Allied-Signal Inc. v. Commissioner of Internal Revenue Service

No. 94-7336 (3d Cir. February 23, 1995)

The court holds that a 1977 contribution a chemical company made to the Virginia Environmental Endowment Fund, which was created in response to litigation over environmental contamination at the company's former plant in Hopewell, Virginia, was in substance an environmental penalty that the company could not deduct as an ordinary and necessary business expense under Internal Revenue Code (IRC) § 162(a). After the company pleaded nolo contendere, the district court assessed a fine of $ 13,240,000 against the company for violating the Refuse Act, 33 U.S.C. § 411, and the Federal Water Pollution Control Act, by unlawfully discharging and depositing toxic chemicals into waters of the United States. The district court later reduced the fine to $ 5 million when the company agreed to contribute $ 8 million to creating the endowment. On its 1977 federal income tax return, the company treated the $ 8 million it transferred to the endowment as an ordinary and necessary business expense deductible under IRC § 162(a) because it contributed to restoring the company's business reputation in the community. The Tax Court affirmed the Internal Revenue Service (IRS) decision disallowing the deduction under IRC § 162(f), which provides that no deduction shall be allowed under § 162(a) for any fine or similar penalty paid to a government for the violation of any law.

The court first holds that the company did not voluntarily contribute $ 8 million to the endowment. The payment was a quid pro quo for the district court's reduction of the criminal fine, and a voluntary payment must be one made without expecting a quid pro quo from a court. The district court presented the company with only two choices: Either pay the $ 13,240,000 million fine or contribute to the endowment. The company expected some mitigation of the fine but ended up getting a dollar for dollar reduction in exchange for its contribution.

The court holds that an $ 8 million payment does not fall under the IRS regulation defining "compensatory damages" as an amount paid to a government that does not constitute a fine or penalty. The $ 8 million payment is punitive rather than remedial in nature, because the endowment the company created did not compensate aggrieved parties for the specific losses attributable to the company's misconduct. The endowment served general public purposes, and to hold that punitive exactions used for general public purposes fall outside the ambit of § 162(f) would effectively nullify the statute, since all exactions of this nature are ultimately used for general public purposes. While the district court judge may have been motivated by both punitive and compensatory purposes, the court finds that the payment was merely a criminal fine diverted from the U.S. Treasury to the endowment.

The court holds that the "paid to a government" requirement of § 162(f) can be satisfied when the payments are made under a court's direction. The district judge was an official of the government, and the payment to the endowment was at his direction and made in lieu of the criminal fine. The court finds no practical difference between a situation when a fine is paid to the Treasury and the government then expends the money for a public purpose, and a situation when the fine is paid directly into a fund to benefit the public at the government's direction.

Counsel for Appellee
Edward Perelmuter
Teich, Groh & Frost
691 State Hwy. 33, Trenton NJ 08619
(609) 890-1500

Counsel for Appellant
Jerome B. Libin
Sutherland, Asbill & Brennan
1275 Pennsylvania Ave. NW, Washington DC 20004
(202) 383-0100

[25 ELR 21182]

Opinion

Cowen, J.:

Allied-Signal Inc. ("Allied") appeals from the decision of the United States Tax Court determining a deficiency in its federal income tax liability for 1977 in the amount of $ 675,402. Because the $ 8 million contributed to the Virginia Environmental Endowment Fund ("Endowment") is not deductible as an ordinary and necessary business expense under section 162(a) of the Internal Revenue Code, but rather was in substance a "fine or similar penalty paid to a government for the violation of any law" that is disallowed pursuant to section 162(f), we will affirm the decision of the Tax Court.

The facts of this case are not in dispute. Facts stipulated to and found by the Tax Court are summarized as follows. Allied-Signal, Inc., successor-in-interest by merger to Allied Corporation, is a Delaware corporation with its principal place of business in Morristown, New Jersey. Allied Corporation was formerly known as Allied Chemical Corporation. During the late 1940s and early 1950s, Allied developed a highly toxic chemical pesticide known as Kepone. Allied marketed Kepone primarily in Europe as a[n] insecticide used in potato farming. The pesticide was also marketed in Central America for use in banana groves, and in the United States for use in ant traps.

