143 T.C. 1 (T.C. 2014), 20755-12, Guardian Industries Corp. v. Commissioner of Internal Revenue

Docket Nº:20755-12
Citation:143 T.C. 1, 143 T.C. No. 1
Opinion Judge:LAUBER, Judge:
Attorney:Allen Duane Webber, Jaclyn J. Pampel, Summer M. Austin, and Katie M. Marcusse, for petitioner. Dennis M. Kelly, Heather L. Lampert, and Robert M. Morrison, for respondent.
Case Date:July 17, 2014
Court:United States Tax Court

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143 T.C. 1 (T.C. 2014)

143 T.C. No. 1





United States Tax Court

July 17, 2014


I.R.C. section 162(f) denies a deduction for " any fine or similar penalty paid to a government for the violation of any law." Section 1.162-21(a), Income Tax Regs., provides that the term " government" includes a " corporation or other entity serving as an agency or instrumentality" of a domestic or foreign government.

In 2008 P, a U.S. corporation, paid a fine to the Commission of the European Community (Commission) for participating in a pricefixing cartel that violated the competition provisions of European Community (EC) law. P subsequently claimed a deduction for this payment on its 2008 Federal income tax return. R disallowed the claimed deduction under I.R.C. section 162(f), contending that the Commission is an instrumentality of the government of a foreign country within the meaning of section 1.162-21(a), Income Tax Regs.

1. Held: The phrase " government of a foreign country," as used in section 1.162-21(a), Income Tax Regs., may refer both to the government of a single foreign country and to the governments of two or more foreign countries.

2. Held, further, the Commission is an entity serving as an instrumentality of the EC member states within the meaning of section 1.162-21(a)(2) and (3), Income Tax Regs.

3. Held, further, P's claimed deduction for the fine paid to the Commission was properly disallowed under I.R.C. section 162(f).

Allen Duane Webber, Jaclyn J. Pampel, Summer M. Austin, and Katie M. Marcusse, for petitioner.

Dennis M. Kelly, Heather L. Lampert, and Robert M. Morrison, for respondent.


LAUBER, Judge:

Following an examination of petitioner's Federal income tax returns for 2005-08, the Internal Revenue Service (IRS or respondent) determined tax deficiencies and accuracy-related penalties under section 6662(a).1 After

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concessions, the remaining substantive issue concerns the deductibility of a € 20 million payment that petitioner made in 2008 to the Commission of the European Community (Commission).2 The IRS disallowed a deduction for this payment under section 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." The parties have filed cross-motions for partial summary judgment on this point.

Petitioner does not dispute that the € 20 million payment was a " fine or similar penalty" or that this payment was made " for the violation of * * * [a] law." The question the parties have submitted for resolution by summary judgment is whether the payment was made " to a government." The answer depends on whether the European Community (EC), and specifically the Commission, is an " agency or instrumentality" of " [t]he government of a foreign country" within the meaning of section 1.162-21(a), Income Tax Regs.

We hold that the term " government of a foreign country" as used in this regulation can refer to a single government or to multiple governments and thus embraces the governments of the EC member states. We further hold that the EC, and specifically the Commission, is an " instrumentality" of the EC member states considered individually and collectively. We believe these holdings to be consistent with a recent opinion of the U.S. Court of Appeals for the Second Circuit, which holds that the EC is an " agency or instrumentality of a foreign state" for purposes of the Foreign Sovereign Immunities Act (FSIA), 28 U.S.C. sec. 1603(b) (2006). See European Cmty. v. RJR Nabisco, Inc., 764 F.3d 129, 2014 WL 1613878 (2d Cir. Apr. 23, 2014), vacating 814 F.Supp.2d 189 (E.D.N.Y. 2011). Concluding as we do that the € 20 million fine was nondeductible under section 162(f) because it was paid to an " instrumentality" of the " government of a foreign country,"

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we will grant respondent's motion for partial summary judgment and deny petitioner's motion.


The following facts are not in dispute and are derived principally from the pleadings, the stipulation of facts, and the related exhibits. At the time petitioner filed its petition, its principal place of business was in Michigan.3

The EC was established in 1958 pursuant to the Treaty Establishing the European Economic Community (EC Treaty).[4] The EC was created to accomplish common objectives that could not be efficiently achieved by individual action of the member states. The European Union (EU) came into existence in 1993 with the Treaty on European Union. During 2008 the EC had 27 member states and was one of several entities collectively constituting the EU, with a separate legal personhood distinct from the EU.5

Under the EC Treaty, shared objectives were to be implemented by the EC acting alone, by the EC and the member

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states sharing competences, or by the EC's undertaking to support, coordinate, or supplement actions of the individual member states. The EC Treaty defines the EC's areas of authority and limits its powers to act outside those areas. See EC Treaty art. 5. As relevant to this Opinion, the institutional framework created to implement the goals of the EC consists of the Parliament, the Council, and the Commission, along with the Court of Justice and the Court of Auditors. Id. art. 7.

The Parliament, a semi-legislative body, consists of representatives directly elected by the citizens of the member states. The Council is a legislative body composed of government ministers from each member state who are authorized to commit their respective governments. Id. art. 203. The Council exercises, jointly with the Parliament, legislative and budgetary functions. See id. arts. 161, 202. However, the Council and the Parliament generally exercise their decisionmaking power only upon the basis of a proposal from the Commission.

The Commission functions in effect as the EC's executive branch. It consists of a President from one member state, who is nominated by the Council and approved by the Parliament, and a commissioner from each other member state. The latter must be approved by the Parliament and by the Council, which appoints each Commission member to a five-year term. Id. art. 214. Commission members are required to be completely independent in the performance of their duties, which means that they must act solely on behalf of the EC and not on behalf of any individual member state or the government thereof. Individual Commission members can be removed only for cause, by the Court of Justice upon proper application by the Council or the Commission. See id. art. 216.

To further economic unity and the goal of a well-regulated common market, the EC Treaty tasks the Commission with enforcing rules governing competition and free trade. These include rules that bar price-fixing, abusive market positions, and mergers that violate competition mandates. See id. arts. 81, 82, 85. As in effect during 2008,6 EC Treaty article 81

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restricted (among other things) actions that directly or indirectly fixed the purchase or selling prices of goods. On application of a member state or on its own initiative, the Commission was authorized to investigate cases of suspected infringement of article 81; propose measures to bring the infringement to an end; and, if the infringement continued, record the infringement in a decision. Id. art. 85. A Commission decision addressing competition or free trade violations is binding upon all those to whom it is addressed. EC Treaty art. 249.

During 2008 the relationship between the Commission and the competition authorities of the member states was governed by a regulation enacted by the Council in 2002. See Regulation No. 1/2003, 2003 O.J. (L 1) 1. Under this regulation, responsibility for enforcing EC competition rules, previously exercised by the Commission alone, was shared between the Commission and national authorities. National authorities and national courts were thenceforth required to apply EC Treaty articles 81 and 82 in individual cases. Regulation 1/2003 arts. 3, 5, 6. They were also empowered to impose liability on infringing parties and decree remedies based on EC as well as national law, provided the application of national law did not prejudice the uniform application of EC rules governing competition.

Regulation 1/2003 requires the Commission and national authorities to apply EC competition law in " close cooperation." Id. art. 11(1). To achieve this goal, the regulation established the European Competition Network (ECN), consisting of the Commission and national competition agencies. Participants in the ECN were encouraged to pool experience, share information, conduct joint investigations...

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