Recently released final regulations under section 162(f) of the Internal Revenue Code of 1986, as amended (the “Code”), make it a necessity to properly draft settlement agreements and court orders between a taxpayer and the government (federal, state or local or any of their agencies) to put the taxpayer in the best tax position possible.  Code Section 162(f) was amended by the Tax Cuts and Jobs Act in 2017 to limit the deductibility of payments made to the government with respect to violations of law or the investigation or inquiry by the government into a potential violation of law by a taxpayer (“Government Payments”).

Government Payments may consist of fines, penalties, restitution, remediation and other damages paid as a result of SEC, EPA, and Stark and False Claims Act violations just to name a few.  The general rule is that no portion of a Government Payment may be deducted by a taxpayer.  Fortunately, there is the proverbial exception.  Government Payments made for restitution, remediation or to bring a taxpayer into compliance with the law may be deducted so long as the taxpayer properly “identifies” and “establishes” the amount paid for one of the aforementioned items.  The recently released final regulations under Code Section 162(f) address the procedures a taxpayer must follow to satisfy the identification and establishment requirements for deductibility and settlement agreements, and court orders play an important role in those procedural requirements.  Absent proper identification and establishment in settlement documentation, no portion of a Government Payment will be deductible by a taxpayer.