In a Chief Counsel Advice memorandum (CCA 201623006), the IRS national office
addressed whether the Financial Industry Regulatory Authority
(FINRA) is a “corporation or other entity serving as an
agency or instrumentality” of the federal government for
purposes of Section 162(f) (which provides that fines are not
deductible). FINRA is a nonprofit corporation that is a registered
self-regulatory organization (SRO) under the Securities Exchange
Act of 1934 (’34 Act). FINRA enforces compliance with the
’34 Act, SEC regulations and its own rules by bringing
disciplinary proceedings to adjudicate violations, which are
subject to SEC review.
Relying primarily on the Tax Court’s opinion in Guardian
Industries Corp. v. Commissioner, 143 T.C. 1 (2014), the IRS
concluded that FINRA is a corporation serving as an agency or
instrumentality of the government for purposes of Section 162(f)
when it is performing its federally mandated duties under the
’34 Act of conducting enforcement and disciplinary
proceedings relating to compliance with federal securities laws,
regulations and its own rules promulgated pursuant to that
statutory and regulatory authority. The IRS noted, however, that
Section 162(f) would not apply to a fine paid to FINRA solely for a
violation of a “housekeeping” rule that is a matter of
private contract between FINRA in its capacity as a professional
organization and its members. Finally, the IRS recognized that some
taxpayers have raised a number of arguments that an SRO such as
FINRA is not an “instrumentality” of the government for
purposes of Section 162(f). The IRS in the Chief Counsel Advice
rejected these arguments.
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