U.S. Tax Court Makes Final Decision for Guardian Industries
On July 17, 2014, the United States Tax Court decided Guardian Industries Corp., v. Commissioner of Internal Revenue, holding that a payment to the European Commission was a nondeductible fine under IRC Sec. 162(f).
Guardian Industries Corp. (“Guardian”) is a U.S. corporation located in Michigan with a wholly-owned subsidiary in Luxembourg. The company is a manufacturer of glass, automotive and building products. Guardian entered the European market in 1981 and is now doing business in eight European countries. In 2004, Guardian, Guardian Europe and other glass suppliers were accused of fixing the prices of their products. After an investigation by the Commission of the European Community (the “Commission”), which is charged with enforcing the rules governing competition and free trade within the European Community (the “EC”), Guardian was found to have been participants in a cartel that fixed prices, timed their announcements and other commercial conditions. Their collusion was found to be an infringement of EC Treaty Article 81, which restricts the fixing of prices for goods. According to the Summary of Commission Decision of November 28, 2007 (“Commission Decision”), it was estimated that the cartel had a market share of 80%. Guardian was deemed liable “on the basis of the presumption of the exercise of decisive influence over their wholly-owned subsidiaries,” according to the Commission Decision.A €148 million euro fine was imposed, jointly and severally, on Guardian and Guardian Europe, for their participation.
Due to their involvement, Guardian paid €20 million to the Commission of the EC in March 2008, and deducted this payment on their 2008 Federal income tax return. Under IRC §162(a), a taxpayer is entitled to a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” In the case of Guardian, the IRS disallowed this deduction under IRC §162(f), which provides that “[n]o deduction shall be allowed for any fine or similar penalty paid to a government for the violation of any law.” While Guardian did not dispute that the payment was made to the EC for the violation of a law, it disputed that the EC could be considered a government under the terms of Sec. 162(f). The Tax Court held that the EC is an “agent or instrumentality” of “[t]he government of a foreign country” within the meanings of IRC Regulation §1.162-21(a). They held that “government of a foreign country” as used in the regulation can refer to a single government or multiple governments and that this does includes governments of the EC member states. They stated that the EC, and specifically the Commission, “is an ‘instrumentality’ of the EC member states, individually or collectively.”
Based on this ruling, it is important to properly analyze payments made for violations of law. Just because the payments are not made directly to a government, payments made to an agent or instrumentality of a government of a foreign country will likely be disallowed under the provisions of Sec. 162(f).
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