Anna Elder, senior manager in the tax group in the Asheville office of Elder and Younger was reviewing the work papers related to the tax return to be filed by her biggest client, AsheMotion. She was intrigued by one of the items listed under other deductions, which was described as a settlement amount of $20 million. After consulting with Alan Stanley, the director of taxes at AsheMotion, Anna discovered the amount represented a settlement with the Department of Justice for violation of the False Claims Act. Alan described the settlement as a penalty the company had to pay to the federal government because one of its divisions billed the Department of Defense (DOD) for defective parts used in the construction of spy satellites. Alans use of the term penalty caused Anna to question whether such payment was deductible for tax purposes. The company deducted the payment on its income statement and reduced its tax provision for the tax benefit provided by the deduction. Anna is aware that Internal Revenue Code (IRC) Section 162(f) specifically prohibits the deduction of any fine or similar penalty paid to a government for the violation of any law. Subsequent research led Anna to Treas. Reg. 1.162-21(b)(1), which states that nondeductible fines or similar penalties include amounts: paid as a civil penalty imposed by Federal, State or local laws, and paid in settlement of the taxpayers actual or potential liability for a fine or penalty (civil or criminal). When Anna asked to see the settlement letter from the Department of Justice, Alan informed her that the companys legal department considered the terms of the letter to be confidential. He explained to her that the companys reason for deducting the amount was that the letter did not describe the settlement as a penalty or characterize any portion of the settlement as compensatory or punitive and specifically stated that nothing in the agreement characterized the payments for federal income tax purposes. Anna later learned through a conversation with her partner that the IRS generally considered single damages as compensatory (deductible) and any multiple damages as punitive (nondeductible). AsheMotion is a long-term client that provides Elder and Younger with substantial amounts in audit and tax fees annually. Alan informed Anna that the company was willing to take the risk in deducting the full amount of the settlement payment because its IRS auditors were unlikely to question the item and the tax refund from deducting the settlement ($7 million) would help alleviate some short-term cash flow problems the company was having. In fact, the company hoped to use the refund to pay off parts suppliers that were threatening to take the company to court over non-payment. The company also preferred not to provide any further disclosure or description of the deduction on the tax return so as not to alert the IRS auditors to a potential audit issue. Anna is trying to decide if the firm should be involved with the companys tax return.