Tax Law

Fox News' Settlement Payment To Dominion Will Be Tax Deductible

Hopefully some of the tax savings can be used to hire a full-time fact checker.

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Fox News paid Dominion $787 million to settle a defamation lawsuit brought against the network. Details about the lawsuit have been covered by others. But the settlement payment could result in a lower tax bill for the network.

Fox News, given its size and reputation, is sued more often than the average Joe. It is still a defendant in another defamation suit with Smartmatic. There is also the discrimination lawsuit by its former producer Abby Grossberg. And there may be a lawsuit due to Tucker Carlson’s recent cancellation from the network. For most of these cases, chances are that settlement will be the final resolution.

In the lawsuits described above, if a settlement is reached where Fox News is required to pay the plaintiff, it will pay a private party. How the deduction will be characterized will depend on the plaintiff’s claims made in the lawsuit.

If Fox News had liability insurance which covered all or part of the settlement payment, then it can only deduct the amount it paid out of pocket.

Amounts paid for legal expenses in connection with litigation are deductible as ordinary business expenses if the litigation is directly connected to, or proximately results from, the conduct of a taxpayer’s business.

On the other hand, if the litigation is connected to the purchase of real estate, then the settlement payment might be a capital expense. This means that the settlement payment will increase the cost basis in the acquired property. If the property is later sold, it will result in lower capital gains taxes.

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Dominion and its attorneys are not likely to care about the tax deduction so long as they get their money. And, of course, Dominion will have to pay income taxes on the money they receive after paying legal fees and costs. They could have demanded that Fox News not take a tax deduction on the payment, but that will not benefit Dominion financially and could even jeopardize the settlement altogether.

Settlement payments (and associated attorney fees) are not deductible when they are connected to sexual abuse or sexual harassment cases if the parties have to sign a nondisclosure agreement. Fox News may have learned this the hard way when it settled its sexual harassment lawsuit brought by former commentator Britt McHenry in 2021.

If Fox News or any other business is being sued by the government seeking restitution and penalties, then its tax options are more limited because the government may seek fines and penalties due to violations of the law. Payments of government fines and penalties are generally not deductible as the policy is to disallow a tax deduction that will reduce the financial sting of the penalty.

Whether the payment to the government is a fine or a penalty has been questioned in a number of cases. However, the Tax Cuts and Jobs Act distinguishes nondeductible payments of fines and penalties from deductible payments for restitution, remediation, and coming into compliance with the law.

As part of settlement agreements with the government, sometimes the defendants have to agree not to take a tax deduction on any settlement amount paid.

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Fox News will likely get at least a $200 million tax break from this settlement. Hopefully some of the tax savings can be used to hire a full-time fact checker.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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