Denial of Deduction for Certain Fines, Penalties, and Other Amounts; Related Information Reporting Requirements, 4970-4990 [2021-00741]

Download as PDF khammond on DSKJM1Z7X2PROD with RULES 4970 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations determined that land ports of entry along the U.S.-Canada border will continue to suspend normal operations and will only allow processing for entry into the United States of those travelers engaged in ‘‘essential travel,’’ as defined below. Given the definition of ‘‘essential travel’’ below, this temporary alteration in land ports of entry operations should not interrupt legitimate trade between the two nations or disrupt critical supply chains that ensure food, fuel, medicine, and other critical materials reach individuals on both sides of the border. For purposes of the temporary alteration in certain designated ports of entry operations authorized under 19 U.S.C. 1318(b)(1)(C) and (b)(2), travel through the land ports of entry and ferry terminals along the United StatesCanada border shall be limited to ‘‘essential travel,’’ which includes, but is not limited to— • U.S. citizens and lawful permanent residents returning to the United States; • Individuals traveling for medical purposes (e.g., to receive medical treatment in the United States); • Individuals traveling to attend educational institutions; • Individuals traveling to work in the United States (e.g., individuals working in the farming or agriculture industry who must travel between the United States and Canada in furtherance of such work); • Individuals traveling for emergency response and public health purposes (e.g., government officials or emergency responders entering the United States to support federal, state, local, tribal, or territorial government efforts to respond to COVID–19 or other emergencies); • Individuals engaged in lawful crossborder trade (e.g., truck drivers supporting the movement of cargo between the United States and Canada); • Individuals engaged in official government travel or diplomatic travel; • Members of the U.S. Armed Forces, and the spouses and children of members of the U.S. Armed Forces, returning to the United States; and • Individuals engaged in militaryrelated travel or operations. The following travel does not fall within the definition of ‘‘essential travel’’ for purposes of this Notification— • Individuals traveling for tourism purposes (e.g., sightseeing, recreation, gambling, or attending cultural events). At this time, this Notification does not apply to air, freight rail, or sea travel between the United States and Canada, the Department,’’ including the Commissioner of CBP. 6 U.S.C. 112(a)(3). VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 but does apply to passenger rail, passenger ferry travel, and pleasure boat travel between the United States and Canada. These restrictions are temporary in nature and shall remain in effect until 11:59 p.m. EST on February 21, 2021. This Notification may be amended or rescinded prior to that time, based on circumstances associated with the specific threat.8 The Commissioner of U.S. Customs and Border Protection (CBP) is hereby directed to prepare and distribute appropriate guidance to CBP personnel on the continued implementation of the temporary measures set forth in this Notification. The CBP Commissioner may determine that other forms of travel, such as travel in furtherance of economic stability or social order, constitute ‘‘essential travel’’ under this Notification. Further, the CBP Commissioner may, on an individualized basis and for humanitarian reasons or for other purposes in the national interest, permit the processing of travelers to the United States not engaged in ‘‘essential travel.’’ Peter T. Gaynor Acting Secretary, U.S. Department of Homeland Security. [FR Doc. 2021–01028 Filed 1–15–21; 8:45 am] Background BILLING CODE 9112–FP–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9946] RIN 1545–BO67 Denial of Deduction for Certain Fines, Penalties, and Other Amounts; Related Information Reporting Requirements Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. AGENCY: This document contains final regulations providing guidance on section 162(f) of the Internal Revenue Code (Code), as amended in 2017, concerning the deduction of certain fines, penalties, and other amounts. This document also contains final regulations providing guidance relating to the information reporting requirements under new section 6050X of the Code with respect to those fines, penalties, and other amounts. The final SUMMARY: 8 DHS is working closely with counterparts in Mexico and Canada to identify appropriate public health conditions to safely ease restrictions in the future and support U.S. border communities. PO 00000 Frm 00094 Fmt 4700 regulations affect taxpayers that pay or incur amounts to, or at the direction of, governments, governmental entities or certain nongovernmental entities treated as governmental entities relating to the violation of any law or investigations or inquiries by such governments, governmental entities, or nongovernmental entities into the potential violation of any law. The final regulations also affect governments, governmental entities, and nongovernmental entities subject to the related reporting requirements. DATES: Effective date: These regulations are effective on January 14, 2021. Applicability dates: For dates of applicability, see §§ 1.162–21(g) and 1.6050X–1(g). FOR FURTHER INFORMATION CONTACT: Concerning the regulations on amended section 162(f), Sharon Y. Horn (202) 317–4426; concerning the information reporting requirement, Nancy L. Rose (202) 317–5147. The phone numbers above may also be reached by individuals who are deaf or hard of hearing, or who have speech disabilities, through the Federal Relay Service toll-free at (800) 877–8339. SUPPLEMENTARY INFORMATION: Sfmt 4700 Prior to its amendment in 2017, section 162(f) disallowed an ordinary and necessary business expense deduction under section 162(a) for any fine or similar penalty paid to a government for the violation of any law. On February 20, 1975, the Treasury Department and the IRS issued final regulations under the prior version of section 162(f) (TD 7345, 40 FR 7437), which were amended on July 11, 1975 (T.D. 7366, 40 FR 29290) (together the 1975 regulations). Section 162(f) was amended by section 13306(a) of Public Law 115–97, 131 Stat. 2054 (2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA). Section 6050X was added to the Code by section 13306(b) of the TCJA. As amended by the TCJA, the general rule of section 162(f)(1) provides that no deduction otherwise allowable under chapter 1 of the Code (chapter 1) shall be allowed for any amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry by such government or governmental entity into the potential violation of any law. Section 162(f)(5) describes certain selfregulating nongovernmental entities that are treated as governmental entities for E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations purposes of section 162(f). As used in this preamble, the term ‘‘governmental entities’’ includes nongovernmental entities treated as governmental entities under section 162(f)(5). Section 162(f)(2) provides an exception to the general disallowance rule in section 162(f)(1) for certain amounts paid or incurred for restitution, remediation, or to come into compliance with a law. Under section 162(f)(2)(A)(i) and (ii), section 162(f)(1) does not apply to amounts that (i) the taxpayer establishes were paid or incurred as restitution (including remediation of property) or to come into compliance with a law (establishment requirement), and (ii) are identified in a court order (order) or settlement agreement (agreement) as restitution, remediation, or amounts paid or incurred to come into compliance with a law (identification requirement). Section 162(f)(2)(B) provides that amounts paid for restitution, remediation, and to come into compliance with a law do not include any amount paid or incurred as reimbursement to a government or governmental entity for the costs of any investigation or litigation. Section 162(f)(3) provides an exception to the general rule for amounts paid or incurred related to private party suits and section 162(f)(4) provides an exception for certain taxes due. Section 6050X(a)(1) and 6050X(a)(2)(A) requires the appropriate official of any government or governmental entity involved in a suit or agreement described in section 6050X(a)(2)(A)(i) to file an information return if the aggregate amount involved in all orders or agreements with respect to the violation, investigation, or inquiry is $600 or more. Section 6050X(a)(2)(B) authorizes the Secretary of the Treasury or his delegate (Secretary) to adjust the threshold amount for filing the information return as necessary to ensure the efficient administration of the internal revenue laws. Pursuant to section 6050X(a)(1), the information return must set forth (1) the amount required to be paid as a result of the order or agreement to which section 162(f)(1) applies; (2) any amount required to be paid as a result of the order or agreement that constitutes restitution or remediation of property; and (3) any amount required to be paid as a result of the order or agreement for the purpose of coming into compliance with a law that was violated or involved in the investigation or inquiry. Section 6050X(a)(3) provides that the government or governmental entity shall file the information return at the time the agreement is entered into, as VerDate Sep<11>2014 23:04 Jan 17, 2021 Jkt 253001 determined by the Secretary. Section 6050X(b) requires the government or governmental entity to furnish to each person who is a party to the suit or agreement a written statement, at the time the information return is filed with the IRS, that includes (1) the name of the government or entity and (2) the information submitted to the IRS. Under section 13306(a)(2) and (b)(3) of the TCJA, the amendments to section 162(f) and new section 6050X apply to amounts paid or incurred on or after December 22, 2017, the date of enactment of the TCJA. However, they do not apply to amounts paid or incurred under any binding order issued or agreement entered into, before December 22, 2017, and, if such order or agreement requires court approval, the required approval is obtained before December 22, 2017. On May 13, 2020, the Internal Revenue Service published a notice of proposed rulemaking (REG–104591–18) in the Federal Register (85 FR 28524) providing guidance on the deduction disallowance rules in section 162(f) and the associated reporting requirements in section 6050X. No public hearing on the proposed regulations was requested and accordingly no public hearing was held. The Treasury Department and the IRS received written comments in response to the proposed regulations. All comments were considered and are available at www.regulations.gov or upon request. After full consideration of the comments received on the proposed regulations, this Treasury decision adopts the proposed regulations with modifications in response to such comments as described in the Summary of Comments and Explanation of Revisions. Summary of Comments and Explanation of Revisions Most of the comments addressing the proposed regulations are summarized in this Summary of Comments and Explanation of Revisions. However, comments merely summarizing or interpreting the proposed regulations, recommending statutory revisions, or addressing issues that are outside the scope of the final regulations are not discussed. Part I of this Summary of Comments and Explanation of Revisions addresses § 1.162–21 and Part II addresses § 1.6050X–1. I. Denial of Deduction for Certain Fines, Penalties, and Other Amounts A. General Rule The proposed regulations revise § 1.162–21 and provide operational and PO 00000 Frm 00095 Fmt 4700 Sfmt 4700 4971 definitional guidance concerning the application of section 162(f), as amended by the TCJA. The proposed regulations provide generally that a taxpayer may not take a deduction under any provision of chapter 1 for amounts (1) paid or incurred by suit, agreement, or otherwise; (2) to, or at the direction of, a government or governmental entity; (3) in relation to the violation, or investigation or inquiry into the potential violation, of any civil or criminal law. The proposed regulations also describe an exception to the general rule, under section 162(f)(2), which allows a deduction for certain amounts identified in the order or agreement as restitution, remediation, or paid or incurred to come into compliance with a law and the taxpayer establishes that the amount was paid or incurred for the purpose identified. The final regulations provide generally that a taxpayer may not take a deduction under any provision of chapter 1 for amounts (1) paid or incurred by suit, agreement, or otherwise; (2) to, or at the direction of, a government or governmental entity; (3) in relation to the violation, or investigation or inquiry by such government or governmental entity into the potential violation, of any civil or criminal law. This general rule applies whether or not the taxpayer admits guilt or liability or pays the amount imposed for any other reason, including to avoid the expense or uncertain outcome of an investigation or litigation. An admission of guilt or liability is not necessary because section 162(f)(1) contemplates a broader disallowance, as demonstrated by the disallowance of any amount paid or incurred, to, or at the direction of, a government or governmental entity in relation to the ‘‘investigation or inquiry’’ into the ‘‘potential violation of any law.’’ 1. Suit, Agreement, or Otherwise Under the proposed regulations, suit, agreement, or otherwise includes, but is not limited to, settlement agreements; non-prosecution agreements; deferred prosecution agreements; judicial proceedings; administrative adjudications; decisions issued by officials, committees, commissions, or boards of a government or governmental entity; and any legal actions or hearings in which a liability for the taxpayer is determined or pursuant to which the taxpayer assumes liability. Commenters asked that the final regulations exclude administrative and certain other categories of proceedings from the definition of suit, agreement, or otherwise. The final regulations do not adopt this recommendation because the E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES 4972 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations statute’s use of the phrase ‘‘suit, agreement, or otherwise’’ indicates that Congress intended for section 162(f)(1) to apply broadly to both formal legal proceedings as well as other less formal proceedings. The preamble to the proposed regulations under section 6050X explains that an order or agreement is treated as binding under applicable law even if all appeals have not been exhausted with respect to the suit, agreement, or otherwise. A commenter recommended that the final regulations provide that the same meaning applies for the term ‘‘binding’’ order or agreement under section 162(f). The final regulations generally adopt this recommendation. powers, including adopting, administering, or enforcing laws and imposing sanctions, as part of performing an essential governmental function. The final regulations revise the definition to clarify that selfregulatory powers include enforcing rules, not laws. A commenter recommended that the definition of ‘‘essential governmental function’’ under section 115 should apply to section 162(f)(5). The final regulations do not adopt this recommendation because section 115 does not define the term ‘‘essential governmental function.’’ The final regulations clarify that a governmental entity includes a nongovernmental entity treated as a governmental entity. 2. To, or at the Direction of, a Government or Governmental Entity One commenter asked for clarification that, if a deduction is otherwise allowable under chapter 1, section 162(f)(1) does not disallow a deduction for amounts paid for the taxpayer’s own legal fees and related expenses incurred in defending a prosecution or other action or proceeding, including an investigation or inquiry into a potential violation of any law. Legal fees and other expenses, such as stenographic and printing charges, paid or incurred in the defense of a prosecution or civil action arising from a violation of any law, or an investigation or inquiry into a potential violation of any law, are not amounts paid or incurred to, or at the direction of, a government or governmental entity. Thus it is clear that section 162(f)(1) does not disallow a deduction for such amounts, and there is no need to clarify this rule in final regulations. The proposed regulations provide a definition of ‘‘government or governmental entity.’’ The definition in the final regulations has been reorganized to provide a definition of a government in § 1.162–21(e)(1) and to provide a definition of a ‘‘governmental entity’’ in § 1.162–21(e)(2). The definitions are based on the definition in the proposed regulations but clarify that a political subdivision of a government includes a local government unit. No comments were received on the definition of ‘‘government or governmental entity’’ in the proposed regulations. The proposed regulations define a nongovernmental entity treated as a governmental entity as an entity that exercises self-regulatory powers (including imposing sanctions) in connection with a qualified board or exchange, as defined in section 1256(g)(7), or exercises self-regulatory 3. Violation of Any Law Commenters asked that the final regulations provide a definition of a ‘‘violation of any law.’’ The final regulations do not adopt this recommendation because they are intended to provide broad rules of general application based on the underlying principles of section 162(f) rather than narrow rules with limited application. The final regulations provide several examples to illustrate the application of section 162(f) to violations of any law. Commenters also requested clarification that ‘‘technical violations’’ of any law, such as vendor overcharge errors remedied in the ordinary course of business, are not violations of any law. The commenters did not further define what constitutes a ‘‘technical violation.’’ Without a more comprehensive definition, the commenters’ requests may be inconsistent with the general rule in the final regulations. Therefore, the final regulations do not adopt this comment. Commenters recommended that the final regulations clarify that the phrase ‘‘in relation to the violation of any law or the investigation or inquiry by such government or [governmental] entity into the potential violation of any law’’ do not apply to a government or governmental entity enforcing its legal rights, including defending against claims, as a private party. The Treasury Department and the IRS agree that, in general, unless a government contracting or similar statute provides otherwise, a government’s recovery of vendor overcharge errors are in the nature of private party recoveries and not payments made to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry in to the potential violation of any law. Similarly, as discussed with VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 PO 00000 Frm 00096 Fmt 4700 Sfmt 4700 respect to private party suits in Part I.B.6 of this Summary of Comments and Explanation of Revisions, a violation of any law does not include any order or agreement in a suit in which a government or governmental entity enforces rights as a private party. Commenters asked the Treasury Department and the IRS how section 162(f) applies to amounts paid or incurred pursuant to certain statutes that contain provisions that may apply without any finding of a violation of law, such as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). CERCLA contains cleanup requirements and reimbursement provisions that generally apply even though there has been no violation of law. CERCLA also contains penalty provisions for specific violations of law. Although section 162(f) and the final regulations generally will not apply to CERCLA cleanup requirements and reimbursements required to be paid or incurred by provisions that apply without any violation of law, section 162(f) and the final regulations will apply to penalties required to be paid or incurred for violations of law, including penalties required to be paid or incurred by reason of a violation of specific CERCLA provisions. 4. Investigation or Inquiry Into the Potential Violation of Any Law The Treasury Department and the IRS received several requests for additional guidance concerning ‘‘the investigation or inquiry by [a] government or [governmental] entity into the potential violation of any law.’’ Commenters requested that the final regulations: (1) Provide that an investigation or inquiry by such government into the potential violation of any law does not include a routine investigation, inquiry, audit, review, or inspection; (2) clarify when a routine investigation, inquiry, audit, review, or inspection ends and a nonroutine investigation or inquiry begins; (3) clarify whether payments related to an investigation or inquiry are deductible if the investigation or inquiry ends without a finding of a violation of any law; and (4) provide examples of routine investigations, inquiries, audits, reviews, or inspections that are not nonroutine investigations or inquiries. In addition, some of the commenters requested guidance that is unique to an industry or a statute. The Treasury Department and the IRS agree that, in general, section 162(f)(1) does not disallow a deduction for amounts paid or incurred in connection with investigations or inquiries of regulated businesses or industries E:\FR\FM\19JAR1.SGM 19JAR1 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations conducted in the ordinary course of business if the payment is otherwise deductible as an ordinary and necessary business expense. Accordingly, the final regulations provide, in general, that amounts paid or incurred for routine investigations or inquiries, such as audits or inspections, required to ensure compliance with rules and regulations applicable to the business or industry, which are not related to any evidence of wrongdoing or suspected wrongdoing, are not amounts paid or incurred relating to the potential violation of any law. Therefore, section 162(f)(1) will not apply to disallow an otherwise deductible ordinary and necessary business expense for amounts paid or incurred for these routine investigations or inquiries. Examples to illustrate the application of this rule are provided in the final regulations. In contrast, section 162(f)(1) explicitly disallows a deduction for amounts paid or incurred for an investigation or inquiry by the government or governmental entity relating to the potential violation of any law. Therefore, the final regulations do not adopt the commenters’ recommendation that section 162(f)(1) does not apply to amounts paid or incurred where, at the conclusion of the investigation or inquiry, there is no finding of wrongdoing, because the recommendation is inconsistent with section 162(f)(1). The final regulations clarify that the investigation or inquiry must be one that is conducted by the government or governmental entity. Examples to illustrate the application of this rule are provided in the final regulations. khammond on DSKJM1Z7X2PROD with RULES 5. Fine or Penalty The proposed regulations disallow a deduction for payments made, at the taxpayer’s election, in lieu of a fine or penalty. No comments were received regarding this provision and it is retained in the final regulations. One commenter asked that the final regulations adopt a definition for ‘‘fine or penalty,’’ and expressly state that both are not deductible. Although the final regulations do not provide a definition of ‘‘fine or penalty,’’ they provide that an amount that is paid or incurred in relation to the violation of any civil or criminal law includes a fine or penalty. B. Exception to General Rule Section 162(f)(2) provides an exception to the general disallowance rule for certain amounts identified in the order or agreement as, and established by the taxpayer to be, paid or incurred for restitution or VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 remediation, or to come into compliance with a law. The final regulations provide definitions and other guidance on the operation of this exception. 1. Restitution and Remediation a. General The proposed regulations provide that an amount is paid or incurred for restitution or remediation if it restores, in whole or in part, the person, as defined in section 7701(a)(1); the government; the governmental entity; or property harmed by the violation or potential violation of any law. Commenters requested clarification as to what comprises restitution or remediation and requested modifications to the proposed definitions. A commenter recommended that the final regulations distinguish between civil and criminal restitution and disallow the deduction for amounts paid as criminal restitution. The final regulations do not adopt this rule because section 162(f)(2) does not distinguish between civil and criminal restitution and applies to ‘‘restitution (including remediation of property) for damage or harm which was or may be caused by the violation of any law or the potential violation of any law.’’ Emphasis added. Nonetheless, it may be harder for a taxpayer to establish that an amount paid is restitution in the criminal context because of the punitive purpose underlying most criminal liability. b. Restitution or Remediation of the Environment One commenter asked whether the definition of ‘‘property’’ for which restitution or remediation may be provided includes the environment. Another commenter noted that restitution or remediation cannot redress irreparable harms to the environment or natural resources, such as, killing wildlife or destroying a species or an ecosystem caused by the violation of any law. The commenter recommended that the final regulations provide a special restitution and remediation rule to address amounts paid or incurred for irreparable harm to the environment, natural resources, or wildlife. The Treasury Department and the IRS agree, provided the identification and establishment requirements are met and the restitution or remediation has a strong nexus or connection to the harm to the environment, natural resources, or wildlife that the taxpayer has caused or is alleged to have caused. The final regulations revise the definition of ‘‘restitution, remediation of property, PO 00000 Frm 00097 Fmt 4700 Sfmt 4700 4973 and amounts paid to come into compliance with a law’’ to clarify that, if otherwise deductible under chapter 1, an amount is paid or incurred for restitution or remediation of the environment, wildlife, or natural resources if it is paid or incurred for the purpose of conserving soil, air, or water resources, protecting or restoring the environment or an ecosystem, improving forests, or providing a habitat for fish, wildlife, or plants, and has the requisite nexus with the harm that the taxpayer has caused or is alleged to have caused. Such amounts may include payments described in § 1.162– 21(e)(4)(A), to be used exclusively for the restitution or remediation of a harm to the environment, wildlife, or natural resources that the taxpayer has caused or is alleged to have caused or paid to a segregated fund or account established by, or at the direction of, the government or governmental entity for the restitution or remediation of harm to the environment, wildlife, or natural resources that the taxpayer has caused or is alleged to have caused, provided, pursuant to the order or agreement, the amounts are not disbursed to the general account of the government or governmental entity for general enforcement efforts or other discretionary purposes. c. Disgorgement or Forfeiture Under the proposed regulations, the section 162(f)(2) exception to the general deduction disallowance rule does not apply to forfeiture or disgorgement. Therefore, the proposed regulations treat any amount paid or incurred as forfeiture or disgorgement as, per se, disallowed under section 162(f)(1). To support excluding disgorgement from the definition of restitution, remediation, or amounts paid to come into compliance with a law, the preamble to the proposed regulations quote Kokesh v. Securities and Exchange Commission, 137 S. Ct. 1635, 1643 (2017) (‘‘ ‘[t]he primary purpose of disgorgement orders is to deter violations of the securities laws by depriving violators of their ill-gotten gains’ ’’). In Kokesh, the Supreme Court determined that disgorgement, when imposed as a sanction for violating a Federal securities law, constitutes a penalty under the related five-year statute of limitations because disgorgement is imposed to deter violations of securities laws by depriving violators of their ill-gotten gains and because the funds are dispersed to the United States Treasury to redress a wrong to the public at large caused by the violation. Kokesh, 137 S. Ct. at 1642–44. However, in Kokesh, the E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES 4974 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations Supreme Court recognized that disgorgement may serve a compensatory purpose as well (‘‘wrong sought to be redressed is . . . a wrong to the individual;’’ ‘‘[s]ome disgorged funds are paid to victims’’). Id. To support excluding forfeiture from the definition of restitution, remediation, or amounts paid to come into compliance with a law, the preamble to the proposed regulations quotes Nacchio v. United States, 824 F.3d 1370, 1379 (Fed. Cir. 2016) (‘‘ ‘[w]hile restitution seeks to make victims whole by reimbursing them for their losses, forfeiture is meant to punish the defendant by transferring his ill-gotten gains to the United States Department of Justice.’ ’’) In Nacchio, the United States Court of Appeals for the Federal Circuit disallowed the taxpayer’s deduction for the amount of mandatory forfeiture pursuant to a criminal conviction for insider trading, even though the government, in its discretion, subsequently used the forfeited funds to compensate victims. Several commenters asked the Treasury Department and the IRS to reconsider the rule in the proposed regulations, which excludes disgorgement and forfeiture from the definition of ‘‘restitution, remediation, and coming into compliance.’’ One commenter explained the exclusion is contrary to the expressed intent of Congress because the statute provides an exception to the disallowance rule of section 162(f)(1) for restitution and that, in Kokesh, the Supreme Court stated, ‘‘[g]enerally, disgorgement is a form of ‘[r]estitution measured by the defendant’s wrongful gain.’’ Kokesh, 137 S. Ct. at 1640. Commenters noted that, in Liu v. Securities and Exchange Commission, 140 S. Ct. 1936 (2020), which was decided after the publication of the proposed regulations, the Supreme Court recognized that, amounts paid through disgorgement that do not exceed the wrongdoer’s net profits and that are awarded to individual victims may constitute an equitable remedy. Commenters also noted that, in Liu, the Supreme Court expressly declined to answer whether under Kokesh disgorgement necessarily constitutes a penalty. Liu, 140 S. Ct. at 1946. In consideration of the comments submitted with respect to disgorgement and the Supreme Court’s decision in Liu, the final regulations will not treat disgorgement of net profits as, per se, nondeductible under section 162(f)(1). Instead, taxpayer’s claim for a deduction for amounts paid or incurred through disgorgement will not be disallowed if the amount is otherwise deductible VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 under chapter 1; the order or agreement identifies the payment, not in excess of net profits, as restitution, remediation, or an amount paid to come into compliance with a law; the taxpayer establishes that the amount was paid as restitution, remediation, or an amount paid to come into compliance with a law; and the origin of the taxpayer’s liability is restitution, remediation, or an amount paid to come into compliance with a law. However, amounts paid or incurred through disgorgement will be disallowed if, pursuant to the order or agreement, the amounts are disbursed to the general account of the government or governmental entity for general enforcement efforts or other discretionary purposes. The final regulations provide an example to illustrate the application of section 162(f) to disgorgement. Commenters also requested that the Treasury Department and the IRS reconsider the rule in the proposed regulations that excludes forfeiture from the definition of ‘‘restitution, remediation, and coming into compliance,’’ but did not address forfeiture independently from their discussion of disgorgement. Virtually all states have some form of asset recovery legislation and the United States Code contains many forfeiture provisions. Because the final regulations cannot provide specific rules about the application of section 162(f) to every asset recovery statute, the final regulations will not treat forfeiture of net profits as, per se, nondeductible under section 162(f)(1). Instead, taxpayer’s claim for a deduction for an amount paid or incurred through forfeiture will not be disallowed if the amount is otherwise deductible under chapter 1; the order or agreement identifies the payment, not in excess of net profits, as restitution, remediation, or an amount paid to come into compliance with a law; the taxpayer establishes that the amount was paid as restitution, remediation, or an amount paid to come into compliance with a law; and the origin of the taxpayer’s liability is restitution, remediation, or an amount paid to come into compliance with a law. However, amounts paid or incurred through forfeiture will be disallowed if, pursuant to the order or agreement, the amounts are disbursed to the general account of the government or governmental entity for general enforcement efforts or other discretionary purposes. The final regulations provide an example to illustrate the application of section 162(f) to forfeiture. PO 00000 Frm 00098 Fmt 4700 Sfmt 4700 d. Payment to a Fund Under the proposed regulations, restitution, remediation, and amounts paid to come into compliance with a law do not include any amount paid or incurred to an entity; to a fund, including a restitution, remediation, or other fund; to a group; or to a government or governmental entity, to the extent it was not harmed by the taxpayer’s violation or potential violation of a law. Commenters asked that the Treasury Department and the IRS reconsider this rule. In consideration of the comments, the final regulations remove the per se exclusion. However, the final regulations provide that restitution and remediation do not include amounts paid or incurred pursuant to an order or agreement to the general account or treasury of the government or governmental entity for general enforcement efforts or other discretionary purposes or amounts paid or incurred that do not meet the requirements of § 1.162–21(e)(4)(i). In addition, the final regulations provide that if amounts paid or incurred pursuant to an order or agreement to an entity, fund, group, or government or governmental entity are subsequently returned to the taxpayer, the taxpayer will be required to include those amounts in income under the tax benefit rule. Several commenters noted that restitution funds may not be exhausted if, for example, there are unclaimed amounts or when less than the entire fund is required to be used to make harmed parties whole. One commenter recommended that the final regulations provide an example to illustrate that when unclaimed amounts revert to a government or governmental entity’s general account the nature of those amounts does not change as long as it was reasonably expected, at the time the taxpayer made the payment to the fund, that the amount would be used for restitution payments to harmed parties. Although the final regulations do not provide this example, the Treasury Department and the IRS generally agree that, if the order or agreement identifies the payment to a fund, described in § 1.162–21(e)(4)(A) or (e)(4)(B), as restitution or remediation, and the taxpayer establishes that it made the payment to a fund for the purpose identified, for example, by providing the canceled check making the payment to the fund, a deduction will not be disallowed if, after the taxpayer makes the payment, the amount paid to the fund is not used for the purpose identified as long as the amount does E:\FR\FM\19JAR1.SGM 19JAR1 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations not revert to the taxpayer or for the benefit of the taxpayer. khammond on DSKJM1Z7X2PROD with RULES 2. Coming Into Compliance With a Law The proposed regulations provide that an amount is paid or incurred to come into compliance with a law by performing specific services, taking a specific corrective action, providing specific property, or a combination thereof. The final regulations also list amounts that will not be treated as paid or incurred to come into compliance with a law. The final regulations clarify that the services performed, actions taken, and the provision of property must be done to come into compliance with the law that has been violated, or potentially violated. One commenter requested that the final regulations treat amounts paid or incurred pursuant to an order or agreement to upgrade equipment or property to a higher standard than required by law as coming into compliance with a law. The final regulations modify an example in the proposed regulations to clarify that if an order or agreement requires a taxpayer to come into compliance with a law and the taxpayer elects to upgrade equipment or property to a higher than required standard, any amount paid or incurred in excess of the amount paid or incurred to come into compliance with a law will not be disallowed by section 162(f)(1) or the related final regulations because it is not an amount paid or incurred to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry into the potential violation of any law. Another commenter requested that the final regulations define the class of services and actions that qualify as having been made to come into compliance with a law under section 162(f)(2)(A)(i)(II). The final regulations do not adopt this recommendation because they are intended to provide broad rules of general application based on the underlying principles of section 162(f) rather than narrow rules with limited application that risk excluding certain services or actions. The commenter also suggested that the government or governmental entity not be required to verify the accuracy of the amount expended by a taxpayer to perform the activities to come into compliance. The regulations do not require the government or governmental entity to verify the accuracy of the amount expended by a taxpayer to perform the activities to come into compliance. VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 3. Identification Requirement Section 162(f)(2)(A)(ii) requires an order or agreement to identify an amount paid or incurred as restitution, remediation, or to come into compliance with a law. Under the proposed regulations, an order or agreement identifies a payment by stating the nature of, or purpose for, each payment each taxpayer is obligated to pay and the amount of each payment identified. To satisfy the identification requirement, the proposed regulations require the order or agreement to specifically state the amount of the payment and that the payment constitutes restitution, remediation, or an amount paid to come into compliance with a law. The proposed rule provides that the identification requirement may be met if the order or agreement uses a different form of the requisite words, such as ‘‘remediate’’ or ‘‘comply with a law.’’ The Treasury Department and the IRS received several recommendations and requests for clarification regarding how orders or agreements may meet the identification requirement when the payment amount is not identified. One commenter suggested that, if the total amount to be paid is known at the time the agreement is entered into or the order is issued, the order or agreement must identify separately the amount to be paid as restitution, remediation, or to come into compliance with a law in order to meet the identification requirement. In contrast, several other commenters asked whether the identification requirement may be met if the order or agreement identifies the total payment as restitution, remediation, or paid to come into compliance with a law without allocating the payment amount among ‘‘restitution,’’ ‘‘remediation,’’ and ‘‘coming into compliance.’’ Some commenters expressed the concern that it may not be possible to satisfy the identification requirement in an order or agreement that imposes lump-sum judgments or settlements, involves multiple taxpayers, or multiple damage awards, because the order or agreement may not segregate the amounts to be paid as restitution, remediation, or to come into compliance with a law from the disallowed amounts, or allocate the payments among the multiple taxpayers. The final regulations do not adopt a rule that a total payment amount must be allocated in an order or agreement among ‘‘restitution,’’ ‘‘remediation,’’ and/or ‘‘coming into compliance’’ in order to meet the identification requirement under section 162(f)(2)(A)(ii) because it could be PO 00000 Frm 00099 Fmt 4700 Sfmt 4700 4975 burdensome on governments and governmental entities and taxpayers and would be difficult for the IRS to administer. Instead, the final regulations modify the proposed rule for payment amounts not identified so that it applies to orders or agreements that impose lump-sum payment judgments for ‘‘restitution, remediation, and coming into compliance,’’ or that involve multiple taxpayers or multiple damage awards. The payment amount not identified rule provides that the identification requirement may be met even if the order or agreement does not allocate the total lump-sum payment amount or multiple damage award among restitution, remediation, or to come into compliance or allocate the total payment among multiple taxpayers. The final regulations also clarify that the identification requirement may be met even if the order or agreement does not provide an estimated payment amount. Several commenters asked for clarification about how a taxpayer may meet the identification requirement. Consistent with section 162(f)(2)(A)(ii), the final regulations provide that the order or agreement, not the taxpayer, must meet the identification requirement with language specifically stating, or describing, that the amount will be paid or incurred as restitution, remediation, or to come into compliance with a law. Under the proposed regulations, the identification requirement is presumed to be met if an order or agreement specifically states that the payment, and the amount of the payment, constitutes restitution, remediation, or an amount paid to come into compliance with a law. Commenters requested that the final regulations adopt a more permissive rule pursuant to which the identification requirement is presumed to be met if the order or agreement uses words other than ‘‘restitution,’’ ‘‘remediation’’ or ‘‘remediate,’’ and ‘‘come into compliance’’, or ‘‘comply.’’ In addition, a commenter also asked for a more permissive rule if an order or agreement is in a foreign language. The final regulations provide that the identification requirement is met, not presumed to be met, if the order or agreement specifically states that the payment constitutes restitution, remediation, or an amount paid to come into compliance with a law. In response to the comments, the final regulations also provide a similar result if the order or agreement uses a different form of the required words, such as, ‘‘remediate’’ or ‘‘comply with a law.’’ An order or agreement in a foreign language may meet the identification requirement if E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES 4976 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations the taxpayer provides a complete and accurate certified English translation of the order or agreement that describes the nature and purpose of the payment using the foreign language equivalent of restitution, remediation, or coming into compliance with the law. An order or agreement will also meet the identification requirement, despite not using the words ‘‘restitution,’’ ‘‘remediation,’’ ‘‘remediate,’’ ‘‘come into compliance’’, or ‘‘comply,’’ if the nature and purpose of the payment, as described in the order or agreement, are clearly and unambiguously to restore the injured party or property or to correct the non-compliance. The final regulations provide that an order or agreement will also meet the identification requirement if the order or agreement describes the damage done, harm suffered, or manner of noncompliance with a law, and describes the action required of the taxpayer to (i) restore, in whole or in part, the party, property, environment, wildlife, or natural resources harmed, injured, or damaged by the violation or potential violation of that law or (ii) to perform services, take action, provide property, or doing any combination thereof to come into compliance with that law. The proposed regulations provide that the IRS may challenge an order or agreement’s identification of the payment amount as restitution, remediation, or made to come into compliance with a law for the purposes of meeting the identification requirement. One commenter recommended that a substantive challenge to the characterization of a payment would more appropriately fit under the establishment requirement, rather than under the identification requirement. To address this comment, the identification requirement in the final regulations does not include a rebuttable presumption. the taxpayer must prove to meet the establishment requirement. The commenter also advised that it would be more appropriate for the IRS to challenge the characterization of the payment amount as restitution, remediation, or made to come into compliance with a law under the establishment requirement rather than under the identification requirement. The final regulations clarify that the establishment requirement is met if the documentary evidence submitted by the taxpayer proves that the taxpayer was legally obligated to pay the amount identified in the order or agreement as restitution, remediation, or to come into compliance with a law and that it was paid or incurred for the nature and purpose identified. If the order or agreement identifies a lump sum payment or a multiple damage award that includes some combination of restitution, remediation, and coming into compliance with a law, the taxpayer must establish the exact amount paid or incurred for each purpose. Likewise, if an order or agreement involves multiple taxpayers, each taxpayer must establish the amount that taxpayer paid or incurred as restitution, remediation, or to come into compliance. The proposed regulations provided a non-exhaustive list of documents that taxpayers may use to satisfy the establishment requirement. Commenters requested that the final regulations include additional examples of such documents. The final regulations expand the list of documentary evidence that may be used to meet the establishment requirement. The taxpayer may be able to use documentary evidence in a foreign language to satisfy the establishment requirement if the taxpayer provides a complete and accurate certified English translation of the documentary evidence. 4. Establishment Requirement Section 162(f)(2)(A)(i) requires that a taxpayer establish that an amount was paid as restitution or remediation, or that the amount was paid to come into compliance with a law. The proposed regulations provide that the taxpayer may satisfy the establishment requirement by providing documentary evidence (1) that the taxpayer was legally obligated to pay the amount the order or agreement identified as restitution, remediation, or to come into compliance with a law; (2) of the amount paid or incurred; and (3) of the date on which the amount was paid or incurred. A commenter recommended that the final regulations clarify what 5. Information Return May Not Satisfy the Identification Requirement or the Establishment Requirement The proposed regulations provide that reporting of the amount by a government or governmental entity under section 6050X does not satisfy the identification requirement or the establishment requirement. A commenter requested that the final regulations provide that a government or governmental entity’s submission of an information return under section 6050X can satisfy the identification requirement under section 162(f)(2)(A)(ii) and/or the establishment requirement under section 162(f)(2)(A)(i). The final regulations do VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 PO 00000 Frm 00100 Fmt 4700 Sfmt 4700 not adopt this recommendation. The reporting requirement imposed by section 6050X is for tax administration purposes and does not serve as documentation that the taxpayer has met the identification requirement or the establishment requirement. Therefore, the taxpayer may not use the information reported on the Form 1098– F to satisfy the identification requirement or the establishment requirement. 6. Private Party Suit Under section 162(f)(3), the general rule that disallows a deduction does not apply to any amount paid or incurred pursuant to an order in a suit in which no government or governmental entity is a party. Like the proposed regulations, the final regulations clarify that section 162(f)(1) does not apply to any amount paid or incurred by reason of any order or agreement in a suit in which no government or governmental entity is a party. A commenter asked for clarification in the final regulations that section 162(f)(1) does not apply to any amount paid or incurred by reason of any order or agreement in a suit in which a government or governmental entity enforces rights as a private party. For example, payments pursuant to contract disputes that are not due to fraud or other potentially illegal activity wherein the government or governmental entity enforces its rights as a private party contracting for goods and/or services, and not in its enforcement, regulatory, or administrative capacity, generally are not payments made at the direction of a government or governmental entity. The final regulations generally adopt this recommendation. An example has been provided in the final regulations to illustrate the application of this rule. A commenter asked for clarification about the application of section 162(f) to qui tam cases brought by private citizens on behalf of a government or governmental entity. The final regulations do not adopt a single rule concerning qui tam cases, but certain principles apply to determine whether a deduction for the amounts paid or incurred will be allowed. In general, a government or governmental entity is the real party in interest in the suit and receives any funds paid pursuant to the order or agreement, including any share ultimately paid by the government or governmental entity to the relator, whether or not the government or governmental entity intervenes in the suit. Accordingly, any amount paid or incurred to a government or governmental entity as a result of the E:\FR\FM\19JAR1.SGM 19JAR1 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations suit will likely be disallowed unless an exception to section 162(f)(1) applies. khammond on DSKJM1Z7X2PROD with RULES 7. Pre and Postjudgment Interest A commenter asked whether section 162(f)(1) disallows a deduction for prejudgment and postjudgment interest. Section 162(f)(1) applies to prejudgment interest paid or incurred to, or at the direction of, a government or governmental entity for the violation of any law or for the investigation or inquiry into a violation or potential violation of any law. However, a deduction for prejudgment interest will not be disallowed if the prejudgment interest is identified as a component of the total amount identified in the order or agreement as restitution and the taxpayer establishes that it was paid for this purpose. In general, section 162(f)(1) applies to postjudgment interest on amounts to be paid or incurred to, or at the direction of, a government or governmental entity for the violation of any law or investigation or inquiry into a potential violation of any law. However, if postjudgment interest is paid on an amount to which an exception under section 162(f)(2) applies, the exception also applies to that postjudgment interest. 8. Failure To Pay Tax and Related Interest and Penalties The proposed regulations provide that section 162(f)(1) does not apply to amounts paid or incurred as otherwise deductible taxes or related interest. In accordance with section 162(f)(2)(A)(iii), the final regulations provide that, in the case of any amount paid or incurred as restitution for failure to pay any tax imposed under Title 26, section 162(f)(1) does not disallow a deduction for an amount equal to or less than the amount otherwise allowed under chapter 1 if the tax had been timely paid. For example, section 162(f)(1) does not disallow a deduction of an amount paid or incurred as restitution for failure to pay a tax imposed under Title 26 of the Code, such as certain excise or employment taxes otherwise deductible under chapter 1. However, a deduction for amounts paid or incurred as restitution for failure to pay a Federal income tax is disallowed because Federal income taxes are not otherwise deductible under chapter 1. See section 275(a)(1). The Treasury Department and the IRS received several comments about the application of section 162(f) to federal, state and local taxes, and any related interest and penalties. Under the proposed regulations, if penalties are imposed with respect to otherwise deductible taxes, a taxpayer may not VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 deduct the interest paid with respect to such penalties. A commenter requested clarification that the taxpayer also may not deduct the penalties. The Treasury Department and the IRS agree and the final regulations are revised accordingly to provide that if penalties are imposed with respect to otherwise deductible taxes, a taxpayer may not deduct the penalties or the interest paid with respect to such penalties. 9. Material Change The proposed regulations contained a material change rule under which some orders issued, or agreements entered, before December 22, 2017, were subject to section 162(f)(1) as amended by the TCJA. Several commenters considered the definition of ‘‘material change’’ in the proposed regulations as ‘‘overly broad,’’ and suggested it could cause unnecessary administrative disputes and discourage taxpayers from negotiating with governments or governmental entities to clarify the terms of an order or agreement, resulting in increased litigation and burdening taxpayers, governments and governmental entities, and courts. One commenter argued that section 13306(a)(2) of the TCJA (the transition rule for section 162(f)) precludes adopting a material change rule for any binding orders issued or agreements entered into before December 22, 2017. The commenter recommended that the final regulations provide that the amendment to section 162(f) applies only to orders issued or agreements entered into after December 22, 2017. In response to this comment, the Treasury Department and the IRS have determined that section 162(f), as amended by TCJA, does not apply to any pre-December 22, 2017 binding order or agreement even if modified on or after December 22, 2017. In addition, material changes to an order or agreement will generally result in a new order or agreement subject to section 162(f). For these reasons, the final regulations do not include the material change rule included in the proposed regulations. 4977 In general, under the final regulations, if the aggregate amount a payor is required to pay pursuant to an order or agreement for a violation, investigation, or inquiry to which section 6050X(a)(1) and (a)(2) applies equals or exceeds the threshold amount, the appropriate official of a government or governmental entity that is a party to the order or agreement must file an information return with the IRS regarding certain amounts paid or incurred pursuant to the order or agreement, the payor’s taxpayer identification number (TIN), and other information required by the information return and the related instructions. The appropriate official of a government or governmental entity that is a party to the order or agreement must also furnish a written statement with the same information to the payor. A. General Rule 1. Government, Governmental Entity, or Nongovernmental Entity Treated as a Governmental Entity The proposed regulations provided a definition of ‘‘government or governmental entity.’’ No comments were received on the definition of ‘‘government or governmental entity’’ in the proposed regulations. The definition in the final regulations has been reorganized to provide a definition of a government in § 1.6050X–(f)(2) and to provide a definition of a ‘‘governmental entity’’ in § 1.162–21(f)(3). The definitions are based on the definition in the proposed regulations but clarify that a political subdivision of a government includes a local government unit. The final regulations also clarify that a governmental entity includes a nongovernmental entity treated as a governmental entity. The proposed regulations under section 6050X incorporate the definition of a ‘‘nongovernmental entity’’ in the proposed regulations under section 162(f). The final regulations clarify that, for purposes of the information reporting requirements in section 6050X, a nongovernmental entity treated as a governmental entity does not include a nongovernmental entity of a territory of the United States, including American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands, a foreign country, or an Indian tribe. The purpose of the regulations under section 6050X is to provide appropriate officials of governments or governmental entities the operational, administrative, and definitional rules for complying with the statutory information reporting requirements for suits or agreements to which section 6050X(a)(1) applies. 2. Suit or Agreement The proposed regulations provided that the information reporting is required for a ‘‘suit, agreement, or otherwise’’ pursuant to section 162(f)(1). A commenter noted that this rule is inconsistent with the statutory language of section 6050X, which only concerns a ‘‘suit or agreement.’’ The final II. Reporting Information for Certain Fines, Penalties, and Other Amounts PO 00000 Frm 00101 Fmt 4700 Sfmt 4700 E:\FR\FM\19JAR1.SGM 19JAR1 4978 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES regulations clarify that a government or governmental entity involved in a suit or agreement to which section 6050X(a)(2) applies must file an information return for payment amounts described in section 6050X(a)(1). Another commenter recommended that the final regulations clarify that a suit or agreement is treated as binding under applicable law even if all appeals have not been exhausted. The final regulations generally adopt this recommendation. 