Is Elon Musk’s $40M SEC Payment Deductible? Tax Expert Rob Wood Explains the Law
By now, you probably know that Elon Musk’s tweets about taking Tesla private caused tumult in the stock market and moved the SEC to file a lawsuit. The lawsuit was settled on October 16, with Musk and Tesla each agreeing to pay $20 million to the SEC and with Musk agreeing to step aside as chairman of the board (he’ll remain CEO of the company). That raises an interesting question: can Musk write off the $20M payment on his taxes? Well, maybe, says Tax lawyer Rob Wood. He discusses the tax law involved, both in this report and in his recent Forbes article, “Elon Musk's $40M SEC Settlement; Nice Tax Deduction?”
Wood says that this is an interesting area of the law. A lot of people assume that any fine such as the one in this case is non-deductible. That’s a safe assumption, but it may not be accurate. IRC Section 162(f) seems to eliminate any possibility of deducting a fine paid to the government. However, Wood notes, the tax law contains a lot of exceptions, and creative companies and taxpayers have often found ways to deduct these payments. [Wood adds that Tesla has already agreed with the SEC that it will not seek any deduction of its $20 million payment. However, the SEC’s statement about the settlement is silent as to deductibility, so Musk may have a chance at a deduction.]
In spite of what sounds like a clear statement in Section 162(f) the law has been interpreted in a number of cases to permit some “fines” to be deducted in the right circumstances. Wood explains that if a company can show that a payment “was kind of a remedial penalty,” it may be able to take a deduction. One example would be a payment whose purpose is to help make cleaner water or cleaner rather than simply to punish someone. Such payments have been found to be deductible.
However, Wood notes, companies will have a harder time deducting such payments starting in 2018 under the new tax law passed in 2017. It will likely be harder to get a deduction now than it was a year ago, but companies will surely make the effort, and some of them will probably succeed.
Wood also reminds viewers that anyone who is receiving or paying money will probably have some tax consequences to consider. People who are receiving money will have to address the question whether the money will be deemed income. People who are paying money often don’t consider—until tax filing time—whether a particular payment might be deductible. Wood says that both sides in any dispute where money is being paid should think about tax consequences before drawing up any documents.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.