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US Outbound: US Tax Court holds EC fine non-deductible under section 162(f)



Sean Foley

Landon McGrew

The US Tax Court recently denied a US taxpayer's deduction of a fine paid to the European Commission (EC) under section 162(f) of the Internal Revenue Code based on its holding that the EC is "an agency or instrumentality" of "a foreign government" within the meaning of Treasury Regulation §1.162-21(a) (Guardian Industries Corp. v. Commissioner, 143 T.C. No. 1). Under section 162(f), a taxpayer may not deduct as a business expense "any fine or similar penalty paid to a government for the violation of any law." Treasury Regulation §1.162-21(a) provides that for purposes of section 162(f), the term government includes "a corporation or other entity serving as an agency or instrumentality" of a US or foreign government.

During its 2008 taxable year, Guardian Industries Corp. (Guardian), a US corporation, paid a €20 million ($26 million) fine to the EC in connection with an EC determination that Guardian and its subsidiaries had participated in a cartel that infringed the competition provisions of EC Treaty article 81 by fixing prices. Guardian deducted the payment made to the EC as a section 162 business expense on its 2008 tax return. Following examination, the Internal Revenue Service issued a notice of deficiency claiming that the deduction was disallowed under section 162(f).

At trial, Guardian did not dispute that the €20 million payment was a "fine or similar penalty" or that the payment was made "for the violation of a law" within the meaning of section 162(f). Rather, the sole question before the court was whether the payment was made to "a government" as defined in Treas. Reg. §1.162-21(a) or, more specifically, whether the EC is "an agency or instrumentality" of "[t]he government of a foreign country" within the meaning of Treas. Reg. §1.162-21(a).

In claiming that the EC is not "an agency or instrumentality" of a foreign government, Guardian argued that "[t]he common sense reading of the term 'agency or instrumentality' in the context of the applicable regulatory language, and as informed by applicable dictionary definitions, demonstrates that such term encompasses only entities that act as divisions or subsidiary branches of a government". According to Guardian, an entity qualifies as an "agency or instrumentality" of a foreign government only if it: (1) is controlled by that government; (2) acts exclusively on behalf of that government; and (3) is subordinate to that government.

The Tax Court disagreed, holding that the EC is an "entity serving as an agency or instrumentality" of the EC member states within the meaning of Treas. Reg. §1.162-21(a) because it "exercises part of the sovereign power of the EC member states, performs important government functions, and has authority to act with the sanction of those governments behind it." Consequently, the Tax Court held that Guardian's payment to the EC was non-deductible for US tax purposes under section 162(f).

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.

Sean Foley ( Washington, DC, and Landon McGrew (, McLean, VA


Tel: +1 202 533 5588

Fax: +1 202 315 3087


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