3. Payor The final regulations define ‘‘payor’’ as the person, as defined in section 7701(a)(1), which, pursuant to an order or agreement, has paid or incurred, or is liable to pay or incur, an amount to, or at the direction of, the government or governmental entity in relation to the violation or potential violation of any law. In general, the payor will be the person to which section 162(f) and § 1.162–21 apply. One commenter recommended that the final regulations provide that governments and governmental entities do not have a reporting requirement, and do not need to furnish a written statement, pursuant to section 6050X for the amounts described in section 6050X(a)(1) that tax-exempt, non-profit payors are required to pay. Another commenter recommended that the final regulations provide that the information reporting requirement should apply only for civil, not criminal, cases. A third commenter recommended that the final regulations provide that the information reporting requirement applies only to payors involved in a trade or business and not to individual payors. The final regulations do not adopt these recommendations because they are inconsistent with section 6050X. Section 6050X does not carve out an exception for criminal cases, individuals, including those not in a trade or business, and tax-exempt organizations. The final regulations require the appropriate official to include the TIN of the payor on the information return filed regarding the payor. Commenters asked how the appropriate official of a government or governmental entity may secure a payor’s TIN. If the appropriate official does not already have the payor’s TIN, the appropriate official must request the TIN. The TIN may be requested in any manner. The appropriate official must notify the payor that the law requires the payor to furnish a TIN for inclusion on the information return and that failure to furnish the TIN may subject the payor VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 to a penalty under section 6723. The payor may provide the TIN in any manner including orally, in writing, or electronically. If the payor furnishes the TIN in writing, no particular form is required. 4. Threshold Amount Section 6050X(a)(2)(B) provides the Secretary with the authority to adjust the statutory reporting threshold of $600 as necessary to ensure the efficient administration of the internal revenue laws. Based on comments received prior to the publication of the proposed regulations from governments and governmental entities concerned about the burden of information reporting and to ensure the efficient administration of the internal revenue laws, the Treasury Department and the IRS determined that a threshold higher than $600 was appropriate to address these concerns. The proposed regulations provided that reporting is required if the aggregate amount of all orders and agreements for the violation, investigation, or inquiry equals or exceeds $50,000 (threshold amount). Anticipating possible compliance burdens on filers, the Treasury Department and the IRS requested comments about the proposed $50,000 threshold. In particular, the Treasury Department and the IRS requested data on the annual number of relevant orders issued, or agreements entered, by governments or governmental entities and the financial, time, and administrative burdens associated with different threshold amounts. After publication of the proposed regulations, the Treasury Department and the IRS received several requests from governments and governmental entities to raise the proposed $50,000 threshold amount, but none of the comments provided data to support those requests. As a result, the final regulations maintain the proposed threshold amount and provide that reporting is required for payment amounts equal to or in excess of $50,000. Commenters described several situations in which the government or governmental entity may be uncertain about its reporting obligation because it is not clear that the suit or agreement requires the payor to make payments described in section 6050X(a)(1) that equal or exceed the threshold amount. In one situation, the order or agreement described in section 6050X(a)(1) requires the payor to make several payments for a violation, investigation, or inquiry, each described in section 6050X(a)(2) and each for less than the threshold amount, but the aggregate amount of all payments pursuant to the PO 00000 Frm 00102 Fmt 4700 Sfmt 4700 order or agreement equals or exceeds the threshold amount. In another situation, an order or agreement involving more than one violation, investigation, or inquiry, each described in section 6050X(a)(2), requires the payor to make several payments, each described in section 6050X(a)(1), and each for less than the threshold amount, but the aggregate amount of all payments pursuant to the order or agreement equals or exceeds the threshold amount. The commenter recommended that, in these two situations, the final regulations should treat each payment amount separately to determine if the aggregate amount involved in the order or agreement equals or exceeds the threshold amount. The final regulations do not provide rules for every circumstance to which section 6050X(a)(2)(A)(ii) could apply. Form 1098–F and its instructions will contain additional guidance regarding the threshold amount. Another commenter described a situation in which, pursuant to separate orders or agreements, the payor is required to pay separate amounts, all less than the threshold amount, for multiple acts or omissions in violation of the same law but the aggregate amount of the payments to be made pursuant to all orders and agreements equals or exceeds the threshold amount. The commenter requested that, in this situation, the final regulations treat each order and agreement separately. This situation is addressed by section 6050X(a)(2)(A)(ii), which provides that the government or governmental entity must file an information return for a suit or agreement if ‘‘the aggregate amount involved in all court orders and agreements with respect to the violation, investigation, or inquiry’’ equals or exceeds the threshold amount. Therefore, the final regulations do not adopt the rule proposed by the commenter. The final regulations also provide that in this situation, the appropriate official must file only one information return for all amounts the payor is required to pay pursuant to these orders or agreements. 5. Requirement To File Return The appropriate official of a government or governmental entity must comply with the information reporting requirements of section 6050X and the related regulations by filing Form 1098–F, Fines, Penalties, and Other Amounts, or any successor form, as provided by the instructions, with Form 1096, Annual Summary and Transmittal of U.S. Information Returns, on or before the annual due date as E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations provided in the final regulations. Under the final regulations, the information return filed by the government or governmental entity with the IRS must provide the amount a payor is required to pay, pursuant to section 6050X(a)(1)(A) and § 1.6050X–1(b)(1)(i), as a result of the order or agreement, the separate amounts required to be paid as restitution, remediation, or to come into compliance with a law, pursuant to section 6050X(a)(1)(B) and (a)(1)(C) and § 1.6050X–1(b)(1)(ii), as a result of the order or agreement, the payor’s TIN, and any additional information required by the information return and the related instructions. The Treasury Department and the IRS received comments requesting that the final rules require information reporting only for amounts paid directly to a government or governmental entity. A commenter also requested final rules pursuant to which the government or governmental entity could provide the reporting information to the payor and require the payor to file the information return. None of these suggestions were adopted in the final regulations because they are inconsistent with the explicit language of section 6050X. A commenter inquired whether the government or governmental entity reports the payment amount identified in the order or agreement, or only the amount the payor ultimately pays. Another commenter recommended that the reporting requirement apply only to payment amounts described in sections 162(f)(1) and 6050X(a)(1)(A) that are actually collected by governments and governmental entities. Section 6050X(a)(1) mandates reporting for ‘‘the amount required to be paid as a result of the suit or agreement’’ for a violation of any law, or an investigation or inquiry into the potential violation of any law, as well as for restitution, remediation, and to come into compliance with a law. Therefore, the final regulations do not adopt the commenter’s recommendation. Instead, the final regulations clarify that governments and governmental entities have a reporting obligation for the amounts, described in section 6050X(a)(1) and § 1.6050X–1(b)(1)(i) and (ii), required to be paid pursuant to the order or agreement. A commenter inquired whether the IRS would consider using website reporting instead of requiring reporting on a form. Section 6050X prescribes reporting that is more suitable on a form. Furthermore, section 6050X(b) also requires governments and governmental entities to furnish written statements to payors. Thus, even if the final regulations permitted governments VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 and governmental entities to report information to the IRS via a website, they would still need to provide a written statement to payors, which could not be accomplished by a website. To minimize the burden on governments or governmental entities, the final regulations permit the appropriate official to comply with the requirements to furnish written statements to payors via the Form 1098– F or another document that contains the required information if the document conforms to applicable guidance relating to substitute statements. A commenter expressed concerns about the information reporting requirements resulting from an order or agreement, pursuant to which payments are made over the course of several years. To minimize the burden on governments and governmental entities and to ensure the efficient administration of the internal revenue laws, the final regulations do not require an appropriate official to file information returns for each taxable year in which a payor makes a payment pursuant to a single order or agreement. Instead, the appropriate official must file only one information return to report the amounts required by section 6050X(a)(1). Some commenters inquired about the application of the reporting obligation to governments and governmental entities for specific types of administrative and certain other categories of proceedings. The final regulations do not address the application of the reporting obligation to specific statutes or types of proceedings because the final regulations are intended to provide broad rules of general application based on the underlying principles of sections 162(f) and 6050X rather than narrow rules with limited application that risk excluding a certain ‘‘violation of any law or the investigation or inquiry . . . into the potential violation of any law.’’ One commenter observed that the payors and the governments and governmental entities may have incentives to enter into an agreement concerning the filing of information returns such that payors may improperly attempt to claim deductions to which they are not entitled and governments and governmental entities do not have to incur the burden of filing information returns and furnishing written statements. The commenter recommended that the final regulations treat any agreements between payors and governments or governmental entities not to file information returns as invalid and unenforceable. The final regulations do not adopt this recommendation because section 162(f) PO 00000 Frm 00103 Fmt 4700 Sfmt 4700 4979 applies to the taxpayer regardless of whether the appropriate official files an information return with the IRS and furnishes a written statement to the payor. 6. Due Dates Section 6050X(a)(3) provides that the information return shall be filed at the time the agreement is entered into, as determined by the Secretary, not at the time of payment, as recommended by a commenter. Further, section 6050X(b) requires the written statement to be furnished to the payor at the same time the information return is filed with the IRS. Under the proposed regulations, the information return was required to be filed on or before January 31 of the year following the calendar year in which the order or agreement, becomes binding under applicable law. A commenter requested that appropriate officials of governments and governmental entities be given more time to comply with the requirement. As requested, the final regulations provide, pursuant to section 6071(a), that information returns filed with the IRS on paper are due on or before February 28 of the year following the calendar year in which the order or agreement, becomes binding under applicable law. In accordance with section 6071(b), information returns filed electronically are due on or before March 31 of such year. However, to increase the likelihood that payors have the information necessary to timely prepare their income tax returns and to avoid burdening governments and governmental entities with having to determine the tax year of each payor, the final regulations require the appropriate official to furnish the written statement on or before January 31 of such year. 7. Rules for Multiple Payors The final regulations describe the application of the information reporting requirements if, pursuant to the order or agreement, the aggregate amount multiple payors are required to pay, or the costs to provide the property or the service, equals or exceeds the threshold amount. If, pursuant to the order or agreement, more than one payor is individually liable for some or all of the payment amount, the final regulations require the appropriate official to file an information return for the separate amount that each individually liable payor is required to pay, even if a payor’s payment liability is less than the threshold amount, and to furnish a written statement containing this information to each payor. If more than one person, as defined in section E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES 4980 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 7701(a)(1), is a party to an order or agreement, there is no information reporting requirement, or requirement to furnish a written statement, with respect to any person who does not have a payment obligation or obligation for costs to provide services or to provide property. The final regulations provide that, if an order or agreement, identifies multiple jointly and severally liable payors, the appropriate official must file an information return for each payor to report the information required by § 1.6050X–1(b)(1)(i) and (ii) on the amount to be paid by all jointly and severally liable payors. The appropriate official must furnish a written statement containing this information to each of those payors, regardless of which payor makes the payment. A commenter wrote that the rules requiring reporting would be challenging to implement when multiple payors are required to make payments. However, under section 6050X(a)(1)(3), the appropriate official has an obligation to file an information return when an order or agreement becomes binding, not when the payments are made, so there is no need for governments or governmental entities to track the receipt of payments in order to comply with section 6050X or the related final regulations. Another commenter recommended that the payment obligation of each payor be examined separately to determine whether the amount each payor is required to pay, or the costs to provide the property or the service, equals or exceeds the threshold amount. However, in the case of joint and several liability, each payor is responsible for the entire amount, which requires reporting of, and furnishing a statement to, each payor. In the case where a payor is individually liable for an amount below the threshold amount, the payor may still attempt to deduct some or all of the payment amount all of the payors are required to pay, so filing an information return for each of the payors’ liabilities is useful for tax administration. One commenter asked for clarification that the government or governmental entity is not obligated to file an information return with the IRS if, after an order or agreement has become binding under applicable law, the payor pursues another party for contribution. Because any payment the payor receives from another party in a subsequent proceeding will not be subject to section 162(f), the government or governmental entity will not have an obligation to file an information return for any payment made by the other party. VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 8. Payment Amount Not Identified Commenters expressed concern that it is difficult for governments and governmental entities to estimate the payment amount pursuant to the order or agreement, and whether the aggregate amount equals or exceeds the information reporting threshold, when the order or agreement does not specify an amount. The Treasury Department and the IRS agree, which is why the regulations do not require governments or governmental entities to estimate payment amounts. Accordingly, if some or all of the payment amount is not identified in the order or agreement, the regulations direct governments and governmental entities to the instructions to Form 1098–F, or any successor form. Some orders or agreements may identify a payment described in section 6050X(a)(1)(A) and identify a payment or an obligation to provide property or to provide services, as restitution, remediation, or an amount paid to come into compliance with a law, as described in section 6050X(a)(1)(B), but not identify some or all of the payment amounts the payor must pay, or some or all of the cost to provide property or services. The final regulations provide that, if the government or governmental entity reasonably expects that the aggregate amount the payor must pay, and the costs the payor will pay or incur to provide services or to provide property, pursuant to the order or agreement, will equal or exceed the threshold amount, the appropriate official of such government or governmental entity must file an information return on Form 1098–F, or any successor form, as provided in the instructions to the Form 1098–F, and furnish a written statement to the payor with the information supplied to the IRS on Form 1098–F. Similarly, a commenter noted that some orders or agreements may require a payor to make payments described in section 6050X(a)(1) for which reporting is required and other payments for which reporting is not required under section 6050X. The commenter recommended that if it is not clear for which payment amount the government or governmental entity has a reporting requirement, the rule under the proposed regulations for a payment amount not identified should apply. The Treasury Department and the IRS generally agree with this recommendation. Therefore, if, under the circumstances described by the commenter, the government or governmental entity reasonably expects that the aggregate amount the payor must pay, and the costs the payor must PO 00000 Frm 00104 Fmt 4700 Sfmt 4700 pay to provide services or to provide property, will equal or exceed the threshold amount, the appropriate official of such government or governmental entity must file an information return. 9. Material Change Under the proposed regulations, if there was a material change to the terms of an order or agreement for which an appropriate official of a government or governmental entity filed an information return, the appropriate official had to file a corrected information return with the IRS and furnish an amended written statement to the payor. The Treasury Department and the IRS have concluded that material changes to an order or agreement will generally result in a new order or agreement subject to the rules under section 6050X and § 1.6050X–1. For this reason, and because the final regulations under § 1.162–21 do not include a material change rule, the final regulations have removed the material change rule from § 1.6050X–1. Applicability Dates The rules of § 1.162–21 apply to taxable years beginning on or after the date of publication of this Treasury decision in the Federal Register, except that such rules do not apply to amounts paid or incurred under any order or agreement, pursuant to a suit, agreement, or otherwise, that became binding under applicable law before such date, determined without regard to whether all appeals have been exhausted or the time for filing an appeal has expired. The rules of § 1.6050X–1 apply only to orders and agreements, pursuant to suits and agreements, that become binding under applicable law on or after January 1, 2022, determined without regard to whether all appeals have been exhausted or the time for filing an appeal has expired. Special Analyses I. Regulatory Planning and Review— Economic Analysis Executive Orders 12866 and 13563 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. E:\FR\FM\19JAR1.SGM 19JAR1 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES The regulations have been designated by the Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and by the Office of Management and Budget (OMB) regarding review of tax regulations. A. Background Prior to the Tax Cuts and Jobs Act (TCJA), section 162(f) of the Code disallowed a deduction for any fine or similar penalty paid to a government for the violation of any law. This provision, enacted in 1969, codified existing case law that denied business deductions for fines or similar penalties. The general rule of section 162(f)(1), as amended by section 13306(a) of the TCJA, disallows any deduction for amounts paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or governmental entity or certain nongovernmental entities treated as governmental entities, in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law. Section 13306(a) also provides certain exceptions to this disallowance. Section 162(f)(2)(A)(i) and (ii) does not disallow deduction for amounts that (1) the taxpayer establishes were paid or incurred as restitution (including remediation of property) or to come into compliance with a law, and (2) are identified in the court order or settlement agreement as restitution, remediation, or to come into compliance with a law. In addition, under prior law, the Treasury Department and the IRS did not receive information returns from governments or governmental entities that received fines or penalties. Section 6050X of the Code, enacted by section 13306(b) of the TCJA, requires appropriate officials to file an information return if the aggregate amount involved in all orders or agreements relating to the violation, investigation, or inquiry is $600 or more. The information return must include (1) the amount required to be paid as a result of the order or agreement; (2) any amount that constitutes restitution or remediation of property; and (3) any amount required to be paid for the purpose of coming into compliance with a law that was violated or involved in the investigation or inquiry. Section 6050X provides the Secretary with the authority to adjust the $600 reporting threshold in order to ensure efficient tax administration. Proposed regulations regarding these provisions were previously issued on VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 May 13, 2020 (REG–104591–18) (proposed regulations). B. Need for the Regulations Following the passage of the TCJA, the Treasury Department and the IRS received several questions and comments from Federal, state, local, and tribal governments, as well as the public, regarding the meaning of various provisions in each section and issues not explicitly addressed in the statute. The Treasury Department and the IRS have determined that such comments warrant the issuance of further guidance. In addition, the Treasury Department and the IRS have determined that increasing the reporting threshold to reduce the reporting burden and to enhance the efficiency of tax administration is appropriate. C. Overview of the Regulations The regulations provide guidance regarding sections 162(f) and 6050X. The following analysis provides further detail regarding the anticipated impacts of the regulations. Part I.D specifies the baseline for the economic analysis. Part I.E.1. summarizes the economic effects of the rulemaking, relative to this baseline. Part I.E.2. describes the economic effects of specific provisions covering (1) the reporting threshold, (2) the timing of information reporting, and (3) information reporting requirements when payment amounts are not identified. D. Baseline In this analysis, the Treasury Department and the IRS assess the benefits and costs of the final regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these regulations. E. Economic Analysis of the Regulation I. Summary of Economic Effects The regulations under section 162(f) provide definitions for restitution, remediation, and amounts paid to come into compliance with the law. These definitions clarify for taxpayers which amounts paid or incurred may be deductible under the statute. The regulations also clarify (1) how the taxpayer meets the establishment requirement; and (2) how the order or agreement meets the identification requirement. The Treasury Department and the IRS have determined that the burden reduction associated with the regulations for section 162(f) is modest. In addition, while the regulations reduce uncertainty for taxpayers, they PO 00000 Frm 00105 Fmt 4700 Sfmt 4700 4981 are unlikely to affect economic decisionmaking because most of the amounts to be paid or incurred which are subject to section 162(f) are non-discretionary. The regulations under section 6050X provide certainty and consistency for affected governments and governmental entities by defining and clarifying the statute’s terms and rules. Further, the regulations use the authority provided by the statute to the Secretary to set information reporting requirements to minimize the burden on governments and governmental entities and to ensure the efficient administration of the internal revenue laws. Most importantly, the regulations increase the reporting threshold from $600 to $50,000, thereby eliminating information reporting requirements for approximately 1 to 5 million orders or agreements. Using the midpoint of this range (3 million), the estimated burden reduction from this exercise of regulatory discretion is $74 million (2018 dollars) per year relative to the no-action baseline. This reduction in compliance burden is the only meaningful economic effect of the regulations. The regulations do not have meaningful effects on the tax liability of taxpayers, the deductibility of amounts paid to, or at the directions of, governments and governmental entities, or the incentive for individuals or businesses to engage in violations of the law. II. Economic Analysis of Specific Provisions A. Reporting Threshold Section 6050X requires governments and governmental entities which enter orders or agreements to which section 162(f) applies to file an information return if the aggregate amount paid or incurred in all orders or agreements relating to the violation, investigation, or inquiry is equal to or exceeds a threshold of $600. Section 6050X also provides the Secretary with the authority to adjust the statutory reporting threshold as necessary to ensure efficient tax administration. In response to multiple comments received prior to the issuance of the proposed regulations from governments and governmental entities concerned about the burden of information reporting for smaller payments amounts pursuant to orders or agreements, the regulations raise the reporting threshold to $50,000. In the proposed regulations, the Treasury Department and the IRS solicited data on the annual number of orders or agreements by governments or governmental entities that could inform the determination of the appropriate E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES 4982 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations threshold amount. The Treasury Department and the IRS did not receive any such data. The Treasury Department and the IRS considered a range of alternative thresholds including the statutory threshold of $600, along with much higher thresholds suggested by some commenters. Upon consideration of both the enforcement needs of the IRS and the reporting burden on governments and governmental entities, the Treasury Department and the IRS exercised the authority provided to the Secretary by the statute to set the reporting threshold amount at $50,000. The Treasury Department and the IRS do not know of any data on the number of orders or agreements requiring taxpayers to pay amounts to, or at the direction of, governments or governmental entities, or the distribution of these amounts, such as the number that are above or below $600. Based on communications with stakeholders, the Treasury Department and the IRS estimate that the increase in reporting threshold from $600 to $50,000 will reduce the number of required information returns by approximately 1 to 5 million. The Treasury Department and the IRS further estimate that the average time to complete the information return is between 0.387 and 0.687 hours. Using the midpoint of each of these ranges (3 million information returns and .537 hours) and a labor cost of $46 per hour,1 the Treasury Department and the IRS estimate that increasing the reporting threshold will reduce annual compliance burdens by $74 million dollars (2018 dollars) per year. It should be noted that many of the lower level fines and penalties are likely to be assessed on non-businesses that are not able to deduct business expenses so they would be unaffected by the extent to which governments or governmental entities are subject to reporting requirements. Increasing the reporting threshold from $600 to $50,000 is unlikely to have a significant effect on revenues because fines over $50,000 likely account for the vast majority of fines and penalties in terms of dollar values. Based on financial reporting values disclosed on tax returns of C corporations, S corporations and partnerships, firms with over $50,000 in total fines and penalties account for 99 percent of all fines and penalties. However, these data should be interpreted with caution. Financial reporting of fines and 1 This data point is derived by the IRS as part of the burden analysis described in the Paperwork Reduction Act section below. VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 penalties includes both international and domestic fines, and all fines and penalties are aggregated into yearly totals. Furthermore, firms with less than $10 million in assets are not required to provide financial reporting values with their tax returns. B. Time of Reporting Section 6050X provides that the government or governmental entity shall file the information return at the time the order is issued or the agreement is entered into, as determined by the