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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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Are payments made by an individual for restitution tax?

Customer Question

Are payments made by an individual for restitution tax deductible? If someone is order to make restitution payments following a criminal trial, is that tax deductible.

Submitted: 9 years ago.
Category: Tax
Expert:  Ed Johnson replied 9 years ago.

Unfortunately, these are not deductible expenses on the tax return.

there are only four kinds of deductible taxes on the individual tax return:

There are four types of deductible nonbusiness taxes:

Ed Johnson and 3 other Tax Specialists are ready to help you
Customer: replied 9 years ago.

Why is restitution considered a tax?

Expert:  Ed Johnson replied 9 years ago.

Restitution is not a tax. Restitution is income that is taxed. There are only 4 states who current tax restitution payments.

If you are the perp, then they call it a tax because they take money from your income and pay it to a state restitution fund.

Customer: replied 9 years ago.

Uncertainty over which portion of the settlement payments would be tax deductible prompted legislation to expand the Sec. 102(f) definition of "fine or penalty." The proposed Government Settlement Transparency Act of 2003 provided that all amounts paid or incurred (whether by suit, agreement or otherwise) to, of at the direction of, a government in relation to the violation of any law or the investigation or inquiry into the potential violation of any law are nondeductible, except for payments that the taxpayer establishes are restitution. The Joint Committee on Taxation intended that a payment would be treated as restitution only if the payment were required to be paid to specific persons, or in relation to the specific property, actually harmed by the taxpayer's conduct that resulted in the payment. However, the Senate amendment was not included in the Jobs and Growth Tax Relief Reconciliation Act of 2003; to date, the proposed legislation has not become law.

Expert:  Ed Johnson replied 9 years ago.

So what are you trying to say? You asked if it was tax deductible and I said that it was not.

You found this nifty piece of legislation which I knew about. But since it has not become law, it cannot be used to justify a tax deduction. I do not give a lot of legislative reference as most customers are not able to handle the information, and then we get into long philosophical discussions which do not really answer a question.

You seem to be better than most.

Until the legislation become law, the tax still exists. As I previously said, only four states currently administer this tax.

The guidance from the tax advisory committee is actually for a person to negotiate where possible for getting any fines and penalties characterizes as restitution to a particular individual; this is because legislation aside, the courts will uphold a claim for deductibility on that premise only. For now we only have four states to contend with, as the others have followed former supreme court decision in shaping these laws.

This does not negate my original answer. For now, there are only those four taxes, taken from an exact quote on the IRS website, that are deductible taxes.

The IRS regulation is what drives the answers in TAX because we cannot recommend a deviation from the law as written and codified.

If I recommend that you file a law suit to claim the deduction, and then you lose, then I am implicated for steering you in the wrong direction; for legal reasons, I can only adhere to the letter of the law.

The fed, that is the IRS and U.S. Treasury, only allow those four categories of tax to be deducted on a personal return until such time as the law changes.

Customer: replied 9 years ago.
I am a CPA looking for info for a client that had to pay restitution of 15million. His attorney seems to think that it was deductible. I did not take it as a deduction, but I am investigating it just the same. Thank you for your time.
Expert:  Ed Johnson replied 9 years ago.

The courts seem to rule in favor of people who have restitution when it is characterized as to a particular individual. If he can get it re-characterized, for 15 million, it seems to be worth the litigation. But, he has to get it characterized from the courts.

Court case against deductions:

Cases for deductibility...note they are designated as compensatory to an individual person or organization: The courts ruled in the following cases that penalties designated as liquidated damages were deductible if they were compensatory or remedial in nature, not primitive (Middle Atlantic Distributors, 72 TC 1136 (1979); The Mason and Dixon Lines, Inc., 708 F2d 1043 (1983); Larry. D. Huff, 80 TC 804 (1983); and H.A. True, Inc., 603 F Supp 1370 (1985)). The Service also ruled, in Rev. Ruls. 69-581, 80334 and 88-46, that penalties that are remedial, rather than punitive, are deductible.


In John 77 Stephens, 905 F2d 667 (1990), the Second Circuit ruled that a taxpayer could claim a deductible loss for the return of embezzled funds to a corporation, because the restitution was to a private party and was a civil remedy ordered primarily to reimburse tire corporation's loss.

Finally, in Talley Industries, Inc., 18 Fed Appx 661 (9th Cir. 2001), the Ninth Circuit ruled that a government contractor who pled guilty to a charge of false and fraudulent statements could deduct the portion of the settlement payment that represented compensation of the government's actual loss. However, the balance of the payment could not be deducted, because the parties did not show they intended it to compensate for loss.

It is clearly not deductible by the code, but: if he wants to get it into court, he might try, and then again, he might litigate for it or get an amended or modified court order allowing it. But, that is more legal than tax.

Again, I apologize if I appeared a bit testy. It just had the look and feel of something else. It is hard to convey meaning in this venue.