Tax Notes Quotes Mark Allison on IRS Memo

Tax Notes Today spoke to Mark D. Allison concerning a memo released by the IRS stating that a fine paid to the Financial Industry Regulatory Authority (FINRA) is not deductible under section 162(f). For the full article, please visit the Tax Notes Today's website (subscription required).

Excerpt taken from the article "Memo Stakes Out IRS Position on Fines Paid to Private Regulator" by Nathan J. Richman for Tax Notes Today.

Mark D. Allison of Caplin & Drysdale Chtd. said that the memo, along with Guardian Industries, reflects the IRS's attempts to expand section 162(f) and provides some information on how the IRS will litigate these cases in the future. However, "I don't expect this IRS memo to be the end of the story on the treatment of" self-regulatory organizations, he said, adding that Guardian Industries involved an organization, the European Commission, created directly by a government, as opposed to self-regulatory organizations, like FINRA, which have more of the hallmarks of private membership.

Allison said that with the fallout from the financial crisis and other recent regulatory actions, someday a fine will be levied by a self-regulatory organization such as FINRA for which a taxpayer will find a challenge to the deduction prohibition under section 162(f) to be economically viable.

While FINRA has some characteristics of a government agency, perhaps more than other self-regulatory organizations, it does not describe itself as part of the government, Allison said. "You have an immediate tension when the organization deflects the same characterization that the IRS is trying to pin on it," he said. Self-regulatory organizations' dependence on contractual relationships with their members distinguish them from other kinds of agencies and organizations, he said.

Allison said the memo's statement that the IRS should win on summary judgment in the case of FINRA was startling, adding the memo makes that claim immediately after acknowledging potentially contrary court opinions as well as FINRA's own statement on its status as something other than a government agency.

"The IRS clearly is not happy with the way taxpayers have been able to claim deductions for settlements and resolutions with other government or para-government agencies and they are looking for ways to enforce the sting of those settlements," Allison said. That effort might be better served by providing more direction to taxpayers and clarification to practitioners than was found in this guidance, he said.