Question

What code section/regs does this fall under?

Snidely Limited spent $1 million this year to upgrade its manufacturing plant, which had received several warnings from the state environmental commissioner about releasing pollutive elements into the local river. Late in the year, Snidely received an assessment of $700,000 for violating the state’s Clean Water Act. After he negotiated with the state, which cost him $135,000 in attorney fees, Snidely spent another $200,000 the current year for more pollution control devices, and the fine was reduced to $450,000. Snidely deducted $785,000 in the current year. The IRS denied the deduction.

Answer 1

Applicable section is § 162(f) of the Code, 1986.

Relevant case law is True v. United States.

Any amount paid in violation of any act or statue or potential violation of the same is not deductible as an expense.

This covers only punitive statue violations and not civil disputes settlement. The violation of Water Act is a punitive damage and is meant to act as deterrant to stop such behaviour in future.

Unfortunately, we can't qoute the law or the act as it is in violation of policy.