Secretary. The Treasury Department and the IRS received comments from governments and governmental entities prior to the issuance of the proposed regulations observing that it would be burdensome and inefficient for them to file information returns each time an order or agreement becomes binding under applicable law. Several commenters suggested that annual filing of information returns would meaningfully reduce this reporting burden. The Treasury Department and the IRS agree with this comment and have adopted it in the regulations. The Treasury Department and the IRS have not estimated the difference in compliance burden between these two alternatives because they do not have suitable data or models to do so. Several commenters also expressed uncertainty and concern about the information reporting requirements for an order or agreement pursuant to which payments are made over the course of several years. To reduce uncertainty, and to minimize the burden on governments and governmental entities, the regulations clarify that information reporting is required only for the year in which the order or agreement becomes binding under applicable law, and not required for each taxable year in which a payor makes a payment. The Treasury Department and the IRS considered requiring information reporting at the time the order is issued or the agreement is entered. The Treasury Department and the IRS also considered requiring information reporting in each year in which an amount is paid or incurred pursuant to the order or agreement. However, both alternative approaches were determined to impose unnecessary burden for governments and governmental entities without creating accompanying benefits for tax administration or for taxpayers. Under the proposed regulations, the information return was required to be filed with the IRS, and a written statement furnished to the payor, on or before January 31 of the year following the calendar year in which the order or PO 00000 Frm 00106 Fmt 4700 Sfmt 4700 agreement becomes binding under applicable law, even if all appeals have not been exhausted for the suit or agreement. In response to the proposed regulations, a commenter requested that governments and governmental entities be given more time to comply with the requirements. As requested, the final regulations are revised to provide that information returns filed with the IRS on paper are due on or before February 28 of the year following the calendar year in which the order or agreement becomes binding under applicable law and information returns filed electronically are due on or before March 31 of such year. However, to increase the likelihood that payors have the information necessary to timely prepare their income tax returns, the final regulations still require governments and governmental entities to furnish the written statements to payors on or before January 31 of such year. C. Payment Amount Not Identified When the expected amount paid or incurred pursuant to an order or agreement equals or exceeds the threshold amount, section 6050X requires governments or governmental entities to file an information return including: (1) The amount required to be paid as a result of the order or agreement; (2) any amount that constitutes restitution or remediation of property; and (3) any amount required to be paid for the purpose of coming into compliance with a law that was violated or involved in the investigation or inquiry. However, some orders or agreements may involve uncertain payments or costs to provide property or services without identifying some or all of the aggregate amount the payor must pay, or some or all of the aggregate cost to provide property or services. The Treasury Department and the IRS received comments expressing concern that amounts paid or incurred are often difficult to assess, and strict valuation requirements would impose undue burden on governments and governmental entities. For situations in which the amount is not identified, the regulations direct governments and governmental entities to the instructions to Form 1098–F. To address commenters’ concerns, these instructions will permit governments and governmental entities to report the threshold amount of $50,000 when the amount is unknown but expected to equal or exceed $50,000. This rule is necessary to improve taxpayer compliance. The Treasury Department and the IRS considered requiring governments and E:\FR\FM\19JAR1.SGM 19JAR1 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations governmental entities to provide an estimate of each amount to be paid or incurred; however this approach was rejected because it would impose significant burden on governments and governmental entities. The Treasury Department and the IRS did not estimate the difference in compliance burden between the final regulation and this alternative approach because they do not have suitable data or models to do so. Paperwork Reduction Act Collection of Information—Form 1098–F In general, the collection of information in the regulations is required under section 6050X of the Code. The collection of information in these regulations is set forth in § 1.6050X–1. The IRS intends that the collection of information pursuant to section 6050X will be conducted by way of Form 1098–F, Fines, Penalties, and Other Amounts. Form 1098–F will be Form Type of filer 1098–F ............... Governments, Governmental Entities, And Certain Nongovernmental Entities. used by all governments, governmental entities, and nongovernmental entities treated as governmental entities with a reporting requirement. The Treasury Department and the IRS request comments on all aspects of information collection burdens related to the regulations. In addition, when available, drafts of IRS forms are posted for comment at www.irs.gov/draftforms. The current status of the PRA submissions related to section 6050X are provided in the following table. OMB No. 1545–2284 4983 Status Form 1098–F is approved through 1/31/ 2023. RELATED NEW OR REVISED TAX FORMS khammond on DSKJM1Z7X2PROD with RULES Form 1098–F ..... New Revision of existing form Number of respondents (2018, estimated) Yes ................... ....................................................... 90,100 (85,500 small governmental jurisdictions, 4,500 large governmental jurisdictions and 100 nongovernmental entities). A reasonable burden estimate for the average time to complete Form 1098–F is between 0.387 and 0.687 hours (approximately 23 to 41 minutes). This estimate is based on survey data collected from similar information return filers. In addition, the increase in the reporting threshold under section 6050X will lead to a decrease in the number of information returns filed by approximately 1 million to 5 million returns. Using the midpoint of these ranges, or 3 million and 0.537 hours, the estimated burden reduction is $74 million per year. Estimated average time per form: .537 hours. Estimated number of respondents: 90,100. Estimated total annual burden hours: 48,383.70. Estimated change in number of information returns resulting from increased reporting threshold: (3,000,000). Estimated change in burden (hours): (1,611,150). Estimated change in burden (Dollars): ($74,161,235). An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 are confidential, as required by 26 U.S.C. 6103. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6) requires agencies to ‘‘prepare and make available for public comment an initial regulatory flexibility analysis,’’ which will ‘‘describe the impact of the rule on small entities.’’ 5 U.S.C. 603(a). Section 605(b) of the RFA allows an agency to certify a rule if the rulemaking is not expected to have a significant economic impact on a substantial number of small entities. Pursuant to the RFA, the Secretary of the Treasury hereby certifies that these regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the RFA. The RFA generally applies to regulations that affect small businesses, small organizations, and small governmental jurisdictions. For purposes of the RFA, small governmental jurisdictions are governments of cities, counties, towns, townships, villages, school districts, or special districts with a population of less than 50,000. This rule would affect States, as well as local governments, some of which may meet the definition of small governmental jurisdiction. Approximately 90,100 governments, governmental entities, and nongovernmental entities treated as governmental entities may be subject to the reporting requirements of section 6050X. Of those governments and governmental entities, approximately PO 00000 Frm 00107 Fmt 4700 Sfmt 4700 85,500 (or 95%) are small governmental jurisdictions. Although the regulations may affect a substantial number of small governmental jurisdictions, the economic impact of the regulations is not expected to be significant. The regulations set a reporting threshold that is higher than the minimum required by statute and also provide for governments and governmental entities to file annual returns. Both of these provisions reduce the potential burden on small governmental jurisdictions. In particular, the increase in the reporting threshold will lead to a decrease in the number of information returns filed by approximately 1 million to 5 million returns. Using the midpoint of this range, or 3 million, the estimated burden reduction is $74 million per year (2018 dollars). It is estimated that after reading and learning about the requirements of the regulations, the burden associated with filing the annual form is approximately 23 to 41 minutes and the average cost per information return is approximately $24.72, which would not result in a significant economic impact on small entities. Pursuant to section 7805(f) of the Code, the proposed rule preceding this rulemaking was submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small entities and no comments were received. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) E:\FR\FM\19JAR1.SGM 19JAR1 4984 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. This rule does not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. Executive Order 13132: Federalism Executive Order 13132 (entitled Federalism) prohibits an agency from publishing any rule that has Federalism implications if the rule either imposes substantial direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. These rules do not have Federalism implications, and do not impose substantial direct compliance costs on state and local governments or preempt state law, within the meaning of the Executive Order. The compliance costs, if any, are imposed on state and local governments by section 6050X, as enacted by the TCJA. Notwithstanding, the Treasury Department and the IRS consulted with the National League of Cities and the National Governors Association prior to the issuance of the proposed regulations. Pursuant to the requirements set forth in section 8(a) of Executive Order 13132, the Treasury Department and the IRS certify that they have complied with the requirements of Executive Order 13132. khammond on DSKJM1Z7X2PROD with RULES Congressional Review Act The Administrator of the Office of Information and Regulatory Affairs of the Office of Management and Budget has determined that this is a major rule for purposes of the Congressional Review Act (5 U.S.C. 801 et seq.) (CRA)). Under 5 U.S.C. 801(3), a major rule takes effect 60 days after the rule is published in the Federal Register. Notwithstanding this requirement, 5 U.S.C. 808(2) allows agencies to dispense with the requirements of 5 U.S.C. 801 when the agency for good cause finds that such procedure would be impracticable, unnecessary, or contrary to the public interest and the rule shall take effect at such time as the agency promulgating the rule determines. Pursuant to 5 U.S.C. 808(2), the Treasury Department and the IRS find, for good cause, that a 60-day delay VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 in the effective date is unnecessary and contrary to the public interest. Following the amendments to section 162(f) and enactment of section 6050X by the TCJA, the Treasury Department and the IRS published IRS published Notice 2018–23, 2018–15 I.R.B. 474, to provide transitional guidance on the identification requirement of section 162(f) and the information reporting requirement under section 6050X and to solicit comments from the public and affected governments and governmental entities on issues related to the implementation of section 162(f) and section 6050X. Subsequently, on May 13, 2020, the Treasury Department and the IRS published a notice of proposed rulemaking (REG–104591–18) in the Federal Register (85 FR 28524) providing additional guidance for taxpayers and governments and governmental entities on the deduction disallowance rules in section 162(f) and the associated reporting requirements in section 6050X. However, as demonstrated by the wide variety of public comments in response to the proposed regulations received, taxpayers and governments and governmental entities continue to express uncertainty regarding the proper application of the relevant statutory rules under section 162(f) and section 6050X. These final regulations provide crucial guidance for taxpayers and governments and governmental entities on how to apply the relevant statutory rules. In certain cases, failure to comprehend the proper application of the requirements of section 162(f) can prevent taxpayers from claiming appropriate deductions, resulting in them paying potentially higher taxes than required during a time of economic difficulty.2 In addition, governments and governmental entities will require several months to update or develop data collection and reporting systems to comply with the rules under section 6050X. However, governments and governmental entities will need to know that the final regulations are effective before incurring necessary costs to timely comply with the final regulations. Accordingly, the Treasury Department and the IRS have determined that the rules in this Treasury decision will take effect on the date of filing for public inspection in the Federal Register. Statement of Availability of IRS Documents IRS Revenue Procedures, Revenue Rulings, Notices and other guidance 2 See Executive Order 13924 (May 19, 2020) 85 FR 31,353–54. PO 00000 Frm 00108 Fmt 4700 Sfmt 4700 cited in this document are published in the Internal Revenue Bulletin and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov. Drafting Information The principal author of these regulations is Sharon Y. Horn of Associate Chief Counsel (Income Tax and Accounting), IRS. However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes; Reporting and recordkeeping requirements. Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * * * * * * Section 1.6050X–1 also issued under 26 U.S.C. 6050X(a), (b). * * * * * Par. 2. Section 1.162–21 is revised to read as follows: ■ § 1.162 –21 Denial of deduction for certain fines, penalties, and other amounts. (a) Deduction Disallowed. Except as otherwise provided in this section, no deduction is allowed under chapter 1 of the Internal Revenue Code (Code) for any amount that is paid or incurred— (1) By suit, settlement agreement (agreement), or otherwise, as defined in paragraph (e)(5) of this section; (2) To, or at the direction of, a government, as defined in paragraph (e)(1) of this section, or a governmental entity, as defined in paragraph (e)(2) of this section; and (3) In relation to the violation, or investigation or inquiry by such government or governmental entity into the potential violation, of any civil or criminal law. (i) An amount that is paid or incurred in relation to the violation of any civil or criminal law includes a fine or penalty. (ii) An investigation or inquiry into the potential violation of any law does not include routine investigations or inquiries, such as audits or inspections, of regulated businesses that are not related to any evidence of wrongdoing E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations or suspected wrongdoing, but are conducted to ensure compliance with the rules and regulations applicable to those businesses. (b) Exception for restitution, remediation, and amounts paid to come into compliance with a law—(1) In general. Paragraph (a) of this section does not apply to amounts paid or incurred for restitution (including remediation) or to come into compliance with a law, as defined in paragraphs (e)(4) of this section, provided that both the identification and the establishment requirements of paragraphs (b)(2) and (b)(3) of this section are met. (2) Identification requirement—(i) In general. A court order (order) or an agreement, as defined in paragraph (e)(5) of this section, identifies a payment by stating the nature of, or purpose for, each payment each taxpayer is obligated to pay and the amount of each payment identified. (ii) Meeting the identification requirement. The identification requirement is met if an order or agreement specifically states the amount of the payment described in paragraph (b)(2)(i) of this section and that the payment constitutes restitution, remediation, or an amount paid to come into compliance with a law. If the order or agreement uses a different form of the required words (such as ‘‘remediate’’ or ‘‘comply with a law’’) and describes the purpose for which restitution or remediation will be paid or the law with which the taxpayer must comply, the order or agreement will be treated as stating that the payment constitutes restitution, remediation, or an amount paid to come into compliance with a law. Similarly, if an order or agreement specifically describes the damage done, harm suffered, or manner of noncompliance with a law and describes the action required of the taxpayer to provide restitution, remediation, or to come into compliance with any law, as defined in paragraph (e)(4) of this section, the order or agreement will be treated as stating that the payment constitutes restitution, remediation, or an amount paid to come into compliance with any law. Meeting the establishment requirement of paragraph (b)(3) of this section alone is not sufficient to meet the identification requirement of paragraph (b)(2) of this section. (iii) Payment amount not identified. (A) If the order or agreement identifies a payment as restitution, remediation, or to come into compliance with a law but does not identify some or all of the amount the taxpayer must pay or incur, the identification requirement may be VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 met for any payment amount not identified if the order or agreement describes the damage done, harm suffered, or manner of noncompliance with a law, and describes the action required of the taxpayer, such as paying or incurring costs to provide services or to provide property. (B) If the order or agreement identifies a lump-sum payment or multiple damages award as restitution, remediation, or to come into compliance with a law but does not allocate some or all of the amount the taxpayer must pay or incur among restitution, remediation, or to come into compliance with a law, or does not allocate the total payment amount among multiple taxpayers, the identification requirement may be met for any payment amount not specifically allocated if the order or agreement describes the damage done, harm suffered, or manner of noncompliance with a law, and describes the action required of the taxpayer, such as paying or incurring costs to provide services or to provide property. (3) Establishment requirement—(i) Meeting the establishment requirement. The establishment requirement is met if the taxpayer, using documentary evidence, proves the taxpayer’s legal obligation, pursuant to the order or agreement, to pay the amount identified as restitution, remediation, or to come into compliance with a law; the amount paid or incurred; the date the amount was paid or incurred; and that, based on the origin of the liability and the nature and purpose of the amount paid or incurred, the amount the taxpayer paid or incurred was for restitution or remediation, as defined in paragraph (e)(4)(i) of this section or to come into compliance with any law, as defined in paragraph (e)(4)(ii) of this section. If the amount is paid or incurred to a segregated fund or account, as described in paragraphs (e)(4)(i)(A)(2) and (3), (e)(4)(i)(B), or (e)(4)(i)(C) of this section, the taxpayer may meet the establishment requirement even if each ultimate recipient, or each ultimate use, of the payment is not designated or is unknown. A taxpayer will not meet the establishment requirement if the taxpayer fails to prove that the taxpayer paid or incurred the amount identified as restitution, remediation, or to come into compliance with a law; the amount paid; the date the amount was paid or incurred; or that the amount the taxpayer paid or incurred was for the nature and purpose identified in the order or agreement as required by paragraph (b)(2)(i) of this section, or was made for the damage done, harm suffered, noncompliance, or to provide PO 00000 Frm 00109 Fmt 4700 Sfmt 4700 4985 property or services as described in (b)(2)(iii) of this section. Meeting the identification requirement of paragraph (b)(2) of this section is not sufficient to meet the establishment requirement of paragraph (b)(3) of this section. (ii) Substantiating the establishment requirement. The documentary evidence described in paragraph (b)(3)(i) of this section includes, but is not limited to, receipts; the legal or regulatory provision related to the violation or potential violation of any law; documents issued by the government or governmental entity relating to the investigation or inquiry, including court pleadings filed by the government or governmental entity requesting restitution, remediation, or demanding that defendant take action to come into compliance with the law; judgment; decree; documents describing how the amount to be paid was determined; and correspondence exchanged between the taxpayer and the government or governmental entity before the order or agreement became binding under applicable law, determined without regard to whether all appeals have been exhausted or the time for filing an appeal has expired. (c) Other exceptions—(1) Suits between private parties. Paragraph (a) of this section does not apply to any amount paid or incurred by reason of any order or agreement in a suit in which no government or governmental entity is a party or any order or agreement in a suit pursuant to which a government or governmental entity enforces its rights as a private party. (2) Taxes and related interest. Paragraph (a) of this section does not apply to amounts paid or incurred as otherwise deductible taxes or related interest. However, if penalties are imposed relating to such taxes, paragraph (a) of this section applies to disallow a deduction for such penalties and interest payments related to such penalties. (3) Failure to pay title 26 tax. In the case of any amount paid or incurred as restitution for failure to pay tax imposed under title 26 of the United States Code, paragraph (a) of this section does not disallow a deduction for title 26 taxes, such as excise and employment taxes, which are equal to or less than the deduction otherwise allowed under chapter 1 of the Code if the tax had been timely paid. (d) Application of general principles of Federal income tax law—(1) Taxable year of deduction. If, under paragraph (b) or (c) of this section, the taxpayer is allowed a deduction for the amount paid or incurred pursuant to an order or agreement, the deduction is taken into E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES 4986 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations account under the rules of section 461 and the related regulations, or under a provision specifically applicable to the allowed deduction, such as § 1.468B– 3(c). (2) Tax benefit rule applies. If the deduction allowed under paragraphs (b) or (c) of this section results in a tax benefit to the taxpayer, the taxpayer must include in income, under sections 61 and 111, the recovery of any amount deducted in a prior taxable year to the extent the prior year’s deduction reduced the taxpayer’s tax liability. (i) A tax benefit to the taxpayer includes a reduction in the taxpayer’s tax liability for a prior taxable year or the creation of a net operating loss carryback or carryover. (ii) A taxpayer’s recovery of any amount deducted in a prior taxable year includes, but is not limited to— (A) Receiving a refund, recoupment, rebate, reimbursement, or otherwise recovering some or all of the amount the taxpayer paid or incurred, or (B) Being relieved of some or all of the payment liability under the order or agreement. (e) Definitions. For section 162(f) and § 1.162–21, the following definitions apply: (1) Government. A government means— (i) The government of the United States, a State, or the District of Columbia; (ii) The government of a territory of the United States, including American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands; (iii) The government of a foreign country; (iv) An Indian tribal government, as defined in section 7701(a)(40), or a subdivision of an Indian tribal government, as determined in accordance with section 7871(d); or (v) A political subdivision (such as a local government unit) of a government described in paragraph (e)(1)(i), (ii), or (iii) of this section. (2) Governmental entity. A governmental entity means— (i) A corporation or other entity serving as an agency or instrumentality of a government (as defined in paragraph (e)(1) of this section), or (ii) A nongovernmental entity treated as a governmental entity as described in paragraph (e)(3) of this section. (3) Nongovernmental entity treated as a governmental entity. A nongovernmental entity treated as a governmental entity is an entity that— (i) Exercises self-regulatory powers (including imposing sanctions) in VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 connection with a qualified board or exchange, as defined in section 1256(g)(7); or (ii) Exercises self-regulatory powers, including adopting, administering, or enforcing rules and imposing sanctions, as part of performing an essential governmental function. (4) Restitution, remediation of property, and amounts paid to come into compliance with a law—(i) Amounts for restitution or remediation. An amount is paid or incurred for restitution or remediation pursuant to paragraph (b)(1) of this section if it is paid or incurred to restore, in whole or in part, the person, as defined in section 7701(a)(1); government; governmental entity; property; environment; wildlife; or natural resources harmed, injured, or damaged by the violation or potential violation of any law described in paragraph (a)(3) of this section to the same or substantially similar position or condition as existed prior to such harm, injury or damage. (A) Environment, wildlife, or natural resources. Restitution or remediation of the environment, wildlife, or natural resources includes amounts paid or incurred for the purpose of conserving soil, air, or water resources, protecting or restoring the environment or an ecosystem, improving forests, or providing a habitat for fish, wildlife, or plants. The amounts must be paid or incurred— (1) To, or at the direction of, a government or governmental entity to be used exclusively for the restitution or remediation of a harm to the environment, wildlife, or natural resources; (2) To a segregated fund or account established by a government or governmental entity and, pursuant to the order or agreement, the amounts are not disbursed to the general account of the government or governmental entity for general enforcement efforts or other discretionary purposes; or (3) To a segregated fund or account established at the direction of a government or governmental entity. (4) Paragraph (e)(4)(i)(A) of this section applies only if there is a strong nexus or connection between the purpose of the payment and the harm to the environment, natural resources, or wildlife that the taxpayer has caused or is alleged to have caused. (B) Disgorgement or forfeiture. Provided the identification and establishment requirements of paragraphs (b)(2) and (b)(3) of this section are met, restitution may include amounts paid or incurred as disgorgement or forfeiture, if paid or incurred at the direction of a PO 00000 Frm 00110 Fmt 4700 Sfmt 4700 government or governmental entity directly to the person, as defined in section 7701(a)(1), harmed by the violation or potential violation of any law or to, or at the direction of, the government or governmental entity, to establish a segregated fund or account for the benefit of such harmed person. This paragraph (e)(4)(i)(B) does not apply if the order or agreement identifies the payment amount as in excess of the taxpayer’s net profits or, pursuant to the order or agreement, the amounts are disbursed to the general account of the government or governmental entity for general enforcement efforts or other discretionary purposes. (C) Segregated funds or accounts. Provided the identification and establishment requirements of paragraphs (b)(2) and (b)(3) of this section are met, restitution or remediation may include amounts paid or incurred, pursuant to an order or agreement, to a segregated fund or account to restore, in whole or in part, the person, as defined in section 7701(a)(1); government; governmental entity; property; environment; wildlife; or natural resources harmed, injured, or damaged by the violation or potential violation of any law described in paragraph (a)(3) of this section. This paragraph (e)(4)(i)(C) does not apply if, pursuant to the order or agreement, the amounts are disbursed to the general account of the government or governmental entity for general enforcement efforts or other discretionary purposes. (ii) Amounts to come into compliance with a law. An amount is paid or incurred to come into compliance with a law that the taxpayer has violated, or is alleged to have violated, by performing services; taking action, such as modifying equipment; providing property; or doing any combination thereof to come into compliance with that law. (iii) Amounts not included. Regardless of whether the order or agreement identifies them as such, restitution, remediation, and