The deductibility of payments made in settlement of claims is often contested by the Internal Revenue Service. In Gage v. Commissioner (TC Memo 2023-47), the taxpayers wished to deduct an amount payable to the federal government to resolve claims attributable to their guarantee of obligations collateral to a loan insured by the Department of Housing and Urban Development (HUD).

The Commissioner argued that the taxpayers could not deduct the amount as a business loss in the year before the court because “payment” was not made in that year. The Commissioner also argued that the payment was in settlement of a statutory claim for punitive damages and therefore a nondeductible “fine or similar penalty” under Internal Revenue Code section 162(f).

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