SCOTUS Reports

Tag: Section 162(g)

  • McDermott, Inc. v. Commissioner, 93 T.C. 217 (1989): Deductibility of Settlement Payments Under Section 162(g) of the Internal Revenue Code

    McDermott, Inc. v. Commissioner, 93 T. C. 217 (1989)

    Settlement payments under the Clayton Act are subject to the limitations of section 162(g) of the Internal Revenue Code if they are ‘on account of’ the same conduct admitted in a related criminal antitrust proceeding.

    Summary

    McDermott, Inc. faced a tax dispute over the deductibility of settlement payments made to plaintiffs in a consolidated Clayton Act antitrust litigation following its nolo contendere plea to Sherman Act violations. The Tax Court held that payments related to bid-rigging contracts, both targeted and nontargeted, were subject to section 162(g)’s limitation, disallowing deductions for two-thirds of such payments. However, payments related to negotiated contracts were fully deductible under section 162(a). The decision hinged on the interpretation of ‘on account of such violation’ in section 162(g), focusing on whether the civil settlements were essentially coextensive with the criminal conduct admitted.

    Facts

    McDermott, Inc. , a marine construction company, was indicted alongside Brown & Root, Inc. , for bid rigging and other anticompetitive practices in violation of the Sherman Act. Following a plea agreement, McDermott pleaded nolo contendere to these charges. Subsequently, over 60 companies initiated Clayton Act lawsuits against McDermott for treble damages. McDermott settled these claims using a formula based on the type of contract involved: targeted bid contracts, nontargeted bid contracts, and negotiated contracts. The settlements amounted to $93,959,034, with different rates applied to each contract type. McDermott sought to deduct these payments under section 162(a) of the Internal Revenue Code, but the Commissioner challenged the deductibility under section 162(g).

    Procedural History

    McDermott and the Commissioner filed cross-motions for partial summary judgment in the U. S. Tax Court regarding the deductibility of the settlement payments. The court needed to determine whether these payments were subject to the limitations of section 162(g) due to McDermott’s nolo contendere plea in the criminal antitrust case.

    Issue(s)

    1. Whether payments made to settle claims related to targeted bid contracts are deductible under section 162(g)?
    2. Whether payments made to settle claims related to nontargeted bid contracts are deductible under section 162(g)?
    3. Whether payments made to settle claims related to negotiated contracts are deductible under section 162(g)?

    Holding

    1. No, because the payments were ‘on account of’ the Sherman Act violation admitted in the criminal proceeding.
    2. No, because the nontargeted bid contract settlements were essentially coextensive with the conduct admitted in the criminal proceeding.
    3. Yes, because the negotiated contract settlements were not coextensive with the admitted criminal conduct.

    Court’s Reasoning

    The court interpreted ‘on account of such violation’ in section 162(g) to mean that the civil settlements must be essentially coextensive with the criminal conduct admitted. McDermott’s plea focused on bid rigging, which encompassed both targeted and nontargeted bid contracts, thus subjecting payments for these settlements to section 162(g). The court emphasized the origin and nature of the claims, not McDermott’s settlement motives, in determining the applicability of section 162(g). For negotiated contracts, the court found that the admitted criminal conduct did not extend to these, as the plea did not cover negotiated agreements, allowing full deductions under section 162(a). The court referenced Flintkote Co. v. United States and Federal Paper Board Co. v. Commissioner to support its analysis.

    Practical Implications

    This decision impacts how antitrust litigation settlements are treated for tax purposes. Companies facing antitrust allegations must carefully consider the scope of their criminal pleas to avoid unintended tax consequences in related civil settlements. The ruling clarifies that only settlements directly related to the criminal conduct admitted will be subject to section 162(g), potentially affecting settlement strategies in antitrust cases. Later cases, such as those involving similar issues of deductibility, will need to consider this ruling when determining the applicability of section 162(g). Additionally, this case underscores the importance of distinguishing between different types of contracts in antitrust litigation and their tax treatment.

  • Federal Paper Bd. Co. v. Commissioner, 90 T.C. 1011 (1988): Allocating Antitrust Settlement Payments Between Related and Unrelated Claims

    Federal Paper Bd. Co. v. Commissioner, 90 T. C. 1011 (1988)

    Settlement payments in antitrust litigation must be allocated between claims related and unrelated to a criminal conviction to determine tax deductibility under Section 162(g).

    Summary

    In Federal Paper Bd. Co. v. Commissioner, the U. S. Tax Court ruled on how to allocate antitrust settlement payments for tax purposes under Section 162(g) of the Internal Revenue Code. The company had pleaded nolo contendere to charges of price-fixing involving folding cartons but faced civil claims for both folding and milk cartons. The court held that allocations for the class action settlement should be based on the aggregate sales of all settling defendants to the plaintiffs, while allocations for settlements with opt-out plaintiffs should follow the sharing agreements among defendants. This decision impacts how businesses allocate settlement costs in antitrust cases and underscores the importance of intent and agreements in determining tax implications.

    Facts

    Federal Paper Board Co. was indicted and pleaded nolo contendere to charges of price-fixing in folding cartons in 1976. Subsequent civil antitrust actions claimed a conspiracy affecting both folding and milk cartons. Federal Paper settled with class action plaintiffs and opt-out plaintiffs, with agreements covering both types of cartons. The company sought to allocate settlement payments to both folding and milk carton claims to maximize tax deductions, given that Section 162(g) disallows deductions for payments related to criminal convictions.

    Procedural History

    The company filed a petition in the U. S. Tax Court challenging the IRS’s determination of tax deficiencies due to the allocation of settlement payments. The IRS argued that all payments should be allocated to folding carton claims, subject to Section 162(g). The Tax Court heard arguments and evidence on the allocation methods and the intent behind the settlements.

    Issue(s)

    1. Whether the allocation of settlement payments in the class action should be based on the aggregate sales of all settling defendants to the settling plaintiffs?
    2. Whether the allocation of settlement payments to opt-out plaintiffs should follow the sharing agreements among defendants?

    Holding

    1. Yes, because the court found that the intent of Federal Paper was to allocate settlement payments based on the aggregate sales of all settling defendants to the settling plaintiffs in the class action.
    2. Yes, because the court determined that the sharing agreements among defendants were the best evidence of Federal Paper’s intent regarding allocations for the opt-out plaintiffs.

    Court’s Reasoning

    The court applied the principle that settlement payments are characterized for tax purposes based on the origin and nature of the underlying claims, not their validity. It emphasized the intent of the payor as crucial when no express allocation exists in the settlement agreement. For the class action, the court found that the plaintiffs sought to hold defendants jointly and severally liable for both folding and milk carton claims, justifying an allocation based on aggregate sales. For the opt-out plaintiffs, the court relied on the sharing agreements that defendants entered into, which reflected their intent to allocate payments based on actual sales. The court rejected the IRS’s argument that all payments should be allocated to folding carton claims, as it did not consider the joint and several liability principles applicable to antitrust conspirators. The court also noted that the sharing agreements were entered into after the class action settlement and thus did not influence the allocation for that settlement.

    Practical Implications

    This decision guides businesses on how to allocate antitrust settlement payments for tax purposes, particularly when facing claims related to and unrelated to criminal convictions. It underscores the importance of the payor’s intent and any sharing agreements in determining allocations. Practitioners should carefully document the intent behind settlement agreements and consider the impact of sharing agreements on tax treatment. This ruling may influence how businesses negotiate settlements and structure agreements to optimize tax outcomes. Subsequent cases, such as Fisher Cos. v. Commissioner, have further explored the application of Section 162(g) and the allocation of settlement payments in antitrust litigation.