amounts paid to come into compliance with a law do not include any amount paid or incurred— (A) As reimbursement to a government or governmental entity for investigation costs or litigation costs incurred in such government or governmental entity’s investigation into, or litigation concerning, the violation or potential violation of any law; or (B) At the taxpayer’s election, in lieu of a fine or penalty. (5) Suit, agreement, or otherwise. A suit, agreement, or otherwise includes, E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations but is not limited to, suits; settlement agreements; orders; non-prosecution agreements; deferred prosecution agreements; judicial proceedings; administrative adjudications; decisions issued by officials, committees, commissions, or boards of a government or governmental entity; and any legal actions or hearings which impose a liability on the taxpayer or pursuant to which the taxpayer assumes liability. (f) Examples. The application of this section is illustrated by the following examples. (1) Example 1. (i) Facts. Corp. A enters into an agreement with State Y’s environmental enforcement agency (Agency) for violating state environmental laws. Pursuant to the agreement, Corp. A pays $40X to the Agency in civil penalties, $80X in restitution for the environmental harm that the taxpayer has caused, $50X for remediation of contaminated sites, and $60X to conduct comprehensive upgrades to Corp. A’s operations to come into compliance with the state environmental laws. (ii) Analysis. The identification requirement is satisfied for those amounts the agreement identifies as restitution, remediation, or to come into compliance with a law. If Corp. A meets the establishment requirement, as provided in paragraph (b)(3), paragraph (a) of this section will not disallow Corp. A’s deduction for $80X in restitution and $50X for remediation. Under paragraph (a) of this section, Corp. A may not deduct the $40X in civil penalties. Paragraph (a) of this section will not disallow Corp. A’s deduction for the $60X paid to come into compliance with the state environmental laws. See section 161, concerning items allowed as deductions, and section 261, concerning items for which no deduction is allowed, and the regulations related to sections 161 and 261. (2) Example 2. (i) Facts. Corp. A enters into an agreement with State T’s securities agency (Agency) for violating a securities law by inducing B to make a $100X investment in Corp. C stock, which B lost when the Corp. C stock became worthless. As part of the agreement, Corp. A agrees to pay $100X to B as restitution for B’s investment loss, incurred as a result of Corp. A’s actions. The agreement specifically states that the $100X payment by Corp. A to B is restitution. The agreement also requires Corp. A to pay a $40X penalty for violating Agency law. Corp. A pays the $140X. (ii) Analysis. Corp. A’s $100X payment to B is identified in the agreement as restitution. If Corp. A VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 establishes, as provided in paragraph (b)(3) of this section, that the amount paid was for that purpose, paragraph (a) of this section will not disallow Corp. A’s deduction for the $100X payment. Under paragraph (a) of this section, Corp. A may not deduct its $40X payment to the Agency because it was paid for Corp. A’s violation of Agency law. (3) Example 3. (i) Facts. Corp. B is under investigation by State X’s environmental enforcement agency for a potential violation of State X’s law governing emissions standards. Corp. B enters into an agreement with State X under which it agrees to upgrade the engines in a fleet of vehicles that Corp. B operates to come into compliance with State X’s law. Although the agreement does not provide the specific amount Corp. B will incur to upgrade the engines to come into compliance with State X’s law, it identifies that Corp. B must upgrade existing engines to lower certain emissions. Under the agreement, Corp. B also agrees to construct a nature center in a local park for the benefit of the community. Instead of paying $12X, to come into compliance with State X’s law, Corp. B pays $15X to upgrade the engines to a standard higher than that which the law requires. Corp. B presents evidence to establish that it would cost $12X to upgrade the engines to come into compliance with State X’s law. (ii) Analysis. Because the agreement describes the specific action Corp. B must take to come into compliance with State X’s law, and Corp. B provides evidence, as described in paragraph (b)(3)(ii) of this section, to establish that the agreement obligates it to incur costs to come into compliance with a law, paragraph (a) of this section will not disallow Corp. B’s deduction for the $12X Corp. B incurs to come into compliance. Corp. B may also deduct the $3X if it is otherwise deductible under chapter 1 of the Code. However, Corp. B may not deduct the amounts paid to construct the nature center because no facts exist to establish that the amount was paid either to come into compliance with a law or as restitution or remediation. (4) Example 4. (i) Facts. Corp. D enters into an agreement with governmental entity, Trade Agency, for engaging in unfair trade practices in violation of Trade Agency laws. The agreement requires Corp. D to pay $80X to a Trade Agency fund, through disgorgement of net profits, to be used exclusively to pay restitution to the consumers harmed by Corp. D’s violation of Trade Agency law. Corp. D pays $80X to Trade Agency fund and PO 00000 Frm 00111 Fmt 4700 Sfmt 4700 4987 Trade Agency disburses all amounts in the restitution fund to the harmed consumers. (ii) Analysis. The agreement identifies the $80X payment to the fund as restitution. Trade Agency uses the funds exclusively to provide restitution to the harmed consumers and does not use it for discretionary or general enforcement purposes. If Corp. D establishes, as provided in paragraph (b)(3) of this section, that the $80X constitutes restitution under paragraph (e)(4)(i)(B) of this section, paragraph (a) of this section does not apply. (5) Example 5. (i) Facts. B, a regulated banking institution, is subject to the supervision of, and annual examinations by governmental entity, R. In the ordinary course of its business, B is required to pay annual assessment fees to R, which fees are used to support R in supervising and examining banking institutions to ensure a safe and sound banking system. Following an annual examination conducted in the ordinary course of B’s business, R issues a letter to B identifying concerns with B’s internal compliance functions. B takes corrective action to address R’s concerns by investing in its internal compliance functions. R does not conduct an investigation or inquiry into B’s potential violation of any law. (ii) Analysis. The payment of annual assessment fees by B to R in the ordinary course of business is not related to the violation of any law or the investigation or inquiry into the potential violation of any law. In addition, B’s costs of taking the corrective action are not related to the violation of any law or the investigation or inquiry into the potential violation of any law as described in section 162(f)(1). Paragraph (a) of this section will not disallow the deduction of the annual assessment fees and the cost of the corrective actions. (6) Example 6. (i) Facts. B, a regulated banking institution, is subject to the supervision of, and annual examinations by governmental entity, R. Following an annual examination conducted in the ordinary course of B’s business, R pursues an enforcement action against B for violation of banking laws. B and R enter a settlement agreement, pursuant to which B agrees to undertake certain improvements to come into compliance with banking laws and to pay R $20X for violation of banking laws. B pays the $20X. (ii) Analysis. If the agreement meets the identification requirement of paragraph (b)(2) of this section and B meets the establishment requirement of paragraph (b)(3) of this section, paragraph (a) of this section will not E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES 4988 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations disallow the deduction of the costs of the corrective actions to come into compliance with banking laws. However, B may not deduct the $20X paid to R because the amount was not paid to come into compliance with a law or as restitution or remediation. (7) Example 7. (i) Facts. Corp. C contracts with governmental entity, Q, to design and build a rail project within five years. Corp. C does not complete the project. Q sues Corp. C for breach of contract and damages of $10X. A jury finds Corp. C breached the contract and Corp. C pays $10X to Q. (ii) Analysis. The suit arose out of a proprietary contract, wherein Q enforced its rights as a private party. Paragraph (a) of this section will not disallow Corp. C’s deduction of the payment of $10X pursuant to this suit. (8) Example 8. (i) Facts. Corp. C contracts with governmental entity, Q, to design and build a rail project within five years. Site conditions cause construction delays and Corp. C asks Q to pay $50X in excess of the contracted amount to complete the project. After Q pays for the work, it learns that, at the time it entered the contract with Corp. C, Corp. C knew that certain conditions at the project site would make it challenging to complete the project within five years. Q sues Corp. C for withholding critical information during contract negotiations in violation of the False Claims Act (FCA). The court enters a judgment in favor of Q pursuant to which Corp. C will pay Q $50X in restitution and $150X in treble damages. Corp. C pays the $200X. (ii) Analysis. The suit pertains to Corp. C’s violation of the FCA. The order identifies the $50X Corp. C is required to pay as restitution, as described in paragraph (b)(2) of this section. If Corp. C establishes, as provided in paragraph (b)(3) of this section, that the amount paid was for restitution, paragraph (a) of this section will not disallow Corp. C’s deduction for the $50X payment. Under paragraph (a) of this section, Corp. C may not deduct the $150X paid for the treble damages imposed for violation of the FCA because the order did not identify all or part of the payment as restitution. (9) Example 9. (i) Facts. Corp. T operates a truck fleet company incorporated in State A. State A requires that all vehicles registered in State A have a vehicle emissions test every two years. Corp. T’s 40 trucks take the emissions test on March 1 for which it pays the $15 per vehicle. Under State A law, if a vehicle fails the emissions test, the vehicle owner has 30 days to certify to State A that the vehicle has been repaired and has passed the emissions VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 test. State A imposes a $1X penalty per vehicle for failure to comply with this 30-day rule. Twenty trucks pass; twenty trucks fail. Corp. T does not submit the required certification to State A for the twenty trucks that failed the emissions test. State A imposes a $40X penalty against Corp. T. Corp. T pays the $40X. (ii) Analysis. Emissions tests are conducted in the ordinary course of operating a truck fleet company and, therefore, paragraph (a) of this section does not apply to the $600 Corp. T pays for the emissions tests. However, Corp. T may not deduct the $40X penalty for failure to comply with State A requirements because the amount is required to be paid to a government in relation to the violation of a law. (10) Example 10. (i) Facts. Corp. G operates a chain of 20 grocery stores in County X. Under County X health and food safety code and regulations, Corp. G is subject to annual inspections for which Corp. G is required to pay an inspection fee of $40 per store. Pursuant to the annual inspection, the County X health inspector finds violations of County X’s health and food safety code and regulations in three of Corp. G’s 20 stores. County X bills Corp. G $800 for the annual inspection fees for the 20 stores and a $1,000 fine for each of the three stores, for a total fine of $3,000, for violations of the health and food safety code. Corp. G pays the fees and fines. (ii) Analysis. Paragraph (a) of this section will not disallow Corp. G’s deduction for the $800 inspection fees paid in the ordinary course of a regulated business. Under paragraph (a) of this section, Corp. G may not deduct the $3,000 fine for violation of the County X health code and food safety ordinances because it was paid to a government in relation to the violation of a law. (11) Example 11. (i) Facts. Corp. G operates a chain of grocery stores in County X. Under County X health and food safety code and regulations, Corp. G is subject to annual inspections. Pursuant to an annual inspection, the County X health inspector finds that the refrigeration system in one of Corp. G’s stores does not keep food at the temperature required by the health and food safety code and regulations. The County X health inspector issues a warning letter instructing Corp. G to correct the violation and bring the refrigeration system into compliance with the law before a reinspection in 60 days or face the imposition of fines if it fails to comply. Corp. G pays $10,000 to bring its refrigeration system into compliance with the law. (ii) Analysis. Provided the identification and establishment PO 00000 Frm 00112 Fmt 4700 Sfmt 4700 requirements of paragraphs (b)(2) and (b)(3), respectively, of this section are met, paragraph (a) of this section will not disallow Corp. G’s deduction for the $10,000 it pays to bring its refrigeration system into compliance with the law. (12) Example 12. (i) Facts. Corp. G operates a chain of grocery stores in County X. Under County X health and food safety code and regulations, Corp. G is subject to annual inspections. Pursuant to an annual inspection, the County X health inspector finds that the refrigeration system in one of Corp. G’s stores does not keep food at the temperature required by the health and food safety code and regulations. The County X health inspector issues a warning letter instructing Corp. G to correct the violation and bring the refrigeration system into compliance with the law before a reinspection in 60 days or face the imposition of fines if it fails to comply. The County X health inspector later reinspects the refrigeration system. Corp. G pays a reinspection fee of $80. During the reinspection, the health inspector finds that Corp. G did not bring its refrigeration system into compliance with the law. The health inspector issues a citation imposing a $250 fine on Corp. G. Corp. G pays the $250 fine. (ii) Analysis. Paragraph (a) of this section will disallow Corp. G’s deduction for the $80 inspection fee because it is paid in relation to the investigation or inquiry by County X into the potential violation of a law. Paragraph (a) of this section will also disallow Corp. G’s deduction for the $250 fine paid for violation of the law. (13) Example 13. (i) Facts. Accounting Firm was convicted of embezzling $500X from Bank in violation of State X law. The court issued an order requiring Accounting Firm to pay $100X in restitution to Bank. The court also issued an order of forfeiture and restitution for $400X, which was seized by the State X officials. Accounting Firm paid $100X to Bank. The $400X seized was deposited with Fund within the State X treasury and, at the discretion of the State X Attorney General, was used to support law enforcement programs. (ii) Analysis. Although the order identified the amount forfeited as restitution, paragraph (a) of this section will disallow Accounting Firm’s deduction for the $400X forfeited because, under paragraph (e)(4)(i)(B)(I) of this section, it does not constitute restitution. If Accounting Firm establishes, as provided in paragraph (b)(3) of this section, that the $100X constitutes restitution under paragraph (e)(4)(i), paragraph (a) of this section E:\FR\FM\19JAR1.SGM 19JAR1 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations will not disallow Accounting Firm’s deduction for the $100X paid, provided the $100X is otherwise deductible under chapter 1. (g) Applicability date. The rules of this section apply to taxable years beginning on or after January 19, 2021, except that such rules do not apply to amounts paid or incurred under any order or agreement pursuant to a suit, agreement, or otherwise, which became binding under applicable law before such date, determined without regard to whether all appeals have been exhausted or the time for filing appeals has expired. ■ Par. 3. Add § 1.6050X–1 to read as follows: khammond on DSKJM1Z7X2PROD with RULES § 1.6050X–1 Information reporting for fines, penalties, and other amounts by governments, governmental entities, and nongovernmental entities treated as governmental entities. (a) Information reporting requirement. The appropriate official, as defined in paragraph (f)(1) of this section, of a government, as defined in paragraph (f)(2) of this section, a governmental entity, as defined in paragraph (f)(3) of this section, or nongovernmental entity treated as a governmental entity, as defined in paragraph (f)(4) of this section, that is a party to a suit or agreement to which section 6050X(a)(1) and (a)(2) applies, must— (1) File an information return, as described in paragraph (b) of this section, if the aggregate amount the payor, as defined in paragraph (f)(5) of this section, is required to pay pursuant to all court orders (orders) and settlement agreements (agreements), relating to the violation of any law, or the investigation or inquiry into the potential violation of any law, equals or exceeds the threshold amount provided in paragraph (f)(6) of this section; (2) Furnish a written statement as described in paragraph (c) of this section to each payor; and (3) Request the payor’s taxpayer identification number (TIN) if it is not already known, and notify the payor that the law requires the payor to furnish a TIN for inclusion on the information return and that the payor may be subject to a penalty for failure to furnish the TIN. See sections 6723, 6724(d)(3), and § 301.6723–1 of this chapter. The TIN may be requested in any manner, and the payor may provide the TIN in any manner, including orally, in writing, or electronically. If the TIN is furnished in writing, no particular form is required. Form W–9, Request for Taxpayer Identification Number and Certification, may be used, or the request may be incorporated into VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 documents related to the order or agreement. (b) Requirement to file return—(1) Content of information return. The information return must provide the following: (i) The amount required to be paid to, or at the direction of, a government or governmental entity, pursuant to section 6050X(a)(1)(A), as a result of the orders and/or agreements; (ii) The separate amounts required to be paid as restitution, remediation, or to come into compliance with a law, as described in section 6050X(a)(1)(B) and (C), as a result of the orders and/or agreements; (iii) The payor’s TIN; and (iv) Any additional information required by the information return and the related instructions. (2) Form and manner of reporting. The appropriate official required to file an information return, under paragraph (a)(1) of this section, must file Form 1098–F, Fines, Penalties, and Other Amounts, or any successor form, as provided by the instructions, with Form 1096, Annual Summary and Transmittal of U.S. Information Returns. (3) Multiple orders and/or agreements. The appropriate official must file only one Form 1098–F for amounts required to be paid as a result of multiple orders and/or agreements with respect to the violation, investigation, or inquiry. (4) Time of reporting. Returns required to be made under paragraph (a) of this section must be filed with the Internal Revenue Service (IRS) on or before February 28 (March 31 if filed electronically) of the year following the calendar year in which the orders and/ or agreements become binding under applicable law, determined without regard to whether all appeals have been exhausted or the time for filing an appeal has expired. (c) Requirement to furnish written statement—(1) In general. The appropriate official must furnish a written statement to each payor for which it is required to file an information return under paragraphs (a)(1) and (b) of this section. The written statement must include: (i) The information that was reported to the IRS relating to such payor; and (ii) A legend that identifies the statement as important tax information that is being furnished to the IRS. (2) Copy of the Form 1098–F. The appropriate official may satisfy the requirement of this paragraph (c) by furnishing a copy of the Form 1098–F, or any successor form, filed regarding the payor, or another document that contains the information required by PO 00000 Frm 00113 Fmt 4700 Sfmt 4700 4989 paragraph (c)(1) of this section if the document conforms to applicable revenue procedures or other guidance relating to substitute statements. See § 601.601 of this chapter. (3) Time for furnishing written statement. The appropriate official must furnish the written statement to the payor on or before January 31 of the year following the calendar year in which the order or agreement becomes binding under applicable law, determined without regard to whether all appeals have been exhausted or the time for filing an appeal has expired. (d) Rules for multiple payors—(1) Multiple payors—individual liability. If, pursuant to an order or agreement, multiple individually liable payors are liable to pay, for the violation of any law, or the investigation or inquiry into the potential violation of any law, an amount that, in the aggregate, equals, or exceeds, the threshold amount under paragraph (f)(6) of this section, the appropriate official must file an information return under paragraphs (a)(1) and (b) of this section to report the amount required to be paid by each payor, even if a payor’s payment liability is less than the threshold amount. The appropriate official must furnish a written statement, under paragraph (c) of this section, to each payor. If more than one person, as defined in section 7701(a)(1), is a party to an order or agreement, there is no information reporting requirement, or requirement to furnish a written statement, with respect to any person who does not have a payment obligation or obligation for costs to provide services or to provide property. (2) Multiple payors—joint and several liability. If, pursuant to an order or agreement, multiple payors are jointly and severally liable to pay, for the violation of any law, or the investigation or inquiry into the potential violation of any law, an amount that, in the aggregate, equals or exceeds the threshold amount under paragraph (f)(6) of this section, the appropriate official must file an information return, under paragraphs (a)(1) and (b) of this section for each of the jointly and severally liable payors. Each information return must report all amounts required to be paid by all of the payors pursuant to the order or agreement. The appropriate official must furnish a written statement, under paragraph (c) of this section, to each of the jointly and severally liable payors. (e) Payment amount not identified. If some or all of the payment amount is not identified, as described in § 1.162– 21(b)(2)(iii), for paragraphs (a), (b), and (c) of this section, the appropriate E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES 4990 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations official must file an information return, and furnish the written statement to the payor, as provided by the instructions to Form 1098–F, or any successor form, including instructions as to the amounts (if any) to include on Form 1098–F, only if the government or governmental entity reasonably expects that the aggregate amount required to be paid or incurred pursuant to the order or agreement, relating to the violation of any law, or the investigation or inquiry into the potential violation of any law, will equal or exceed the threshold amount under paragraph (f)(6) of this section. (f) Definitions. The following definitions apply under this section: (1) Appropriate official—(i) One government or governmental entity. If the government or governmental entity has not assigned one of its officers or employees to comply with the reporting requirements of paragraph (a), (b), and (c) of this section, the term appropriate official means the officer or employee of a government or governmental entity having control of the suit, investigation, or inquiry. If the government or governmental entity has assigned one of its officers or employees to comply with the reporting requirements of paragraph (a), (b), and (c) of this section, such officer or employee is the appropriate official. (ii) More than one government or governmental entity—(A) In general. If more than one government or governmental entity is a party to an order or agreement, only the appropriate official of the government or governmental entity listed first on the most recently executed order or agreement is responsible for complying with all reporting requirements under paragraphs (a), (b), and (c) of this section, unless another appropriate official is appointed by agreement under paragraph (f)(1)(ii)(B) of this section. (B) By agreement. The governments or governmental entities that are parties to an order or agreement may agree to appoint one or more other appropriate officials to be responsible for complying with the information reporting requirements of paragraphs (a), (b), and (c) of this section. (2) Government. For purposes of this section, government means the government of the United States, a State, the District of Columbia, or a political subdivision (such as a local government unit) of any of the foregoing. (3) Governmental entity. For purposes of this section, governmental entity means— (i) A corporation or other entity serving as an agency or instrumentality VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 of a government (as defined in paragraph (f)(2) of this section), or (ii) A nongovernmental entity treated as a governmental entity as described in paragraph (f)(4) of this section. (4) Nongovernmental entity treated as governmental entity. For purposes of this section, the definition of nongovernmental entity treated as a governmental entity as set forth in § 1.162–21(e)(3) applies but does not include a nongovernmental entity of a territory of the United States, including American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands, a foreign country, or an Indian tribe. (5) Payor. The payor is the person, as defined in section 7701(a)(1), which, pursuant to an order or agreement, has paid or incurred, or is liable to pay or incur, an amount to, or at the direction of, a government or governmental entity in relation to the violation or potential violation of any law. In general, the payor will be the person to which section 162(f) and § 1.162–21 of the regulations apply. (6) Threshold amount. The threshold amount is $50,000. (g) Applicability date. The rules of this section apply only to orders and agreements, pursuant to suits and agreements, which become binding under applicable law on or after January 1, 2022, determined without regard to whether all appeals have been exhausted or the time for filing an appeal has expired. Sunita Lough, Deputy Commissioner for Services and Enforcement. Approved: January 7, 2021. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2021–00741 Filed 1–14–21; 4:15 pm] BILLING CODE 4830–01–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 40 and 49 [TD 9948] RIN 1545–BP37 Excise Taxes; Transportation of Persons by Air; Transportation of Property by Air; Aircraft Management Services Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. AGENCY: PO 00000 Frm 00114 Fmt 4700 Sfmt 4700 This document contains final regulations relating to the excise taxes imposed on certain amounts paid for transportation of persons and property by air. Specifically, the final regulations relate to the exemption for amounts paid for certain aircraft management services. The final regulations also amend, revise, redesignate, and remove provisions of existing regulations that are out-of-date or obsolete and generally update the existing regulations to incorporate statutory changes, case law, and other published guidance. The final regulations affect persons that provide air transportation of persons and property, and persons that pay for those services. DATES: Effective Date: These regulations are effective January 14, 2021. Applicability Dates: For dates of applicability, see §§ 40.0–1(e), 49.4261– 1(g), 49.4261–2(d), 49.4261–3(e), 49.4261–7(k), 49.4261–9(c), 49.4261– 10(i), 49.4262–1(f), 49.4262–2(e), 49.4262–3(e), 49.4281–1(e), 49.4263– 1(b), 49.4263–3(b), 49.4271–1(g), and 49.4721–2. FOR FURTHER INFORMATION CONTACT: Michael H. Beker at (202) 317–6855 (not a toll-free number). SUPPLEMENTARY INFORMATION: SUMMARY: Background This document amends the Facilities and Services Excise Tax Regulations (26 CFR part 49) under sections 4261, 4262, 4263, 4264, 4271, 4281, and 4282 of the Internal Revenue Code (Code). This document also amends the Excise Tax Procedural Regulations (26 CFR part 40). Sections 4261 and 4271 impose excise taxes on certain amounts paid for transportation of persons or property, respectively, by air, collectively referred to herein as ‘‘air transportation excise tax.’’ Section 13822 of Public Law 115– 97, 131 Stat. 2054, 2182 (2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), added an exception to the air transportation excise tax in new section 4261(e)(5). Specifically, section 4261(e)(5)(A) provides that ‘‘[n]o tax shall be imposed by [section 4261] or section 4271 on any amounts paid by an aircraft owner for aircraft management services related to—(i) maintenance and support of the aircraft owner’s aircraft, or (ii) flights on the aircraft owner’s aircraft.’’ Section 4261(e)(5)(B) defines the term ‘‘aircraft management services’’ to include: (a) Assisting an aircraft owner with administrative and support services, such as scheduling, flight planning, and weather forecasting; (b) E:\FR\FM\19JAR1.SGM 19JAR1

