Rev. Rul. 64-224

Advice has been requested whether amounts paid or incurred in satisfaction of claims for treble damages under section 4 of the Clayton Act, 15 U.S.C. 15, or in satisfaction of damage claims of the United States under section 4A of the Clayton Act, 15 U.S.C. 15(a), or the Federal False Claims Act, 31 U.S.C. 231, as the result of a conspiracy to fix prices, are deductible as ordinary and necessary business expenses. The question presented relates both to claims reduced to judgment in civil suits under the cited sections and to claims settled prior to the institution of suit or prior to judgment.

Prior to the assertion of the claims in question the United States instituted a criminal prosecution against the defendant corporate taxpayers and certain of their officers for engaging in a combination and conspiracy in restraint of trade in violation of section 1 of the Sherman Anti-Trust Act, 15 U.S.C. 1. The defendants were charged with conspiring to fix and maintain prices, terms, and conditions for the sale of various manufactured items; with submitting noncompetitive, collusive, and "rigged" bids for supplying merchandise to Federal, State, and local governmental agencies; with submitting noncompetitive, collusive, and "rigged" price quotations to various purchasers of merchandise; and with enforcing adherence to certain fixed prices in the sale of merchandise through agents, jobbers, and wholesalers.

In some instances the corporate and individual defendants pleaded guilty to the charges. In other instances, pleas of nolo contendere were accepted from the corporate and individual defendants. Fines of varying amounts were imposed on the corporate defendants and both fines and prison terms were imposed on some of the individual defendants.

Thereafter, suits for treble damages under section 4 of the Clayton Act were instituted against the defendant corporations by private party plaintiffs who had been compelled to pay higher prices by reason of the criminal conspiracy. Suits were also instituted by the United States under section 4A of the Clayton Act for actual damages and under the False Claims Act for specific penalties and double damages. Many of these suits have already been settled. Others have proceeded, or will proceed, to judgment or will be settled.

Section 162(a) of the Internal Revenue Code of 1954 provides, in part, that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

However, it is well settled that the allowance of a deduction for fines or penalties would frustrate sharply defined public policy under circumstances where the statute which is violated is intended to punish the wrongdoer. Any punishment so intended would be mitigated by the allowance of an income tax deduction. Tank Truck Rentals, Inc. v. Commissioner, 356 U.S. 30 (1958), Ct. D. 1819, C.B. 1958-1, 502; Hoover Motor Express Co., Inc. v. United States, 356 U.S. 38 (1958), Ct. D. 1820, C.B. 1958-1, 505; Dixie Machine Welding and Metal Works, Inc. v. United States, 315 Fed. (2d) 439 (1963). On the other hand, if the purpose behind a statute compelling a wrongdoer to make payments is remedial in nature and is intended to provide a formula for the reparation of a private injury, such payments, if otherwise proper, constitute allowable deductions from gross income. See generally in that regard Jerry Rossman Corporation v. Commissioner, 175 Fed. (2d) 711 (1949), twice cited with apparent approval in Tank Truck Rentals, Inc. v. Commissioner, supra at pp. 35, 36.

Actions brought under Section 4 of the Clayton Act are remedial in nature since the purpose behind this section of the statute is to provide the victim with a means of recovering damages inflicted, and not to punish the wrongdoer, in the sense of a punishment "imposed and enforced by the State, for a crime or offense against its laws." Huntington v. Attrill, 146 U.S. 657 (1892); Chattanooga Foundry and Pipeworks v. City of Atlanta, 203 U.S. 390 (1906); Overnight Motor Transportation Co. Inc. v. Missel, 316 U.S. 572 (1942). See also United States v. Cooper Corporation, 312 U.S. 600 (1941).

In I.T. 3627, C.B. 1943, 111, it was held that civil actions for multiple damages brought by consumers or tenants under section 205(e) of the Emergency Price Control Act of 1942, 56 Stat. 23, were remedial in nature even though that Act also imposed criminal penalties for its violation. Actions brought under section 4 of the Clayton Act are closely analogous to those brought under the Emergency Price Control Act.

It is accordingly held that amounts paid or incurred in satisfaction of claims for treble damages under section 4 of the Clayton Act are deductible as ordinary and necessary expenses under section 162(a) of the Code.

Amounts paid in satisfaction of damage claims by the United States under section 4A of the Clayton Act or under the Federal False Claims Act, although resembling restitution, are in effect punishment for injury to the public occasioned by the violation of law. Standard Oil Co. v. Commissioner, 129 Fed. (2d) 363 (1942); David R. Faulk, et ux. v. Commissioner, 26 T.C. 948 (1956). The illegality giving rise to the damage combined with the fact that the injury is inflicted upon the Government requires that such payments not be allowed as deductions. I.T. 3627, supra.

Accordingly, it is held that amounts paid or incurred in satisfaction of damage claims by the United States under section 4A of the Clayton Act or under the Federal False Claims Act are not deductible.

With respect to attorneys' fees and legal expenses, it was held in Revenue Ruling 62-175, C.B. 1962-2, 50, that such expenses incurred in unsuccessfully defending a prosecution for a criminal violation of the Sherman Anti-Trust Act are not deductible under section 162 of the Code on the grounds of public policy. In the instant cases, however, the allowance of deductions for attorneys' fees and related legal expenses paid or incurred in connection with private civil actions under section 4 of the Clayton Act would not appear to frustrate any sharply defined public policy, particularly since it is held here that a deduction will be allowed for the damages paid or incurred by the defendants. It is accordingly held that amounts paid or incurred for attorneys' fees and directly related expenses are deductible under section 162(a) of the Code. However, attorneys' fees and related legal expenses paid or incurred in cases in which the United States Government is the injured party as a buyer of goods are not deductible. See David R. Faulk, et ux. v. Commissioner, supra.

¹ Based on Technical Information Release 601, dated June 8, 1964.

² Also released as Technical Information Release 615, dated July 24, 1964.