In 1966, Allied moved its manufacturing operation to a small operating facility in Hopewell, Virginia. The Hopewell facility primarily produced three compounds: Kepone; THEIC, used in commercial wire manufacture; and TAIC, a derivative of TPIEIC used in electrical applications. In the early 1970s, Allied transferred the operations and personnel of its division responsible for Kepone from Hopewell to Houston, Texas. Allied entered into an agreement with Life Science Products Company("Life Science") to manufacture Kepone at the facility in Hopewell.

In its processing of Kepone, Life Science ignored safety precautions which resulted in Kepone poisoning of many Life Science employees and members of their families. In July 1975, the Virginia State Department of Health and Human Services ordered Life Science to cease operations, resulting in the closing of the Hopewell plant. Life Science became insolvent and was financially incapable of remedying the consequences of the Kepone incident.

In addition to poisoning sixty-two employees, the operations of Life Science resulted in deleterious consequences for the environment. The United States Environmental Protection Agency ("EPA") reported Kepone particulate in the atmosphere at Richmond (20 miles from Hopewell), as well as Kepone contamination of the Life Science plant, the soil at the plant site, a section of the Hopewell landfill, and a lagoon adjacent to the Hopewell waste treatment facility. The EPA also reported that the James River, its local tributaries, and fish taken from the river, contained unacceptable levels of Kepone. In December 1975, the Governor of Virginia issued an emergency order closing the James River and certain portions of the Chesapeake Bay to commercial fishing.

The press laid the blame for the Kepone incident on Allied, and several Senate subcommittees conducted hearings on the matter. In addition, Allied was confronted with hundreds of civil damage actions which aggregated in the billions of dollars.

Allied voluntarily worked with federal and state agencies to alleviate the harm done. Allied spent approximately $ 800,000 in decontaminating the Hopewell plant and the materials and wastewater found near the site. In addition, Allied conducted intensive research on methods of identifying and retrieving Kepone from the environment, and sponsored health tests for residents of Hopewell and research [25 ELR 21183] for effective treatment of Kepone poisoning. In January 1976, Allied's Chairman committed to the Governor of Virginia that Allied would "do the right thing" and take further voluntary action to alleviate the damage caused by the Kepone incident.

In early 1976, the United States Attorney for the Eastern District of Virginia empaneled a grand jury to determine whether federal criminal charges should be brought against Allied, Life Science, and their officials. On May 7, 1976, the grand jury returned a 940-count indictment against Allied (including counts against officials of Life Science). Counts 1 through 456 of the indictment alleged violations of the Refuse Act of 1899, 33 U.S.C. § 407, which prohibits the. discharge of refuse matter from a manufacturing establishment into any navigable waters of the United States. Violations of § 407 are misdemeanors punishable by a fine not exceeding $ 2,500 nor less than $ 500 and/or by imprisonment for not less than 30 days and no more than one year. 33 U.S.C. § 411. The indictment alleged that between July 1, 1971 and October 17, 1972, Allied committed daily violations of the Waste Refuse Act by unlawfully discharging and depositing Kepone, TAIC and THEIC into waters of the United States.

Counts 457 through 940 of the indictment alleged violations of the Federal Water Pollution Control Act, 33 U.S.C. § 1311(a), which prohibits the discharge of any pollutant except in compliance with law. Willful or negligent violations are punishable by a fine no less than $ 2,500 nor more than $ 25,000 per day of violation, and/or by imprisonment for not more than one year. 33 U.S.C. § 1319(c)(1). Counts 457 through 940 were based on the discovery that Allied's applications for permits to discharge manufacturing wastes had failed to list Kepone, THEIC and TAIC discharges. The grand jury also returned indictments that alleged that Allied aided and abetted Life Science in unlawful discharge of Kepone, and that Allied had conspired with Life Science in the unlawful discharge of Kepone.

