Settlmet Payment Deductiility

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ACTG 4400 Taxation Dr. Tripp Final Paper Qixi Huang Are Settlement Payments Deductible or Not? The law dictionary online defines “settlement” as a resolution of a lawsuit or a legal dispute without a final court decision. “Settlement payment,” in this essay, also refers to payments to governments because of fines or penalty. Usually, settlement achieves through negotiations among different parties through attorneys. When agreements are reached, “settlement payments” occur. Hence, people consider settlement payments as prices that one party pay to the others for their wrongful behaviors or violation of laws. For tax purposes, are settlement payments deductible? According to Internal Revenue Code (IRC) Section 162(a), any ordinary…show more content…
It demonstrated that deductions for capital expenditures are possible. In Chief Industries, Inc., TC Memo 2004-45, the tax court held that the settlement payment and the redemption payment should be considered as separate. In 1993, the tax payer, a corporation, and its board of directors voted a new CEO to replace the principle founder. The taxpayer and the founder reached an employment agreement that the founder could continue the title “chairman of the board of directors” without any managerial authority. Then, a litigation of controlling the taxpayer occurred between the board and the founder. To avoid unnecesary risks, time and expenses, the board pursed settlement negotiations. In 1996, the taxpayer, the new chairman and CEO agreed to purchase all of the founder’s stocks in the taxpayer for $37,223,114. Additionally, the taxpayer transferred a $3,082,710 settlement payment to the founder to relinquish his rights under the employment agreement. IRS argued, the settlement payments were used for purchasing stocks, which belong to capital assets. Furthermore, the settlement payments increased company’s value, because the payments were to prevent the founder re-controlling the taxpayer. According to Reg. 1.263(a)-1(b), expenditures that substantially increase values should not be deductible. However, the taxpayer argued that the payments were “to defend against attacks on business practices and partially in

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