By Pamela Johnston, Frederic Adam and Jessica Walker ( October 12, 2018, 1:18 PM EDT) -- Clients are asking their lawyers and their accountants if they can deduct on their income tax returns the amounts they have to pay the U.S. Securities and Exchange Commission to settle or resolve civil securities investigations. The answer used to be simple: The client could deduct the disgorgement amount, but could not deduct the civil penalty portion because it was a "penalty." The situation changed in June 2017 when the U.S. Supreme Court decided Kokesh v. SEC.[1] Kokesh held that for purposes of applying a federal statute of limitations, disgorgement could be considered "punitive" (otherwise considered a "penalty"), stating "SEC disgorgement ... bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate."[2] This decision protects defendants from the SEC bringing stale cases, but it has an unintended consequence: It changed the landscape for deduction of SEC disgorgement settlements and judgments. Since the decision, the Internal Revenue Service and state taxing authorities have been applying Kokesh to challenge deductions for disgorgement paid as a result of SEC settlements....