Preserving Disgorgement Tax Deductibility In SEC Settlements

A recent change in regulations by the U.S. Internal Revenue Service and Department of the Treasury affects whether Securities and Exchange Commission (SEC or Commission) disgorgement may be deductible for federal income tax purposes. Recent SEC settlements appear to take the position that disgorgement awards can be transferred to the general account of the Treasury if it is infeasible to return the funds to injured investors. Amounts transferred to the Treasury likely are not deductible under the new regulations, although disgorgement payments made to a fund for reimbursement of injured investors and used for that purpose should be deductible if certain requirements are satisfied. Careful planning by parties settling SEC actions can lead to greater certainty about the deductibility of disgorgement awards.