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Colt Indus. v. United States

Citation: 17 ELR 20962
No. No. 614-84T, 11 Cl. Ct. 140/25 ERC 1283/(Cl. Ct., 10/23/1986)

The court rules that civil penalties assessed against a taxpayer pursuant to § 309(d) of the Federal Water Pollution Control Act (FWPCA) and § 113(b) of the Clean Air Act (CAA) constitute a "fine or similar penalty paid to a government for the violation of [a] law" and therefore are not deductible under Internal Revenue Code § 162(a) as trade or business expenses. In 1979, after signing an Environmental Protection Agency (EPA) consent decree, plaintiff made payments totalling $1.6 million to the Pennsylvania Clean Air and Clean Water Funds for FWPCA and CAA violations. Plaintiff later claimed a tax deduction for these payments, which was disallowed under § 162(f) of the Internal Revenue Code. Section 162(f) bars deductions for "any fine or similar penalty paid to a government for the violation of any law." The court first holds that plaintiff's payments were not compensatory in nature. The EPA Civil Penalty Policy Manual stipulates that civil penalties are not effluent or discharge fees and that payment of penalties does not allow one to continue to violate the law or to delay compliance. Nowhere was it alleged that the business or property of either the United States Government or the State of Pennsylvania were injured as a result of the FWPCA and CAA violations. Neither government claimed damages to restore its business or property to their previous condition. Finally, the complaint filed by the United States government prior to the signing of the EPA consent decree sought equitable relief and civil penalties for past violations. The court then holds that the penalties were also not remedial in nature. If a remedial purpose is held to be sufficient to render a civil penalty payment deductible, then virtually no such payments would be subject to § 162(f) of the Internal Revenue Code. Moreover, plaintiff did not establish that either FWPCA § 309(d) or CAA § 113(b) is remedial in nature or that the penalties were assessed for the purpose of encouraging compliance with the law. Lastly, the court holds that the payments did not amount to a fee paid for EPA's approval of a construction permit granted to plaintiff by the Pennsylvania Department of Environmental Resources.

Counsel for Plaintiff
George D. Webster
Webster, Chamberlain & Bean
Suite 1000, 1747 Pennsylvania Ave. NW, Washington DC 20006
(202) 785-9500

Counsel for Defendant
Theodore D. Peyser
Tax Division
Department of Justice, Washington DC 20530
(202) 724-6440