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 and necessary business or trading expenses are deductible during the current taxable year. That is to say if any settlement payments meet criterions of deduction under 162(a), but not in the exception of Section 162, should be deductible. In real court cases, IRS uses the exceptions of Section 162 to disallow settlement payments. Nowadays, more court cases and arguments appear to show that even though some settlement payments are in the exceptions of 162 (a), they can also be deducted. The relief of settle payments deductibility causes disagreements among tax professionals. Some believes settlement payments may be composed of deductible compensatory damages from non-deductible punitive damages; however, others worries that allowing deductibility may leads an indirect lesser penalty, because juries are unaware of tax benefits from deductions. This essay will mainly discuss the deductibility of settlement payments by explaining of original laws and regulation languages, citing tax professionals’ perspectives and illustrating actual court cases. According to IRC Section 162(a), “all the ordinary and necessary expenses” from “any trade