Vernoia, Enterline + Brewer, CPA LLC

finraIRS Chief Counsel has determined that the Financial Industry Regulatory Authority (FINRA) is an entity serving as an agency or instrumentality of the government of the United States. As such, fines paid to FINRA are not tax deductible. Under the Securities Exchange Act, FINRA is required to conduct enforcement and disciplinary proceedings relating to compliance with federal securities laws, regulations, and FINRA rules promulgated pursuant to that statutory and regulatory authority.

Under Code Sec. 162(f), any fine or similar penalty paid to a government for the violation of any law may not be deducted for income tax purposes. For purposes of Code Sec. 162(f), government encompasses the United States government and its agencies and instrumentalities. Key to determining whether an entity is an agency or instrumentality of a government is not only whether the entity has been delegated power to impose fines, but also whether it has the authority of government behind it when it seeks to enforce collection.

Chief Counsel found that FINRA had been delegated the right to exercise part of the sovereign power of a government and has the authority to act with the sanction of that government. Therefore, Chief Counsel concluded, FINRA serves as an agency or instrumentality of the government of the United States. As such, Code Sec. 162(f) bars a deduction for any fine or similar penalty paid to FINRA for the violation of any law.

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