Allied entered a plea of nolo contendere to the 940-count indictment, which the district court accepted over the objection of the United States Attorney, William B. Cummings. The district judge expressed his hope that the criminal fine could be allocated to the Commonwealth of Virginia. He requested from the U.S. Attorney:

Mr. Cummings, the thought runs through my mind — and the thought just occurred to me — it might not even be worth pursuing, but I would ask you to research it and see what discretion, if any, the Court has. I have serious doubt that I have any. There are certain types of cases in which fines and contempts and things of that nature can't be — monies can be allocated to the injured parties. . . . I want to know if any of this fine that will be forthcoming can be allocated to the State of Virginia.

Appendix ("App.") at 37. Allied was eventually acquitted on all counts of the other indictments. Sentencing was set for October 5, 1976.

In September 1976, Allied's Board of Directors, acting in response to continuing negative publicity regarding its actions, authorized expenditures of up to $ 10 million to undertake further voluntary actions to demonstrate its concern for the damage caused by Kepone and to aid in the resolution of claims against the corporation. At this time, Allied also considered the tax-planning impact of its proposed actions. Allied's associate director of taxes advised its associate general counsel by letter that potential criminal fines would not be deductible and recommended that "the court record be clear that the payment is being made voluntarily and not under the compulsion of a suspended sentence" to ensure the deduction. App. at 97.

On October 5, 1976, the district court sentenced Allied to pay the maximum fine on all counts, $ 2,500 per count 1 through 456 and $ 25,000 per count for counts 457 through 940, for a total of $ 13,240,000. The judge stated that he hoped that after this sentence corporations will be deterred from polluting in the future. He reiterated his wish that the fines could be used to benefit directly the people of Virginia who were injured by Allied's actions, but understood that this arrangement was not permitted under the law. He ordered Allied to satisfy payment of the fine in 90 days, but indicated that he would entertain a Rule 35 motion at the end of the 90 days. Rule 35 of the Federal Rules of Criminal Procedure, as applicable to offenses committed prior to November 1, 1987, permitted a defendant to move for a reduction of sentence within 120 days after sentence was imposed.

The district court stated:

Now, so there be no misunderstanding, this is not a suggestion that the Court will reduce the fines. I intend to and will consider what actions, if any, have been voluntarily taken by the defendant corporation to alleviate the horrendous effects that have occurred.

In no event, do I want any action done under any compulsion whatsoever. Any action it would take should be taken voluntarily. In no event would a reduction, if there is a reduction, be in an amount equal to whatever they may voluntarily expend. I am not, however, closing my mind to consideration of an appropriate reduction.

App. at 136.

Counsel for Allied wrote a memorandum recommending voluntary remedial actions, including a creation of a foundation or trust in the amount of $ 5 million, for the purpose of developing methods of eradicating Kepone from the environment. The memorandum advised that the creation of a trust "should serve to achieve a substantial mitigation of the fine." App. at 145.

In November 1976, two of Allied's attorneys met with the district judge in order to discuss the judge's intentions regarding the Rule 35 motion. At that time the judge was noncommittal about his intentions, but was interested in Allied's proposal to create a foundation. The judge stated that Allied would not obtain credit for amounts it was legally obligated to pay. On December 16, 1976, the judge met with counsel for Allied, the U.S. Attorney and the Attorney General of Virginia. The judge indicated that his "rough thinking" was that Allied was to spend $ 5 million "for the good of the people" and that he would then reduce the fine by that amount. App. at 209.

Counsel for Allied met again with the judge on December 20, 1976. In a memorandum dated that day, counsel wrote:

As appears, the Judge has modified his thinking since last week.

The crux of the conversation was this: the Court will look favorably on a motion to reduce the fine if Allied will establish a charitable trust, that will be independent of the Commonwealth of Virginia, the purpose of which will be to help the environment generally.

. . .

Once the trust is established, the Judge would expect us to come in at the time of argument on the motion and represent that we were going to add "a minimum" of $ 8 million to the previously contributed $ 10,000 (he said "do not drop in more than $ 8 million") and in that event he would "look favorably" on reducing the fine by $ 8 million.

