DOJ will almost certainly give no guidance to the person regarding whether the payments will be tax deductible.
Last year, the United States Court of Appeals for the First Circuit ruled, in Fresenius Medical Care Holdings, Inc. v. United States, that a company could deduct $127,000,000 paid to resolve a federal False Claims Act case. The court rejected the government’s position that the company could not deduct the amount of the payment, absent an agreement with the government regarding the deductibility of that amount. However, until recently, we do not believe that either the IRS or a court has ever publicly issued any ruling on this issue in the context of an FDA case.
As we recently learned from FDA News, that changed when on January 26, 2015, the IRS’s Office of Chief Counsel issued aruling (released on May 22, 2015) involving an unidentified drug company. In that matter, the company entered into a cGMP Consent Decree with FDA and DOJ whereby the company agreed to make a payment for what the IRS called was “equitable disgorgement of profits for alleged violations of the FDC Act.” The IRS concluded that although the evidence of FDA’s “intent” regarding whether the FDA considered the payment to be deductible was ambiguous, the amount paid by the company was indeed tax deductible. The parties had a provision in the Consent Decree stating that all monetary payments by the company pursuant to the Consent Decree were “not a fine, penalty, forfeiture, or payment in lieu thereof.” Clearly, the company was trying to establish that the payments would therefore be tax deductible. The IRS noted that because this language did not explicitly address the tax consequences of payments to be made to the government under the Consent Decree, the language was ambiguous because there was no evidence that the language was “intended to address tax consequences.” Nevertheless, the IRS did find that the monetary payments in that matter were tax deductible, largely relying on the conclusion that FDA did not intend to punish the taxpayer.
What are companies and individuals to do to maximize the chances that monetary payments will be tax deductible? When defense counsel are negotiating with FDA and DOJ, tax experts should be consulted so that any final agreement not only contains the most favorable terms possible on FDA issues, but also the most favorable language possible to support the deductibility of any payment under the agreement, consistent with applicable law.
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