Talley Industries, Inc. and Consolidated Subsidiaries - Page 13




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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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