Punitive Damages

BACKGROUND

Internal Revenue Code Section 162 allows a deduction for ordinary and necessary business expenses incurred during the year. Amounts paid as punitive damages incurred by a company in the ordinary course of business are deductible under Section 162.

CHAMBER POSITION

Disallowance of the deduction for punitive damages would result in businesses paying taxes on amounts in excess of income, essentially imposing an additional direct federal fine. Determining the amount of punitive damages is difficult in many cases, especially where the payment arises from the settlement of a claim. The denial of deductions for punitive damages runs counter to 30 years of strong public policy and applies principles of tort law to the tax code.

LINKS

• U.S. Chamber Letter on Punitive Damages
• JCT Explanation of FY 2013 Greenbook