Tax Court - No deduction for payments to qualified settlement fund until actually made 

December 4: The U.S. Tax Court today issued an opinion finding that deductions for amounts owed to a qualified settlement fund (here, concerning tobacco settlements with almost all U.S. states and territories) were properly disallowed because economic performance had not occurred until payment was actually made into the fund. Suriel v. Commissioner, 141 T.C. No. 16 (December 4, 2013)

Read the Tax Court’s opinion [PDF 147 KB]


The taxpayer’s wholly owned S corporation claimed deductions for unpaid obligations, both principal and interest, owed into the Tobacco Master Settlement Agreement (MSA) fund—a qualified settlement fund under section 468B.

The IRS disallowed the deductions on the basis that economic performance did not occur until payment was actually made into the MSA fund.

Pursuant to section 1366, the IRS made adjustments to the taxpayer’s individual income tax returns and determined deficiencies in income tax. The taxpayer filed a petition with the Tax Court. The issues in dispute concern the accrual of unpaid obligations incurred when the S corporation settled with 46 states, the District of Columbia, the Commonwealth of Puerto Rico, and four U.S. territories by entering into the Tobacco Master Settlement Agreement (MSA).

The Tax Court today held that the taxpayer was not entitled to deductions for unpaid MSA obligations because economic performance did not occur until the obligations were actually paid into the MSA escrow account. The court also concluded that accrued interest owed into a qualified settlement fund is deductible in the tax year before actual payment is made.

The court found (and the IRS conceded) that the taxpayer reasonably and in good faith relied upon tax professionals in reporting the deductions of over $302 million for the 2004 tax year and thus was not liable for any accuracy-related penalty under section 6662(a).

©2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International.

KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.

The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Direct comments, including requests for subscriptions, to
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.

Share this

Share this


Current and future KPMG clients may subscribe to TaxNewsFlash email alerts.

Email your contact information.

Other TaxNewsFlash publications

TaxNewsFlash-United States by year