Tax Court Rules That Payments By Tobacco Distributor To Tobacco Master Settlement Agreement Qualified Settlement Fund Not Deductible Until Paid

In Suriel v. Comm'r, 141 T.C. No. 16 (Dec. 4, 2013), the Tax Court ruled that, under the specific facts in this case, the economic performance rules under IRC Section 461(h), permitting a tax deduction for certain liabilities when a liability is fixed and before the liability is actually paid, did not trump the qualified settlement fund economic performance rules under Treas. Reg. section 1.468B-3(c)(1), which require actual payment to occur in order to claim a tax deduction.

In Suriel, the taxpayer, a distributor, but not a manufacturer, of tobacco products in the US, made payments to the qualified settlement fund established under the Tobacco Master Settlement Agreement, which provides liability protection for manufacturers of tobacco products. The settlement resolved claims by 46 states, DC, Puerto Rico and 4 US territories which had commenced or were expected to commence litigation in order to assert claims for monetary, equitable, and injunctive relief against tobacco product manufacturers under consumer protection and antitrust laws. Although the taxpayer was not a manufacturer of tobacco products, the taxpayer was able to join in the settlement under a special provision provided for distributors of tobacco products. The taxpayer joined in the Tobacco Master Settlement Agreement in order to ease its ability to sell cigarettes it purchased from Protabaco, a Columbian cigarette manufacturer, which was not a party to the Tobacco Master Settlement Agreement. The taxpayer took a tax deduction for the amount it owed, but had not paid, to the qualified settlement fund. The taxpayer argued that it was not liable to make payments to the qualified settlement fund, but rather...