Memo Question

Description

Mesa Mining, a sole proprietorship, owns and operates a silver
mine in Northern California. Over the course of many years, the
toxic waste from their mining activity has contaminated the air and
water around the company’s plant (and perhaps significantly
downstream).
A few years ago, several employees of Mesa mining suffered
toxic poisoning and the Environmental Protection Agency finally
cited the company for recurring violations.
In federal court, the judge found Mesa Mining guilty of doing
significant damage to the environment. The Judge imposed
multiple fines totaling $15 million.
Mesa Mining immediately and voluntarily set up a charitable
foundation for the purpose of bettering the environment and
funded it with $8 million. The company incurred legal expenses in
setting up the foundation.
Mesa Mining returned to court and asked for a reduction in the
fine. The court upon hearing about the new charitable foundation
reduced the fine from $15 million to $7 million. Mesa Mining
deducted the $8 million paid to the foundation along with the legal
expenses incurred.
Upon audit, the IRS disallowed both deductions on the grounds
that the payment was, in fact, a fine and in violation of public
policy. Mesa Mining’s president has contacted or firm regarding
the deductibility of the $7 million fine and the $8 million payment
to the foundation.
He needs to understand how Mesa Mining will likely do in a Court
room.
I.R.C. § 162 (a) & (b) IRC Treas. Reg. § 1.162-21(b)