Agencies

[Federal Register Volume 86, Number 11 (Tuesday, January 19, 2021)]
[Rules and Regulations]
[Pages 4970-4990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-00741]


=======================================================================
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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9946]
RIN 1545-BO67


Denial of Deduction for Certain Fines, Penalties, and Other 
Amounts; Related Information Reporting Requirements

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations providing guidance on 
section 162(f) of the Internal Revenue Code (Code), as amended in 2017, 
concerning the deduction of certain fines, penalties, and other 
amounts. This document also contains final regulations providing 
guidance relating to the information reporting requirements under new 
section 6050X of the Code with respect to those fines, penalties, and 
other amounts. The final regulations affect taxpayers that pay or incur 
amounts to, or at the direction of, governments, governmental entities 
or certain nongovernmental entities treated as governmental entities 
relating to the violation of any law or investigations or inquiries by 
such governments, governmental entities, or nongovernmental entities 
into the potential violation of any law. The final regulations also 
affect governments, governmental entities, and nongovernmental entities 
subject to the related reporting requirements.

DATES: 
    Effective date: These regulations are effective on January 14, 
2021.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.162-21(g) and 1.6050X-1(g).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations on amended 
section 162(f), Sharon Y. Horn (202) 317-4426; concerning the 
information reporting requirement, Nancy L. Rose (202) 317-5147. The 
phone numbers above may also be reached by individuals who are deaf or 
hard of hearing, or who have speech disabilities, through the Federal 
Relay Service toll-free at (800) 877-8339.

SUPPLEMENTARY INFORMATION: 

Background

    Prior to its amendment in 2017, section 162(f) disallowed an 
ordinary and necessary business expense deduction under section 162(a) 
for any fine or similar penalty paid to a government for the violation 
of any law. On February 20, 1975, the Treasury Department and the IRS 
issued final regulations under the prior version of section 162(f) (TD 
7345, 40 FR 7437), which were amended on July 11, 1975 (T.D. 7366, 40 
FR 29290) (together the 1975 regulations).
    Section 162(f) was amended by section 13306(a) of Public Law 115-
97, 131 Stat. 2054 (2017), commonly referred to as the Tax Cuts and 
Jobs Act (TCJA). Section 6050X was added to the Code by section 
13306(b) of the TCJA.
    As amended by the TCJA, the general rule of section 162(f)(1) 
provides that no deduction otherwise allowable under chapter 1 of the 
Code (chapter 1) shall be allowed for any amount paid or incurred 
(whether by suit, agreement, or otherwise) to, or at the direction of, 
a government or governmental entity in relation to the violation of any 
law or the investigation or inquiry by such government or governmental 
entity into the potential violation of any law. Section 162(f)(5) 
describes certain self-regulating nongovernmental entities that are 
treated as governmental entities for

[[Page 4971]]

purposes of section 162(f). As used in this preamble, the term 
``governmental entities'' includes nongovernmental entities treated as 
governmental entities under section 162(f)(5).
    Section 162(f)(2) provides an exception to the general disallowance 
rule in section 162(f)(1) for certain amounts paid or incurred for 
restitution, remediation, or to come into compliance with a law. Under 
section 162(f)(2)(A)(i) and (ii), section 162(f)(1) does not apply to 
amounts that (i) the taxpayer establishes were paid or incurred as 
restitution (including remediation of property) or to come into 
compliance with a law (establishment requirement), and (ii) are 
identified in a court order (order) or settlement agreement (agreement) 
as restitution, remediation, or amounts paid or incurred to come into 
compliance with a law (identification requirement). Section 
162(f)(2)(B) provides that amounts paid for restitution, remediation, 
and to come into compliance with a law do not include any amount paid 
or incurred as reimbursement to a government or governmental entity for 
the costs of any investigation or litigation.
    Section 162(f)(3) provides an exception to the general rule for 
amounts paid or incurred related to private party suits and section 
162(f)(4) provides an exception for certain taxes due.
    Section 6050X(a)(1) and 6050X(a)(2)(A) requires the appropriate 
official of any government or governmental entity involved in a suit or 
agreement described in section 6050X(a)(2)(A)(i) to file an information 
return if the aggregate amount involved in all orders or agreements 
with respect to the violation, investigation, or inquiry is $600 or 
more. Section 6050X(a)(2)(B) authorizes the Secretary of the Treasury 
or his delegate (Secretary) to adjust the threshold amount for filing 
the information return as necessary to ensure the efficient 
administration of the internal revenue laws. Pursuant to section 
6050X(a)(1), the information return must set forth (1) the amount 
required to be paid as a result of the order or agreement to which 
section 162(f)(1) applies; (2) any amount required to be paid as a 
result of the order or agreement that constitutes restitution or 
remediation of property; and (3) any amount required to be paid as a 
result of the order or agreement for the purpose of coming into 
compliance with a law that was violated or involved in the 
investigation or inquiry.
    Section 6050X(a)(3) provides that the government or governmental 
entity shall file the information return at the time the agreement is 
entered into, as determined by the Secretary. Section 6050X(b) requires 
the government or governmental entity to furnish to each person who is 
a party to the suit or agreement a written statement, at the time the 
information return is filed with the IRS, that includes (1) the name of 
the government or entity and (2) the information submitted to the IRS.
    Under section 13306(a)(2) and (b)(3) of the TCJA, the amendments to 
section 162(f) and new section 6050X apply to amounts paid or incurred 
on or after December 22, 2017, the date of enactment of the TCJA. 
However, they do not apply to amounts paid or incurred under any 
binding order issued or agreement entered into, before December 22, 
2017, and, if such order or agreement requires court approval, the 
required approval is obtained before December 22, 2017.
    On May 13, 2020, the Internal Revenue Service published a notice of 
proposed rulemaking (REG-104591-18) in the Federal Register (85 FR 
28524) providing guidance on the deduction disallowance rules in 
section 162(f) and the associated reporting requirements in section 
6050X. No public hearing on the proposed regulations was requested and 
accordingly no public hearing was held.
    The Treasury Department and the IRS received written comments in 
response to the proposed regulations. All comments were considered and 
are available at www.regulations.gov or upon request. After full 
consideration of the comments received on the proposed regulations, 
this Treasury decision adopts the proposed regulations with 
modifications in response to such comments as described in the Summary 
of Comments and Explanation of Revisions.