. . .

[The judge] did not want the money going into the State government as he "could see a lot of problems there" and that we would not get "any credit" for monies paid to a State created commission.

App. at 215-16.

On January 13, 1977, counsel for Allied met with the district judge again. Counsel described the meeting in a memorandum. The judge told counsel that he would name the trustees of the endowment, and that "[w]hat ever settlement you make with the state, you want to give them money, before or later, go right ahead. You are not getting credit for it with me. You are only getting credit my way." The judge told counsel that if Allied were to contribute over $ 8 million, then he would suspend $ 8 million of the fine. In fact, the judge indicated that he might even give Allied a "bonus" and suspend $ 8.24 million, which would leave $ 5 million for the fine. App. at 22930. Allied then filed its motion to reduce the fine under Rule 35 of the Federal Rules of Criminal Procedure.

On January 27, 1977, Allied's Board authorized an $ 8 million contribution to an organization to be formed as the Virginia Environmental Endowment Fund ("the Endowment"). The specific authorization of the contribution was in accordance with the Board's authorization in September 1976 of expenditures of up to $ 10 million to remedy the adverse effects of the Kepone incident. The purpose of the Endowment was to alleviate the effects of Kepone on the environment and on the lives of the affected persons and generally to improve and enhance the quality of the environment in Virginia. The Endowment was intended to qualify as an organization operated exclusively for the promotion of social welfare under section 501(c)(4) of the Internal Revenue Code.

The district court conducted a hearing on the motion to reduce the fine on January 28, 1977. At the hearing, counsel for Allied informed the judge about the foundation, and requested that the Court reduce the [25 ELR 21184] fine to $ 1,438,000, the minimum provided by law. The court ordered suspension of payment of the fine until further order of the court and deferred action on the motion until February 1, 1977, in order to provide the U.S. Attorney an opportunity to respond to Allied's motion.

At the February 1 hearing, the U.S. Attorney objected to any reduction of the fine that could result in Allied incurring an after-tax cost of less than $ 13 million. The U.S. Attorney objected to the possibility that Allied could get a tax benefit from the arrangement. The judge responded that he saw nothing wrong with the possibility of Allied securing a tax deduction and rejected the U.S. Attorney's arguments. The district court issued an order resentencing Allied as follows: the imposition of any fine for counts 1-740 of the indictment was suspended and Allied was placed on probation for a period of five years with respect to each of those counts; Allied was required to pay the maximum fine, totalling $ 5 million, for the remaining 200 counts of the indictment.

On its 1977 federal income tax return, Allied treated the $ 8 million it transferred to the Endowment as an ordinary and necessary business expense deductible under section 162(a) of the Internal Revenue Code because it contributed to the restoration of Allied's business reputation in the community.¹ Allied also deducted $ 49,323 in legal expenses incurred in January and February 1977 in connection with the organization of the foundation and other matters related to the Kepone incident. Allied did not deduct the $ 5 million fine it paid to the United States. The Commissioner disallowed both deductions and asserted a deficiency in income tax for 1977.

The Tax Court conducted a trial on the matter in November 1990. On April 6, 1992, the Tax Court filed a memorandum opinion addressing the issues presented. The court concluded that the $ 8 million payment to the Endowment was in substance a nondeductible "fine or similar penalty paid to a government for the violation of any law" within the meaning of section 162(f) of the Internal Revenue Code. The court rejected Allied's arguments that the payment was not a "fine" because it was made "voluntarily" and because it was primarily "remedial" in nature. The court found that the fine was not voluntary because it was made "with the virtual guarantee that the district court would reduce the criminal fine by at least that amount." In addition, the court found that on the facts of the case, "if there was a compensatory or remedial purpose for the payment, it was minimal. The payment was for punishment and deterrence of environmental crimes."

