A company is sued for fraud amoung other things which resulted in a settlement and a large payment from the company to keep a judgement from being entered. Can the company deduct the expense of the funds it paid out?

asked 31 Jan '11, 23:20

Francis's gravatar image

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edited 01 Feb '11, 04:47

TaxQueries's gravatar image

TaxQueries ♦♦

Punitive damages are taxable to the recipient. As for a payment from a company for fraud, this is a penalty and is not deductible unless insurance paid for it.

If punitive and they send the recipient of the $$ a 1099 for these, then perhaps these would be deducted as another picked up income, but without legal documentation I doubt it.

This is a bit more legal advice imho.


answered 01 Feb '11, 00:59

SandySea's gravatar image

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I am not sure I agree with my esteemed colleague, SandySea. This was a settlement and not a judgment. Most settlements include a provision where there is no admission of guilt or wrongdoing. In my opinion an admission of guilt would be necessary for any payment to be treated as punitive and I have never seen of, or heard of for that matter, a settlement that included such an omission.

Additionally, the IRC defines nondeductible penalties as those paid to the government, not to private companies or individuals. Otherwise late payments to the mortgage company would not be deductible as interest.

Without knowing more about the case I can't tell you where to deduct the payment. I also can't tell you HOW to report the payment to the recipient without knowing more about the case than you should post in an open forum like this one - remember, you still have to comply with certain privacy rules and the settlement itself may include a gag provision.

Your best bet would be to talk to your accountant - SOON. I can't imagine a company with sufficient resources to settle a large fraud case who doesn't have an accountant. At the very least your attorney should have retained an accountant to review the impact of the payment.


answered 01 Feb '11, 19:53

EAgent's gravatar image

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It depends on why you were being sued and what the settlement says you are paying. For example, if you were sued for unpaid wages and the settlement syas you will pay a certain amount of back wages, you can deduct it. If you were being sued for not paying your credit card bill, then you cannot deduct it, and, if you settled for less than you owed, then you must pay tax on the unpaid amount that was was cancelled or forgiven.


answered 13 Feb '11, 15:33

stephenweinstein's gravatar image

accept rate: 1%

Because the preceding information is a bit confusing to a layman like myself, permit me to ask a question that I believe may be related. In the news recently, it was reported that a certain company had settled out of court in a federal government suit and paid $13 million to close the case. At the same time, its CEO strongly denied the government's allegations and said that his company had operated within the terms of the contract. Here are my questions:

  • Are the corporation's attorney fees tax deductible?
  • Can the corporation also deduct that $13-million settlement from its taxes?
  • What other expenses related to this case can the corporation deduct from its taxes?

Thank you.


answered 24 Feb '11, 17:31

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Howard Lauther
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Asked: 31 Jan '11, 23:20

Seen: 13,808 times

Last updated: 24 Feb '11, 17:31