Summary of Comments and Explanation of Revisions

    Most of the comments addressing the proposed regulations are 
summarized in this Summary of Comments and Explanation of Revisions. 
However, comments merely summarizing or interpreting the proposed 
regulations, recommending statutory revisions, or addressing issues 
that are outside the scope of the final regulations are not discussed.
    Part I of this Summary of Comments and Explanation of Revisions 
addresses Sec.  1.162-21 and Part II addresses Sec.  1.6050X-1.

I. Denial of Deduction for Certain Fines, Penalties, and Other Amounts

A. General Rule

    The proposed regulations revise Sec.  1.162-21 and provide 
operational and definitional guidance concerning the application of 
section 162(f), as amended by the TCJA. The proposed regulations 
provide generally that a taxpayer may not take a deduction under any 
provision of chapter 1 for amounts (1) paid or incurred by suit, 
agreement, or otherwise; (2) to, or at the direction of, a government 
or governmental entity; (3) in relation to the violation, or 
investigation or inquiry into the potential violation, of any civil or 
criminal law. The proposed regulations also describe an exception to 
the general rule, under section 162(f)(2), which allows a deduction for 
certain amounts identified in the order or agreement as restitution, 
remediation, or paid or incurred to come into compliance with a law and 
the taxpayer establishes that the amount was paid or incurred for the 
purpose identified.
    The final regulations provide generally that a taxpayer may not 
take a deduction under any provision of chapter 1 for amounts (1) paid 
or incurred by suit, agreement, or otherwise; (2) to, or at the 
direction of, a government or governmental entity; (3) in relation to 
the violation, or investigation or inquiry by such government or 
governmental entity into the potential violation, of any civil or 
criminal law. This general rule applies whether or not the taxpayer 
admits guilt or liability or pays the amount imposed for any other 
reason, including to avoid the expense or uncertain outcome of an 
investigation or litigation. An admission of guilt or liability is not 
necessary because section 162(f)(1) contemplates a broader 
disallowance, as demonstrated by the disallowance of any amount paid or 
incurred, to, or at the direction of, a government or governmental 
entity in relation to the ``investigation or inquiry'' into the 
``potential violation of any law.''

1. Suit, Agreement, or Otherwise

    Under the proposed regulations, suit, agreement, or otherwise 
includes, but is not limited to, settlement agreements; non-prosecution 
agreements; deferred prosecution agreements; judicial proceedings; 
administrative adjudications; decisions issued by officials, 
committees, commissions, or boards of a government or governmental 
entity; and any legal actions or hearings in which a liability for the 
taxpayer is determined or pursuant to which the taxpayer assumes 
liability.
    Commenters asked that the final regulations exclude administrative 
and certain other categories of proceedings from the definition of 
suit, agreement, or otherwise. The final regulations do not adopt this 
recommendation because the

[[Page 4972]]

statute's use of the phrase ``suit, agreement, or otherwise'' indicates 
that Congress intended for section 162(f)(1) to apply broadly to both 
formal legal proceedings as well as other less formal proceedings.
    The preamble to the proposed regulations under section 6050X 
explains that an order or agreement is treated as binding under 
applicable law even if all appeals have not been exhausted with respect 
to the suit, agreement, or otherwise. A commenter recommended that the 
final regulations provide that the same meaning applies for the term 
``binding'' order or agreement under section 162(f). The final 
regulations generally adopt this recommendation.
2. To, or at the Direction of, a Government or Governmental Entity
    One commenter asked for clarification that, if a deduction is 
otherwise allowable under chapter 1, section 162(f)(1) does not 
disallow a deduction for amounts paid for the taxpayer's own legal fees 
and related expenses incurred in defending a prosecution or other 
action or proceeding, including an investigation or inquiry into a 
potential violation of any law. Legal fees and other expenses, such as 
stenographic and printing charges, paid or incurred in the defense of a 
prosecution or civil action arising from a violation of any law, or an 
investigation or inquiry into a potential violation of any law, are not 
amounts paid or incurred to, or at the direction of, a government or 
governmental entity. Thus it is clear that section 162(f)(1) does not 
disallow a deduction for such amounts, and there is no need to clarify 
this rule in final regulations.
    The proposed regulations provide a definition of ``government or 
governmental entity.'' The definition in the final regulations has been 
reorganized to provide a definition of a government in Sec.  1.162-
21(e)(1) and to provide a definition of a ``governmental entity'' in 
Sec.  1.162-21(e)(2). The definitions are based on the definition in 
the proposed regulations but clarify that a political subdivision of a 
government includes a local government unit. No comments were received 
on the definition of ``government or governmental entity'' in the 
proposed regulations.
    The proposed regulations define a nongovernmental entity treated as 
a governmental entity as an entity that exercises self-regulatory 
powers (including imposing sanctions) in connection with a qualified 
board or exchange, as defined in section 1256(g)(7), or exercises self-
regulatory powers, including adopting, administering, or enforcing laws 
and imposing sanctions, as part of performing an essential governmental 
function. The final regulations revise the definition to clarify that 
self-regulatory powers include enforcing rules, not laws. A commenter 
recommended that the definition of ``essential governmental function'' 
under section 115 should apply to section 162(f)(5). The final 
regulations do not adopt this recommendation because section 115 does 
not define the term ``essential governmental function.'' The final 
regulations clarify that a governmental entity includes a 
nongovernmental entity treated as a governmental entity.
3. Violation of Any Law
    Commenters asked that the final regulations provide a definition of 
a ``violation of any law.'' The final regulations do not adopt this 
recommendation because they are intended to provide broad rules of 
general application based on the underlying principles of section 
162(f) rather than narrow rules with limited application. The final 
regulations provide several examples to illustrate the application of 
section 162(f) to violations of any law.
    Commenters also requested clarification that ``technical 
violations'' of any law, such as vendor overcharge errors remedied in 
the ordinary course of business, are not violations of any law. The 
commenters did not further define what constitutes a ``technical 
violation.'' Without a more comprehensive definition, the commenters' 
requests may be inconsistent with the general rule in the final 
regulations. Therefore, the final regulations do not adopt this 
comment.
    Commenters recommended that the final regulations clarify that the 
phrase ``in relation to the violation of any law or the investigation 
or inquiry by such government or [governmental] entity into the 
potential violation of any law'' do not apply to a government or 
governmental entity enforcing its legal rights, including defending 
against claims, as a private party. The Treasury Department and the IRS 
agree that, in general, unless a government contracting or similar 
statute provides otherwise, a government's recovery of vendor 
overcharge errors are in the nature of private party recoveries and not 
payments made to, or at the direction of, a government or governmental 
entity in relation to the violation of any law or the investigation or 
inquiry in to the potential violation of any law. Similarly, as 
discussed with respect to private party suits in Part I.B.6 of this 
Summary of Comments and Explanation of Revisions, a violation of any 
law does not include any order or agreement in a suit in which a 
government or governmental entity enforces rights as a private party.
    Commenters asked the Treasury Department and the IRS how section 
162(f) applies to amounts paid or incurred pursuant to certain statutes 
that contain provisions that may apply without any finding of a 
violation of law, such as the Comprehensive Environmental Response, 
Compensation, and Liability Act of 1980 (CERCLA). CERCLA contains 
cleanup requirements and reimbursement provisions that generally apply 
even though there has been no violation of law. CERCLA also contains 
penalty provisions for specific violations of law. Although section 
162(f) and the final regulations generally will not apply to CERCLA 
cleanup requirements and reimbursements required to be paid or incurred 
by provisions that apply without any violation of law, section 162(f) 
and the final regulations will apply to penalties required to be paid 
or incurred for violations of law, including penalties required to be 
paid or incurred by reason of a violation of specific CERCLA 
provisions.
4. Investigation or Inquiry Into the Potential Violation of Any Law
    The Treasury Department and the IRS received several requests for 
additional guidance concerning ``the investigation or inquiry by [a] 
government or [governmental] entity into the potential violation of any 
law.'' Commenters requested that the final regulations: (1) Provide 
that an investigation or inquiry by such government into the potential 
violation of any law does not include a routine investigation, inquiry, 
audit, review, or inspection; (2) clarify when a routine investigation, 
inquiry, audit, review, or inspection ends and a non-routine 
investigation or inquiry begins; (3) clarify whether payments related 
to an investigation or inquiry are deductible if the investigation or 
inquiry ends without a finding of a violation of any law; and (4) 
provide examples of routine investigations, inquiries, audits, reviews, 
or inspections that are not non-routine investigations or inquiries. In 
addition, some of the commenters requested guidance that is unique to 
an industry or a statute.
    The Treasury Department and the IRS agree that, in general, section 
162(f)(1) does not disallow a deduction for amounts paid or incurred in 
connection with investigations or inquiries of regulated businesses or 
industries

[[Page 4973]]

conducted in the ordinary course of business if the payment is 
otherwise deductible as an ordinary and necessary business expense. 
Accordingly, the final regulations provide, in general, that amounts 
paid or incurred for routine investigations or inquiries, such as 
audits or inspections, required to ensure compliance with rules and 
regulations applicable to the business or industry, which are not 
related to any evidence of wrongdoing or suspected wrongdoing, are not 
amounts paid or incurred relating to the potential violation of any 
law. Therefore, section 162(f)(1) will not apply to disallow an 
otherwise deductible ordinary and necessary business expense for 
amounts paid or incurred for these routine investigations or inquiries. 
Examples to illustrate the application of this rule are provided in the 
final regulations.
    In contrast, section 162(f)(1) explicitly disallows a deduction for 
amounts paid or incurred for an investigation or inquiry by the 
government or governmental entity relating to the potential violation 
of any law. Therefore, the final regulations do not adopt the 
commenters' recommendation that section 162(f)(1) does not apply to 
amounts paid or incurred where, at the conclusion of the investigation 
or inquiry, there is no finding of wrongdoing, because the 
recommendation is inconsistent with section 162(f)(1).
    The final regulations clarify that the investigation or inquiry 
must be one that is conducted by the government or governmental entity. 
Examples to illustrate the application of this rule are provided in the 
final regulations.
5. Fine or Penalty
    The proposed regulations disallow a deduction for payments made, at 
the taxpayer's election, in lieu of a fine or penalty. No comments were 
received regarding this provision and it is retained in the final 
regulations. One commenter asked that the final regulations adopt a 
definition for ``fine or penalty,'' and expressly state that both are 
not deductible. Although the final regulations do not provide a 
definition of ``fine or penalty,'' they provide that an amount that is 
paid or incurred in relation to the violation of any civil or criminal 
law includes a fine or penalty.

B. Exception to General Rule

    Section 162(f)(2) provides an exception to the general disallowance 
rule for certain amounts identified in the order or agreement as, and 
established by the taxpayer to be, paid or incurred for restitution or 
remediation, or to come into compliance with a law. The final 
regulations provide definitions and other guidance on the operation of 
this exception.
1. Restitution and Remediation
a. General
    The proposed regulations provide that an amount is paid or incurred 
for restitution or remediation if it restores, in whole or in part, the 
person, as defined in section 7701(a)(1); the government; the 
governmental entity; or property harmed by the violation or potential 
violation of any law. Commenters requested clarification as to what 
comprises restitution or remediation and requested modifications to the 
proposed definitions. A commenter recommended that the final 
regulations distinguish between civil and criminal restitution and 
disallow the deduction for amounts paid as criminal restitution. The 
final regulations do not adopt this rule because section 162(f)(2) does 
not distinguish between civil and criminal restitution and applies to 
``restitution (including remediation of property) for damage or harm 
which was or may be caused by the violation of any law or the potential 
violation of any law.'' Emphasis added. Nonetheless, it may be harder 
for a taxpayer to establish that an amount paid is restitution in the 
criminal context because of the punitive purpose underlying most 
criminal liability.
b. Restitution or Remediation of the Environment
    One commenter asked whether the definition of ``property'' for 
which restitution or remediation may be provided includes the 
environment. Another commenter noted that restitution or remediation 
cannot redress irreparable harms to the environment or natural 
resources, such as, killing wildlife or destroying a species or an 
ecosystem caused by the violation of any law. The commenter recommended 
that the final regulations provide a special restitution and 
remediation rule to address amounts paid or incurred for irreparable 
harm to the environment, natural resources, or wildlife. The Treasury 
Department and the IRS agree, provided the identification and 
establishment requirements are met and the restitution or remediation 
has a strong nexus or connection to the harm to the environment, 
natural resources, or wildlife that the taxpayer has caused or is 
alleged to have caused. The final regulations revise the definition of 
``restitution, remediation of property, and amounts paid to come into 
compliance with a law'' to clarify that, if otherwise deductible under 
chapter 1, an amount is paid or incurred for restitution or remediation 
of the environment, wildlife, or natural resources if it is paid or 
incurred for the purpose of conserving soil, air, or water resources, 
protecting or restoring the environment or an ecosystem, improving 
forests, or providing a habitat for fish, wildlife, or plants, and has 
the requisite nexus with the harm that the taxpayer has caused or is 
alleged to have caused. Such amounts may include payments described in 
Sec.  1.162-21(e)(4)(A), to be used exclusively for the restitution or 
remediation of a harm to the environment, wildlife, or natural 
resources that the taxpayer has caused or is alleged to have caused or 
paid to a segregated fund or account established by, or at the 
direction of, the government or governmental entity for the restitution 
or remediation of harm to the environment, wildlife, or natural 
resources that the taxpayer has caused or is alleged to have caused, 
provided, pursuant to the order or agreement, the amounts are not 
disbursed to the general account of the government or governmental 
entity for general enforcement efforts or other discretionary purposes.
c. Disgorgement or Forfeiture
    Under the proposed regulations, the section 162(f)(2) exception to 
the general deduction disallowance rule does not apply to forfeiture or 
disgorgement. Therefore, the proposed regulations treat any amount paid 
or incurred as forfeiture or disgorgement as, per se, disallowed under 
section 162(f)(1). To support excluding disgorgement from the 
definition of restitution, remediation, or amounts paid to come into 
compliance with a law, the preamble to the proposed regulations quote 
Kokesh v. Securities and Exchange Commission, 137 S. Ct. 1635, 1643 
(2017) (`` `[t]he primary purpose of disgorgement orders is to deter 
violations of the securities laws by depriving violators of their ill-
gotten gains' ''). In Kokesh, the Supreme Court determined that 
disgorgement, when imposed as a sanction for violating a Federal 
securities law, constitutes a penalty under the related five-year 
statute of limitations because disgorgement is imposed to deter 
violations of securities laws by depriving violators of their ill-
gotten gains and because the funds are dispersed to the United States 
Treasury to redress a wrong to the public at large caused by the 
violation. Kokesh, 137 S. Ct. at 1642-44. However, in Kokesh, the

[[Page 4974]]

Supreme Court recognized that disgorgement may serve a compensatory 
purpose as well (``wrong sought to be redressed is . . . a wrong to the 
individual;'' ``[s]ome disgorged funds are paid to victims''). Id.
    To support excluding forfeiture from the definition of restitution, 
remediation, or amounts paid to come into compliance with a law, the 
preamble to the proposed regulations quotes Nacchio v. United States, 
824 F.3d 1370, 1379 (Fed. Cir. 2016) (`` `[w]hile restitution seeks to 
make victims whole by reimbursing them for their losses, forfeiture is 
meant to punish the defendant by transferring his ill-gotten gains to 
the United States Department of Justice.' '') In Nacchio, the United 
States Court of Appeals for the Federal Circuit disallowed the 
taxpayer's deduction for the amount of mandatory forfeiture pursuant to 
a criminal conviction for insider trading, even though the government, 
in its discretion, subsequently used the forfeited funds to compensate 
victims.
    Several commenters asked the Treasury Department and the IRS to 
reconsider the rule in the proposed regulations, which excludes 
disgorgement and forfeiture from the definition of ``restitution, 
remediation, and coming into compliance.'' One commenter explained the 
exclusion is contrary to the expressed intent of Congress because the 
statute provides an exception to the disallowance rule of section 
162(f)(1) for restitution and that, in Kokesh, the Supreme Court 
stated, ``[g]enerally, disgorgement is a form of `[r]estitution 
measured by the defendant's wrongful gain.'' Kokesh, 137 S. Ct. at 
1640. Commenters noted that, in Liu v. Securities and Exchange 
Commission, 140 S. Ct. 1936 (2020), which was decided after the 
publication of the proposed regulations, the Supreme Court recognized 
that, amounts paid through disgorgement that do not exceed the 
wrongdoer's net profits and that are awarded to individual victims may 
constitute an equitable remedy. Commenters also noted that, in Liu, the 
Supreme Court expressly declined to answer whether under Kokesh 
disgorgement necessarily constitutes a penalty. Liu, 140 S. Ct. at 
1946.
    In consideration of the comments submitted with respect to 
disgorgement and the Supreme Court's decision in Liu, the final 
regulations will not treat disgorgement of net profits as, per se, 
nondeductible under section 162(f)(1). Instead, taxpayer's claim for a 
deduction for amounts paid or incurred through disgorgement will not be 
disallowed if the amount is otherwise deductible under chapter 1; the 
order or agreement identifies the payment, not in excess of net 
profits, as restitution, remediation, or an amount paid to come into 
compliance with a law; the taxpayer establishes that the amount was 
paid as restitution, remediation, or an amount paid to come into 
compliance with a law; and the origin of the taxpayer's liability is 
restitution, remediation, or an amount paid to come into compliance 
with a law. However, amounts paid or incurred through disgorgement will 
be disallowed if, pursuant to the order or agreement, the amounts are 
disbursed to the general account of the government or governmental 
entity for general enforcement efforts or other discretionary purposes. 
The final regulations provide an example to illustrate the application 
of section 162(f) to disgorgement.
    Commenters also requested that the Treasury Department and the IRS 
reconsider the rule in the proposed regulations that excludes 
forfeiture from the definition of ``restitution, remediation, and 
coming into compliance,'' but did not address forfeiture independently 
from their discussion of disgorgement. Virtually all states have some 
form of asset recovery legislation and the United States Code contains 
many forfeiture provisions. Because the final regulations cannot 
provide specific rules about the application of section 162(f) to every 
asset recovery statute, the final regulations will not treat forfeiture 
of net profits as, per se, nondeductible under section 162(f)(1). 
Instead, taxpayer's claim for a deduction for an amount paid or 
incurred through forfeiture will not be disallowed if the amount is 
otherwise deductible under chapter 1; the order or agreement identifies 
the payment, not in excess of net profits, as restitution, remediation, 
or an amount paid to come into compliance with a law; the taxpayer 
establishes that the amount was paid as restitution, remediation, or an 
amount paid to come into compliance with a law; and the origin of the 
taxpayer's liability is restitution, remediation, or an amount paid to 
come into compliance with a law. However, amounts paid or incurred 
through forfeiture will be disallowed if, pursuant to the order or 
agreement, the amounts are disbursed to the general account of the 
government or governmental entity for general enforcement efforts or 
other discretionary purposes. The final regulations provide an example 
to illustrate the application of section 162(f) to forfeiture.
d. Payment to a Fund
    Under the proposed regulations, restitution, remediation, and 
amounts paid to come into compliance with a law do not include any 
amount paid or incurred to an entity; to a fund, including a 
restitution, remediation, or other fund; to a group; or to a government 
or governmental entity, to the extent it was not harmed by the 
taxpayer's violation or potential violation of a law. Commenters asked 
that the Treasury Department and the IRS reconsider this rule. In 
consideration of the comments, the final regulations remove the per se 
exclusion. However, the final regulations provide that restitution and 
remediation do not include amounts paid or incurred pursuant to an 
order or agreement to the general account or treasury of the government 
or governmental entity for general enforcement efforts or other 
discretionary purposes or amounts paid or incurred that do not meet the 
requirements of Sec.  1.162-21(e)(4)(i). In addition, the final 
regulations provide that if amounts paid or incurred pursuant to an 
order or agreement to an entity, fund, group, or government or 
governmental entity are subsequently returned to the taxpayer, the 
taxpayer will be required to include those amounts in income under the 
tax benefit rule.
    Several commenters noted that restitution funds may not be 
exhausted if, for example, there are unclaimed amounts or when less 
than the entire fund is required to be used to make harmed parties 
whole. One commenter recommended that the final regulations provide an 
example to illustrate that when unclaimed amounts revert to a 
government or governmental entity's general account the nature of those 
amounts does not change as long as it was reasonably expected, at the 
time the taxpayer made the payment to the fund, that the amount would 
be used for restitution payments to harmed parties. Although the final 
regulations do not provide this example, the Treasury Department and 
the IRS generally agree that, if the order or agreement identifies the 
payment to a fund, described in Sec.  1.162-21(e)(4)(A) or (e)(4)(B), 
as restitution or remediation, and the taxpayer establishes that it 
made the payment to a fund for the purpose identified, for example, by 
providing the canceled check making the payment to the fund, a 
deduction will not be disallowed if, after the taxpayer makes the 
payment, the amount paid to the fund is not used for the purpose 
identified as long as the amount does