Following a recomputation of taxes under Tax Court Rule 155, the Tax Court entered a decision determining a deficiency in the Allied's federal income tax liability for 1977 in the amount of $ 675,402. The Tax Court concluded that Allied was entitled to the claimed legal expense reduction. Allied now appeals from the Tax Court's decision regarding the nondeductibility of the $ 8 million payment to the Endowment. The Commissioner has not cross-appealed from the Tax Court's decision with respect to the deductibility of Allied's legal expenses.

II.

The Tax Court had jurisdiction over the case pursuant to sections 6213(a), 6214(a) and 7442 of the Internal Revenue Code. Jurisdiction is conferred on this court by I.R.C. § 7482.

We have plenary review over the Tax Court's construction and application of the Internal Revenue Code. With respect to disputes of fact, we will reverse the Tax Court only if its findings are clearly erroneous. National Starch and Chemical Corp. v. Commissioner, 918 F.2d 426, 428 (3d Cir. 1990), aff'd sub nom. Indopco, Inc. v. Commissioner, 112 S. Ct. 1039 (1992); Gulf Oil Corp. v. Commissioner, 914 F.2d 396, 399 (3d Cir. 1990). The question presented in the instant case is whether Allied's $ 8 million contribution to the Endowment constituted a "fine or similar penalty" that was "paid to a government" within the meaning of section 162(f). This question involves matters of statutory interpretation, and thus we review de novo. See Frank Lyon Co. v. United States, 435 U.S. 561, 581 n.16, 98 S. Ct. 1291, 1302 n.16 (1978) ("The general characterization of a transaction for tax purposes is a question of law subject to review.").

III.

Section 162(a) of the Internal Revenue Code provides: "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. . . ." As an exception to this general rule, however, section 162(f) provides: "No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law." Section 1.162-21(b), Treas. Regs., further provides:

(1) For purposes of this section a fine or similar penalty includes an amount —

(i) Paid pursuant to a conviction or plea of nolo contenders for a crime (felony or misdemeanor) in a criminal proceeding;

. . .

(iii) Paid in settlement of the taxpayer's actual or potential liability for a fine or penalty (civil or criminal). . . .

(2). . . Compensatory damages . . . paid to a government do not constitute a fine or penalty.

Congress enacted section 162(f) in order to codify prior judicial decisions disallowing, on public policy grounds, trade or business expense deductions for fines and penalties resulting from statutory violations. See S. Rep. No. 91-552, 91st Cong., 1st Sess. 274 (1969-3 C.B. 4423, 597); See also Tank Truck Rentals, Inc. v. Commissioner, 356 U.S. 30, 35-36, 78 S. Ct. 507, 510 (1958) (observing that courts had uniformly held that permitting deductions for fines would frustrate public policy "in severe and direct fashion by reducing the 'sting' of the penalty prescribed by the . . .legislature").

Allied asserts three arguments why its contribution to the Endowment does not fall into the "fine or similar penalty'" exception of section 162(f): (1) Allied's contribution was made voluntarily, rather than "pursuant to" its plea of nolo contendere; (2) the contribution was remedial in nature rather than punitive; and (3) the contribution was not "paid to a government." We will address each argument in turn.

Allied maintains that the Congress and the Treasury Department intended that in the context of a criminal proceeding, the phrases "fine or similar penalty" paid "pursuant to" a plea or conviction comprehend a payment "imposed" on the defendant. Allied further contends that the common thread running through the section 162(f) cases is that the expenditure must have been an involuntary payment ordered by the court. See, e.g., Waldman v. Commissioner, 88 T.C. 1384, 1387 (1987) (because the sentencing court "ordered" payment of restitution by defendant, the payment was thus a "fine or similar penalty"), aff'd, 850 F.2d 611 (9th Cir. 1988); Stephens v. Commissioner, 93 T.C. 108, 113 (1989) (payment was nondeductible fine under section 162(f) because the payment was made as a result of a criminal conviction and that it was ordered in lieu of an additional prison term), rev'd, 905 F.2d 667 (2d Cir. 1990).

