IRS: Consent Decree Payments May Be Tax-Deductible

Drugmakers under consent decrees with the FDA may be able to deduct some payments made as part of their settlement with the agency when they file their tax returns, according to an informal opinion by the Internal Revenue Service’s chief counsel.

The opinion concerns a consent decree with an unidentified company that makes active pharmaceutical ingredients and discusses the equitable disgorgement of profits — situations in which the FDA asks companies to pay a share of the profits accrued while the company acted in violation of regulations.

U.S. tax law allows companies to deduct normal business expenses, but not fines. While the FDA has never clearly expressed an opinion on the tax status of consent decree payments, the agency’s ambiguous statements seem to support the view that consent decree payments may be deducted, the IRS says. The agency notes that the consent decree in question specifically states that payments made under it “are not a fine, penalty, forfeiture, or payment in lieu thereof.”

“The legal theory behind disallowing a deduction for a fine or penalty is that allowing taxpayers to deduct fines or penalties would frustrate public policy,” says Douglas Charnas, an attorney with McGuire Woods who blogged about the case. “The deduction would lessen the financial sting of the fine or penalty.”

However, if the consent decree payment is not a fine, that theory doesn’t apply, he says.

While the ruling isn’t surprising, it’s worth noting that the IRS took up the question at all, given the FDA’s specific language that the payments are not a fine, Charnas says. “The takeaway from the [opinion] is that any settlement agreement should specifically state that the parties do not intend the payment to be a fine or penalty for all purposes, including federal income tax purposes,” he says.

In recent years, the FDA has imposed consent decrees on Johnson & Johnson, Ranbaxy and Ascend Laboratories, among other drugmakers.

View the Jan. 26 opinion at www.fdanews.com/06-15-15-IRS.pdf. — Elizabeth Orr