The Internal Revenue Service has ruled that fines and penalties paid to the securities industry's self-regulatory organization shouldn't be considered tax deductible, a stance that could cost financial firms that settle matters with the regulator. Fines and penalties paid to government agencies aren't tax deductible, and the IRS said the Financial Industry Regulatory Authority, or Finra, is effectively a government agency when it enforces securities regulations. Hence, fines paid to Finra aren't deductible just as fines paid to the Securities and Exchange Commission aren't, the IRS said in a memo from its associate chief counsel's office released Friday. "If a fine is imposed on a taxpayer for violation of the securities laws and regulations, the deductibility of the fine should not depend on whether the same type of bad conduct is being punished by the SRO or directly by the SEC," according to the memo, referring to a self-regulatory organization. The ruling effectively expands by a bit the types of corporate settlement expenses that can't be deducted -- something that has become a contentious issue over the past few years. While fines and penalties paid to the government aren't deductible, many other settlement expenses are -- allowing companies that reach huge settlements with the government over alleged misdeeds, from BP PLC to J.P. Morgan Chase & Co., to reduce the amounts they actually pay. Some in Congress have called for restrictions or fuller disclosure on companies' deductions of settlement costs. Finra levied 645 fines totaling $132.6 million in 2014, according to its annual report for the year. A Finra representative didn't have an immediate comment on the IRS ruling. The ruling is "surprising" because a previous case in U.S. Tax Court had allowed a member of the Chicago Mercantile Exchange, another SRO, to deduct a fine he paid to the CME, said Robert Willens, a tax and accounting expert. Mr. Willens said he expects the IRS's position to be challenged in court. Write to Michael Rapoport at Michael.Rapoport@wsj.com
The IRS has ruled fines and fees paid to companies should not be considered legally deductible as its position as a security regulator places the organisation in a similar authority to government agencies . While Finra issued 645 fines worth $ 132.6 m in 2014 , the court decision will impose restrictions on companies ' deduction of settlement fees , a ruling yet to be challenged in court .