Allied argues that its contribution was not "imposed" by the district court; rather, the decision to make the contribution was at all times entirely with Allied. While Allied had reason to expect favorable resentencing as a result of its contribution, the contribution was in fact separate and distinct from the fine. To support its argument, Allied points to the fact that its Board of Directors had authorized a $ 10 million expenditure for broad-based programs to remedy damage caused by Kepone before the sentencing hearing took place. Additionally, Allied notes that the court did not have the legal authority to order Allied to make a contribution.

Assuming that Allied's criterion of "involuntariness" is a valid characterization of a "fine or similar penalty," we cannot accept that its contribution to the Endowment was in fact made voluntarily.² We agree with the Tax Court that a "voluntary" payment must be one [25 ELR 21185] made without expectation of a quid pro quo from the court. We find the analogy of the Tax Court to the area of charitable contributions valid and instructive for the limited purpose of interpreting the term "voluntary." See, e.g., Graham v. Commissioner, 83 T.C. 575, 581 (1984) ("[W]here contributions are made with the expectation of receiving a benefit, and such a benefit is received, the transfer is not a charitable contribution, but rather a quid pro quo." (citation omitted)), aff'd, 822 F.2d 844 (9th Cir. 1987), aff'd, 490 U.S. 680, 108 S. Ct. 1994 (1988); Neher v. Commissioner, 852 F.2d 848, 852 (6th Cir. 1988) (the issue is "whether the payment was a voluntary transfer made without consideration, or a payment made with the expectation of receiving a commensurate benefit in return"), vacated on other grounds, 882 F.2d 217 (6th Cir. 1989).

After sentencing Allied to a $ 13.24 million fine, the district court left open the possibility that the fine could be reduced pursuant to Rule 35 of the Federal Rules of Criminal Procedure if Allied took "voluntary" steps to alleviate the effects of the Kepone incident. At that time the judge stated that the reduction would in no event equal the amount that Allied would voluntarily expend. However, these statements proved to be inaccurate. The record clearly indicates that Allied was presented with only two choices: either pay the $ 13.24 million fine or make a contribution to the Endowment "the [district judge's] way."

From the outset Allied expected some mitigation of the fine in exchange for its contribution. However, from the time of the December meetings with the district judge, Allied was virtually assured a dollar for dollar reduction of the fine for its contribution. Indeed, during the last meeting between counsel for Allied and the district judge, the judge indicated that he would even give a $ 240,000 bonus reduction of the fine if Allied were to contribute $ 8 million dollars to the Endowment. Under these facts, we cannot find that the $ 8 million contribution was anything but a quid pro quo for a reduction of the criminal fine, and thus was not made "voluntarily."

Although the district judge did not have the power to direct that the criminal fine be earmarked for the benefit of Virginia citizens, the judge and Allied carefully crafted the transaction so that part of the criminal fine would remain in Virginia. This transaction did indeed take Allied out of the literal language or section 162(f) and provided Allied an arguable basis for claiming an ordinary and necessary business expense tax deduction. However, we agree with the Tax Court that in substance Allied paid a criminal fine.

Alternatively, Allied argues that even if its contribution was an involuntary payment, it was not a "fine or similar penalty" because it was designed to ameliorate the harm caused by Allied's violations. Allied maintains that in order to constitute a "fine or similar penalty" under section 162(f) it must be punitive rather than remedial in nature. This requirement is reflected in the applicable regulations, which specifically exempt "[c]ompensatory damages . . . paid to a government" from the scope of the provision. Treas. Reg. § 1.162-21(b)92).

Allied relies upon Stephens v. Commissioner, 905 F.2d 667 (2d Cir. 1990), in which the Second Circuit Court of Appeals, applying the standards established in section 162(f), concluded that because an added $ 1 million payment was designed to serve compensatory rather than punitive purposes, the payment was tax-deductible under section 165 (the section dealing with losses incurred by individuals). 905 F.2d at 672-73. Allied contends that like the court in Stephens, the district judge in this case intended both to punish and to ameliorate the damage caused to the people of Virginia. Thus, Allied argues, the voluntary remedial payments that the judge "encouraged" Allied to undertake are distinguishable from the $ 5 million punitive fine. Also, similar to Stephens, Allied made two payments, one which is a fine which is clearly punitive. Allied requests that we follow the Second Circuit and find that the punitive purpose of one part of the defendant's sentence is evidence that the second part of the sentence had a primarily compensatory purpose. 905 F.2d at 673.

