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Talley reported the $2.5 million payment as an ordinary and
necessary business expense on its consolidated Federal income tax
return for the taxable year 1986. Upon examining the return,
respondent disallowed the deduction and determined a deficiency
in petitioner's Federal income tax for 1986 in the amount of
$853,042. Petitioner invoked the Court's jurisdiction by filing
a petition for redetermination. At the time the petition was
filed, petitioner's principal place of business was located in
Phoenix, Arizona.
OPINION
Section 162(a) provides the general rule that a taxpayer is
allowed a deduction for all ordinary and necessary expenses paid
or incurred by the taxpayer in carrying on a trade or business.
Section 162(f), however, proscribes a deduction under section
162(a) for "any fine or similar penalty paid to a Government for
the violation of any law." The phrase "fine or similar penalty"
is defined in section 1.162-21(b), Income Tax Regs., as follows:
(b) Definition. (1) For purposes of this section
a fine or similar penalty includes an amount--
(i) Paid pursuant to conviction or a plea of
guilty or nolo contendere for a crime (felony or
misdemeanor) in a criminal proceeding;
(ii) Paid as a civil penalty imposed by Federal,
State, or local law, * * *;
(iii) Paid in settlement of the taxpayer's
actual or potential liability for a fine or penalty
(civil or criminal); * * *
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