Talley Industries, Inc. and Consolidated Subsidiaries - Page 14




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          Section 1.162-21(b)(2), Income Tax Regs., provides that                     
          compensatory damages paid to a Government do not constitute a               
          fine or penalty.                                                            
               Deductions are a matter of legislative grace, and the                  
          taxpayer must show that he comes squarely within the terms of the           
          law conferring the benefit sought.  See Rule 142(a); INDOPCO,               
          Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice              
          Co. v. Helvering, 292 U.S. 435, 440 (1934); Welch v. Helvering,             
          290 U.S. 111, 115 (1933).  Applying this principle in the instant           
          case, petitioner bears the burden of proving that, in settling              
          the Stencel matter, the parties intended for the entire $2.5                
          million payment (including the $940,000 portion of the payment              
          that exceeded the Government's $1.56 million "singles" damages)             
          to represent compensation to the Government for its losses.                 
               The first issue to be resolved is whether the parties                  
          intended the Stencel settlement to include double damages under             
          the FCA.  Although the settlement agreement does not characterize           
          the $2.5 million payment, or any part thereof, as double damages,           
          we conclude that the parties intended the settlement to include             
          double damages under the FCA.  In short, the parties' various               
          offers and counteroffers repeatedly referred to the settlement as           
          including double damages.                                                   
               Next, we must consider whether the purpose of the $940,000             
          double damage payment was to compensate the Government for its              






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