We find that Allied's reliance upon Stephens is misplaced. The restitution payment in Stephens provided direct compensation to the specific victim of the criminal activity for the actual loss caused by the crime. The Endowment created by Allied did not compensate aggrieved parties for the specific losses attributable to Allied's misconduct. Indeed, the district judge was emphatic that the foundation would not be used to reduce Allied's legal liabilities. The Endowment instead served general public purposes. To hold that punitive exactions used for general public purposes fall outside the ambit of section 162(f) would effectively nullify the statute, since all exactions of this nature are ultimately used for general public purposes.

It is true that the district judge made remarks indicating both that he desired to punish Allied and deter future pollution, and that he wished that the people of Virginia would benefit from the imposition of the fines. While the judge may have been motivated by both punitive and compensatory purposes, we believe that the payment was merely a criminal fine diverted from the Treasury to the Endowment. We cannot find that payments made pursuant to such a scheme fall under the definition of "compensatory damages . . . paid to a government" that do not constitute a fine or penalty pursuant to section 1.162-21(b)(2).

Last, Allied argues that its payment does not come within the ambit of section 162(f) because the contribution was not "paid to a government." Allied notes that the Endowment is a private nonprofit corporation, organized under the laws of the Commonwealth of Virginia "exclusively for the promotion of social welfare of the people of the Commonwealth of Virginia." Since the Endowment is not a governmental agency or instrumentality, Allied asserts that its contributions cannot satisfy the "paid to a government" requirement.

The Tax Court correctly concluded that the "paid to a government" requirement of section 162(f) can be satisfied when the payments are made pursuant to directions of a court. See Bailey v. Commissioner, 756 F.2d 44, 47 (6th Cir. 1985) (civil penalty applied in settlement of class action pursuant to court order not deductible under section 162(f)); Waldman, 88 T.C. at 1389 ("We do not believe that a Government must actually 'pocket' the fine or penalty to satisfy the 'paid to a government' requirement of section 162(f)," and thus restitution payment pursuant to court order not deductible). The district judge was an official of the government, and the payment to the Endowment was at his direction, paid in lieu of the criminal fine. We find no practical difference between a situation where a fine is paid to the Treasury and the government then expends that money for a public purpose, and a situation where the fine is paid directly into a fund to benefit the public at the direction of the government. Thus, we conclude that Allied's payment to the Endowment falls within the ambit of section 162(f).

Conclusion

We hold that the payment by Allied to the Endowment was in substance a "fine or similar penalty paid to a government for the violation of any law" that is disallowed pursuant to section 162(f). Accordingly, we will affirm the April 11, 1994 decision of the Tax Court.

1. Because the Endowment did not qualify as an organization described under section 501(c)(3), Allied could not claim a charitable contribution deduction for the payment under section 170. See I.R.C. § 170(c)(2)(D). The Endowment is a social welfare organization described in section 501(c)(4). Its income is tax-exempt, but contributions to it are not deductible as charitable contributions.

2. The Commissioner also argues that Allied's "voluntariness" argument is without merit because neither the statute nor the regulations impose a "voluntariness" requirement. We acknowledge that other courts of appeals, which have interpreted section 162(f), have not relied on a voluntariness standard. See, e.g., Kraft v. United States, 991 F.2d 292 (6th Cir.), cert. denied, 114 S. Ct. 467 (1993); Stephens v. Commissioner, 905 F.2d 667 (2d Cir. 1990); True v. United States, 894 F.2d 1197 (10th Cir. 1990); Colt Indus. v. United States, 880 F.2d 1311 (Fed. Cir. 1989). Because we find that Allied's argument is without merit, we need not and do not decide whether Allied's voluntariness theory is a valid -interpretation of the statute and the accompanying regulations.