## Facts

- Mason & Dixon Lines, Inc., an interstate trucking company, operated trucks on Virginia highways.
- During tax years 1971–1975, its trucks were repeatedly cited for exceeding Virginia statutory weight limits.
- Virginia law treated weight-limit violations as misdemeanors punishable by criminal sanctions and, upon conviction, required assessment of additional “liquidated damages” against the owner or operator after notice.
- The company paid (1) criminal fines, (2) court costs, and (3) the post-conviction “liquidated damages.”
- For federal income tax purposes, the company did not deduct the criminal fines but deducted the court costs and “liquidated damages.”
- The IRS disallowed deductions for the “liquidated damages,” assessed deficiencies, and the company paid and sought refunds; the government conceded court costs were deductible, leaving only the “liquidated damages” in dispute.
- The district court, on stipulated facts and cross-motions for summary judgment, ruled the “liquidated damages” nondeductible; the company appealed.

## Issues

1. Whether Virginia “liquidated damages” assessed only after conviction for overweight violations are deductible as “ordinary and necessary” business expenses under I.R.C. § 162(a).
2. Whether those payments are properly characterized for federal tax purposes as compensatory damages or as nondeductible fines or similar penalties paid to a government for violating law.

## Decision

- The Sixth Circuit affirmed the judgment denying the refund.
- The court held the “liquidated damages” were penal sanctions imposed for violating Virginia weight laws and therefore nondeductible under the rule barring deductions for fines and similar penalties.
- The court rejected the district court’s primary rationale that the payments were not “necessary” because the violations were avoidable, but held the same result followed because the payments were fines or similar penalties in substance.

## Legal Principles

- Federal tax characterization turns on substance rather than state-law labels; a charge labeled “liquidated damages” may be treated as a penalty if imposed as a sanction for unlawful conduct.
- Payments imposed only upon conviction for statutory offenses and paid to a government are generally treated as fines or similar penalties and are nondeductible under the public-policy limitation reflected in I.R.C. § 162 and codified in § 162(f).
- Deductions are disallowed when allowing them would partially offset governmental sanctions and thereby frustrate a clearly defined policy to deter prohibited conduct.

## Conclusion

Because Virginia’s “liquidated damages” were triggered by criminal convictions and functioned as an added governmental sanction designed to deter overweight trucking, the payments were treated as fines or similar penalties and were not deductible business expenses under I.R.C. § 162.


Mason & Dixon Lines, Inc. v. United States, 708 F.2d 1043 (6th Cir. 1983)