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Over the last few years, it's been all but impossible to pick up the business section of the paper without encountering some story about a major corporate entity either under investigation or reaching a settlement with the federal government over purported malfeasance.

When these companies do settle, the large fines they pay to the government aren’t deductible, but many other expenses actually are. This, in turn, has created some consternation among members of Congress, with many calling for either fuller disclosure or enhanced restrictions on the corporate settlement expenses that can be deducted.

In recent developments, the Internal Revenue Service has done exactly this, issuing a memo last week stating that any fines and penalties paid by companies to the Financial Industry Regulatory Authority -- or FINRA -- are now non-deductible.

What is FINRA?

For those unfamiliar with FINRA, it's an independent, non-profit organization authorized by Congress to ensure the securities industry operates fairly and honestly. Among its many tasks, FINRA drafts rules governing securities firms and enforces compliance with these same rules.

Indeed, one report indicates that it issued 645 fines totaling $132.6 million in 2014 alone.

What did the IRS decide exactly?

In a decision that could stand to cost companies a significant amount of money, the IRS held that fines and penalties paid to FINRA are non-deductible.

The rationale for the decision was that 1) since FINRA effectively acts as a government agency when enforcing securities regulations and 2) fines paid to government agencies like the Securities & Exchange Commission aren't deductible, it stands to reason that penalties paid to FINRA should be afforded similar tax treatment.

Will the IRS' position be challenged?

Given that there is a conflicting body of case law on this subject, experts indicate that the IRS' position is very likely going to be challenged in court.

Stay tuned for updates …

If you have questions or concerns regarding a corporate tax matter, consider speaking with an experienced legal professional as soon as possible.

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