Maybe I’m cursed by profession but I personally have no problem with the artful (from a tax standpoint) structuring of a civil settlement in such a way that maximizes related tax deductions thus minimizing future tax liability. Other folks are not so happy however:
BP could get billions in tax breaks on oil spill settlement ~ Jennifer Larino
The reason cited in the story is that BP admitted to criminal charges, which ironically, can actually enhance the probability that certain spill related professional fees like the lawyering can be deducted under IRC Section 162(a). I can’t talk specifics from my own tax practice but here is an interesting blurb reprinted from the M&A Tax Report circa 2002:
Deducting Legal Fees for Criminal Defense ~ Robert Wood
It is a fairly complex area but when it comes to criminal racketeering, the answer is usually yes, especially if the defendant is convicted. Accardo v. Commissioner of Internal Revenue, 942 F.2d 444 (7th Cir. 1991) is an interesting case to learn where the IRS and the 7th Circuit made the cut in denying an attorney fees deduction for the successful defense of a criminal RICO prosecution:
This is where the paradox noted above creeps into the picture. The Commissioner (Br. 16) concedes that those defendants who were found guilty as a result of the same RICO prosecution could properly claim a deduction for legal fees under Section 162(a) “as expenses paid or incurred * * * in carrying on any trade or business,” because they were found to be engaged in the racketeering business. Section 162(a) does not draw any distinction between legitimate and illegitimate business enterprises. But since the jury acquitted taxpayer of involvement in the racketeering business, he could not claim a Section 162(a) deduction….
I imagine E&Y was consulted as the settlement was being drafted, in fact I’d rate it that as a certainty based on the after the fact chatter from the public interest groups.