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Insuring against Class-Action Settlements on Financial and Tax Reporting

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The deductibility of class-action settlement costs is dependent on tracing the origin of the claims asserted in cause of the class-action lawsuit back to the source of the litigation and the origin and character of the claim and nature of the ultimate payment. To the extent the litigation arose from acts that can be construed to have been conducted in the ordinary conduct of the taxpayer’s business, a current tax deduction is warranted. In contrast, if the settlement and payment represents a fine or statutory penalty, then the payments are likely not tax deductible.

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