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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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