What is the status of deductions for expenditures deemed contrary to public policy, such as fines or bribes?

Deductions for expenditures that are deemed contrary to public policy, such as fines and bribes, are classified as not deductible. The rationale behind this treatment lies in the principles of tax policy, where the law aims to discourage illegal activities by not allowing taxpayers to gain a tax advantage from such actions.

The IRS and tax courts maintain that allowing deductions for illegal activities would undermine the rule of law and public policy. Therefore, expenditures linked to illegal actions, such as bribes to secure contracts or fines imposed for illegal conduct, do not qualify for tax deductions. This position reinforces the idea that the tax system should not incentivize or condone unlawful behavior.

As a result, choosing the option that states these expenditures are not deductible aligns with the current tax regulations designed to maintain integrity within the taxation system.