[[Page 4975]]

not revert to the taxpayer or for the benefit of the taxpayer.
2. Coming Into Compliance With a Law
    The proposed regulations provide that an amount is paid or incurred 
to come into compliance with a law by performing specific services, 
taking a specific corrective action, providing specific property, or a 
combination thereof. The final regulations also list amounts that will 
not be treated as paid or incurred to come into compliance with a law. 
The final regulations clarify that the services performed, actions 
taken, and the provision of property must be done to come into 
compliance with the law that has been violated, or potentially 
violated.
    One commenter requested that the final regulations treat amounts 
paid or incurred pursuant to an order or agreement to upgrade equipment 
or property to a higher standard than required by law as coming into 
compliance with a law. The final regulations modify an example in the 
proposed regulations to clarify that if an order or agreement requires 
a taxpayer to come into compliance with a law and the taxpayer elects 
to upgrade equipment or property to a higher than required standard, 
any amount paid or incurred in excess of the amount paid or incurred to 
come into compliance with a law will not be disallowed by section 
162(f)(1) or the related final regulations because it is not an amount 
paid or incurred to, or at the direction of, a government or 
governmental entity in relation to the violation of any law or the 
investigation or inquiry into the potential violation of any law.
    Another commenter requested that the final regulations define the 
class of services and actions that qualify as having been made to come 
into compliance with a law under section 162(f)(2)(A)(i)(II). The final 
regulations do not adopt this recommendation because they are intended 
to provide broad rules of general application based on the underlying 
principles of section 162(f) rather than narrow rules with limited 
application that risk excluding certain services or actions. The 
commenter also suggested that the government or governmental entity not 
be required to verify the accuracy of the amount expended by a taxpayer 
to perform the activities to come into compliance. The regulations do 
not require the government or governmental entity to verify the 
accuracy of the amount expended by a taxpayer to perform the activities 
to come into compliance.
3. Identification Requirement
    Section 162(f)(2)(A)(ii) requires an order or agreement to identify 
an amount paid or incurred as restitution, remediation, or to come into 
compliance with a law. Under the proposed regulations, an order or 
agreement identifies a payment by stating the nature of, or purpose 
for, each payment each taxpayer is obligated to pay and the amount of 
each payment identified.
    To satisfy the identification requirement, the proposed regulations 
require the order or agreement to specifically state the amount of the 
payment and that the payment constitutes restitution, remediation, or 
an amount paid to come into compliance with a law. The proposed rule 
provides that the identification requirement may be met if the order or 
agreement uses a different form of the requisite words, such as 
``remediate'' or ``comply with a law.''
    The Treasury Department and the IRS received several 
recommendations and requests for clarification regarding how orders or 
agreements may meet the identification requirement when the payment 
amount is not identified. One commenter suggested that, if the total 
amount to be paid is known at the time the agreement is entered into or 
the order is issued, the order or agreement must identify separately 
the amount to be paid as restitution, remediation, or to come into 
compliance with a law in order to meet the identification requirement. 
In contrast, several other commenters asked whether the identification 
requirement may be met if the order or agreement identifies the total 
payment as restitution, remediation, or paid to come into compliance 
with a law without allocating the payment amount among ``restitution,'' 
``remediation,'' and ``coming into compliance.'' Some commenters 
expressed the concern that it may not be possible to satisfy the 
identification requirement in an order or agreement that imposes lump-
sum judgments or settlements, involves multiple taxpayers, or multiple 
damage awards, because the order or agreement may not segregate the 
amounts to be paid as restitution, remediation, or to come into 
compliance with a law from the disallowed amounts, or allocate the 
payments among the multiple taxpayers.
    The final regulations do not adopt a rule that a total payment 
amount must be allocated in an order or agreement among 
``restitution,'' ``remediation,'' and/or ``coming into compliance'' in 
order to meet the identification requirement under section 
162(f)(2)(A)(ii) because it could be burdensome on governments and 
governmental entities and taxpayers and would be difficult for the IRS 
to administer. Instead, the final regulations modify the proposed rule 
for payment amounts not identified so that it applies to orders or 
agreements that impose lump-sum payment judgments for ``restitution, 
remediation, and coming into compliance,'' or that involve multiple 
taxpayers or multiple damage awards. The payment amount not identified 
rule provides that the identification requirement may be met even if 
the order or agreement does not allocate the total lump-sum payment 
amount or multiple damage award among restitution, remediation, or to 
come into compliance or allocate the total payment among multiple 
taxpayers. The final regulations also clarify that the identification 
requirement may be met even if the order or agreement does not provide 
an estimated payment amount.
    Several commenters asked for clarification about how a taxpayer may 
meet the identification requirement. Consistent with section 
162(f)(2)(A)(ii), the final regulations provide that the order or 
agreement, not the taxpayer, must meet the identification requirement 
with language specifically stating, or describing, that the amount will 
be paid or incurred as restitution, remediation, or to come into 
compliance with a law.
    Under the proposed regulations, the identification requirement is 
presumed to be met if an order or agreement specifically states that 
the payment, and the amount of the payment, constitutes restitution, 
remediation, or an amount paid to come into compliance with a law. 
Commenters requested that the final regulations adopt a more permissive 
rule pursuant to which the identification requirement is presumed to be 
met if the order or agreement uses words other than ``restitution,'' 
``remediation'' or ``remediate,'' and ``come into compliance'', or 
``comply.'' In addition, a commenter also asked for a more permissive 
rule if an order or agreement is in a foreign language. The final 
regulations provide that the identification requirement is met, not 
presumed to be met, if the order or agreement specifically states that 
the payment constitutes restitution, remediation, or an amount paid to 
come into compliance with a law. In response to the comments, the final 
regulations also provide a similar result if the order or agreement 
uses a different form of the required words, such as, ``remediate'' or 
``comply with a law.'' An order or agreement in a foreign language may 
meet the identification requirement if

[[Page 4976]]

the taxpayer provides a complete and accurate certified English 
translation of the order or agreement that describes the nature and 
purpose of the payment using the foreign language equivalent of 
restitution, remediation, or coming into compliance with the law.
    An order or agreement will also meet the identification 
requirement, despite not using the words ``restitution,'' 
``remediation,'' ``remediate,'' ``come into compliance'', or 
``comply,'' if the nature and purpose of the payment, as described in 
the order or agreement, are clearly and unambiguously to restore the 
injured party or property or to correct the non-compliance. The final 
regulations provide that an order or agreement will also meet the 
identification requirement if the order or agreement describes the 
damage done, harm suffered, or manner of noncompliance with a law, and 
describes the action required of the taxpayer to (i) restore, in whole 
or in part, the party, property, environment, wildlife, or natural 
resources harmed, injured, or damaged by the violation or potential 
violation of that law or (ii) to perform services, take action, provide 
property, or doing any combination thereof to come into compliance with 
that law.
    The proposed regulations provide that the IRS may challenge an 
order or agreement's identification of the payment amount as 
restitution, remediation, or made to come into compliance with a law 
for the purposes of meeting the identification requirement. One 
commenter recommended that a substantive challenge to the 
characterization of a payment would more appropriately fit under the 
establishment requirement, rather than under the identification 
requirement. To address this comment, the identification requirement in 
the final regulations does not include a rebuttable presumption.
4. Establishment Requirement
    Section 162(f)(2)(A)(i) requires that a taxpayer establish that an 
amount was paid as restitution or remediation, or that the amount was 
paid to come into compliance with a law. The proposed regulations 
provide that the taxpayer may satisfy the establishment requirement by 
providing documentary evidence (1) that the taxpayer was legally 
obligated to pay the amount the order or agreement identified as 
restitution, remediation, or to come into compliance with a law; (2) of 
the amount paid or incurred; and (3) of the date on which the amount 
was paid or incurred. A commenter recommended that the final 
regulations clarify what the taxpayer must prove to meet the 
establishment requirement. The commenter also advised that it would be 
more appropriate for the IRS to challenge the characterization of the 
payment amount as restitution, remediation, or made to come into 
compliance with a law under the establishment requirement rather than 
under the identification requirement. The final regulations clarify 
that the establishment requirement is met if the documentary evidence 
submitted by the taxpayer proves that the taxpayer was legally 
obligated to pay the amount identified in the order or agreement as 
restitution, remediation, or to come into compliance with a law and 
that it was paid or incurred for the nature and purpose identified.
    If the order or agreement identifies a lump sum payment or a 
multiple damage award that includes some combination of restitution, 
remediation, and coming into compliance with a law, the taxpayer must 
establish the exact amount paid or incurred for each purpose. Likewise, 
if an order or agreement involves multiple taxpayers, each taxpayer 
must establish the amount that taxpayer paid or incurred as 
restitution, remediation, or to come into compliance.
    The proposed regulations provided a non-exhaustive list of 
documents that taxpayers may use to satisfy the establishment 
requirement. Commenters requested that the final regulations include 
additional examples of such documents. The final regulations expand the 
list of documentary evidence that may be used to meet the establishment 
requirement. The taxpayer may be able to use documentary evidence in a 
foreign language to satisfy the establishment requirement if the 
taxpayer provides a complete and accurate certified English translation 
of the documentary evidence.
5. Information Return May Not Satisfy the Identification Requirement or 
the Establishment Requirement
    The proposed regulations provide that reporting of the amount by a 
government or governmental entity under section 6050X does not satisfy 
the identification requirement or the establishment requirement. A 
commenter requested that the final regulations provide that a 
government or governmental entity's submission of an information return 
under section 6050X can satisfy the identification requirement under 
section 162(f)(2)(A)(ii) and/or the establishment requirement under 
section 162(f)(2)(A)(i). The final regulations do not adopt this 
recommendation. The reporting requirement imposed by section 6050X is 
for tax administration purposes and does not serve as documentation 
that the taxpayer has met the identification requirement or the 
establishment requirement. Therefore, the taxpayer may not use the 
information reported on the Form 1098-F to satisfy the identification 
requirement or the establishment requirement.
6. Private Party Suit
    Under section 162(f)(3), the general rule that disallows a 
deduction does not apply to any amount paid or incurred pursuant to an 
order in a suit in which no government or governmental entity is a 
party. Like the proposed regulations, the final regulations clarify 
that section 162(f)(1) does not apply to any amount paid or incurred by 
reason of any order or agreement in a suit in which no government or 
governmental entity is a party. A commenter asked for clarification in 
the final regulations that section 162(f)(1) does not apply to any 
amount paid or incurred by reason of any order or agreement in a suit 
in which a government or governmental entity enforces rights as a 
private party. For example, payments pursuant to contract disputes that 
are not due to fraud or other potentially illegal activity wherein the 
government or governmental entity enforces its rights as a private 
party contracting for goods and/or services, and not in its 
enforcement, regulatory, or administrative capacity, generally are not 
payments made at the direction of a government or governmental entity. 
The final regulations generally adopt this recommendation. An example 
has been provided in the final regulations to illustrate the 
application of this rule.
    A commenter asked for clarification about the application of 
section 162(f) to qui tam cases brought by private citizens on behalf 
of a government or governmental entity. The final regulations do not 
adopt a single rule concerning qui tam cases, but certain principles 
apply to determine whether a deduction for the amounts paid or incurred 
will be allowed. In general, a government or governmental entity is the 
real party in interest in the suit and receives any funds paid pursuant 
to the order or agreement, including any share ultimately paid by the 
government or governmental entity to the relator, whether or not the 
government or governmental entity intervenes in the suit. Accordingly, 
any amount paid or incurred to a government or governmental entity as a 
result of the

[[Page 4977]]

suit will likely be disallowed unless an exception to section 162(f)(1) 
applies.
7. Pre and Postjudgment Interest
    A commenter asked whether section 162(f)(1) disallows a deduction 
for prejudgment and postjudgment interest. Section 162(f)(1) applies to 
prejudgment interest paid or incurred to, or at the direction of, a 
government or governmental entity for the violation of any law or for 
the investigation or inquiry into a violation or potential violation of 
any law. However, a deduction for prejudgment interest will not be 
disallowed if the prejudgment interest is identified as a component of 
the total amount identified in the order or agreement as restitution 
and the taxpayer establishes that it was paid for this purpose. In 
general, section 162(f)(1) applies to postjudgment interest on amounts 
to be paid or incurred to, or at the direction of, a government or 
governmental entity for the violation of any law or investigation or 
inquiry into a potential violation of any law. However, if postjudgment 
interest is paid on an amount to which an exception under section 
162(f)(2) applies, the exception also applies to that postjudgment 
interest.
8. Failure To Pay Tax and Related Interest and Penalties
    The proposed regulations provide that section 162(f)(1) does not 
apply to amounts paid or incurred as otherwise deductible taxes or 
related interest. In accordance with section 162(f)(2)(A)(iii), the 
final regulations provide that, in the case of any amount paid or 
incurred as restitution for failure to pay any tax imposed under Title 
26, section 162(f)(1) does not disallow a deduction for an amount equal 
to or less than the amount otherwise allowed under chapter 1 if the tax 
had been timely paid. For example, section 162(f)(1) does not disallow 
a deduction of an amount paid or incurred as restitution for failure to 
pay a tax imposed under Title 26 of the Code, such as certain excise or 
employment taxes otherwise deductible under chapter 1. However, a 
deduction for amounts paid or incurred as restitution for failure to 
pay a Federal income tax is disallowed because Federal income taxes are 
not otherwise deductible under chapter 1. See section 275(a)(1).
    The Treasury Department and the IRS received several comments about 
the application of section 162(f) to federal, state and local taxes, 
and any related interest and penalties. Under the proposed regulations, 
if penalties are imposed with respect to otherwise deductible taxes, a 
taxpayer may not deduct the interest paid with respect to such 
penalties. A commenter requested clarification that the taxpayer also 
may not deduct the penalties. The Treasury Department and the IRS agree 
and the final regulations are revised accordingly to provide that if 
penalties are imposed with respect to otherwise deductible taxes, a 
taxpayer may not deduct the penalties or the interest paid with respect 
to such penalties.
9. Material Change
    The proposed regulations contained a material change rule under 
which some orders issued, or agreements entered, before December 22, 
2017, were subject to section 162(f)(1) as amended by the TCJA. Several 
commenters considered the definition of ``material change'' in the 
proposed regulations as ``overly broad,'' and suggested it could cause 
unnecessary administrative disputes and discourage taxpayers from 
negotiating with governments or governmental entities to clarify the 
terms of an order or agreement, resulting in increased litigation and 
burdening taxpayers, governments and governmental entities, and courts. 
One commenter argued that section 13306(a)(2) of the TCJA (the 
transition rule for section 162(f)) precludes adopting a material 
change rule for any binding orders issued or agreements entered into 
before December 22, 2017. The commenter recommended that the final 
regulations provide that the amendment to section 162(f) applies only 
to orders issued or agreements entered into after December 22, 2017.
    In response to this comment, the Treasury Department and the IRS 
have determined that section 162(f), as amended by TCJA, does not apply 
to any pre-December 22, 2017 binding order or agreement even if 
modified on or after December 22, 2017. In addition, material changes 
to an order or agreement will generally result in a new order or 
agreement subject to section 162(f). For these reasons, the final 
regulations do not include the material change rule included in the 
proposed regulations.

II. Reporting Information for Certain Fines, Penalties, and Other 
Amounts

A. General Rule

    The purpose of the regulations under section 6050X is to provide 
appropriate officials of governments or governmental entities the 
operational, administrative, and definitional rules for complying with 
the statutory information reporting requirements for suits or 
agreements to which section 6050X(a)(1) applies.
    In general, under the final regulations, if the aggregate amount a 
payor is required to pay pursuant to an order or agreement for a 
violation, investigation, or inquiry to which section 6050X(a)(1) and 
(a)(2) applies equals or exceeds the threshold amount, the appropriate 
official of a government or governmental entity that is a party to the 
order or agreement must file an information return with the IRS 
regarding certain amounts paid or incurred pursuant to the order or 
agreement, the payor's taxpayer identification number (TIN), and other 
information required by the information return and the related 
instructions. The appropriate official of a government or governmental 
entity that is a party to the order or agreement must also furnish a 
written statement with the same information to the payor.
1. Government, Governmental Entity, or Nongovernmental Entity Treated 
as a Governmental Entity
    The proposed regulations provided a definition of ``government or 
governmental entity.'' No comments were received on the definition of 
``government or governmental entity'' in the proposed regulations. The 
definition in the final regulations has been reorganized to provide a 
definition of a government in Sec.  1.6050X-(f)(2) and to provide a 
definition of a ``governmental entity'' in Sec.  1.162-21(f)(3). The 
definitions are based on the definition in the proposed regulations but 
clarify that a political subdivision of a government includes a local 
government unit. The final regulations also clarify that a governmental 
entity includes a nongovernmental entity treated as a governmental 
entity.
    The proposed regulations under section 6050X incorporate the 
definition of a ``nongovernmental entity'' in the proposed regulations 
under section 162(f). The final regulations clarify that, for purposes 
of the information reporting requirements in section 6050X, a 
nongovernmental entity treated as a governmental entity does not 
include a nongovernmental entity of a territory of the United States, 
including American Samoa, Guam, the Northern Mariana Islands, Puerto 
Rico, or the U.S. Virgin Islands, a foreign country, or an Indian 
tribe.
2. Suit or Agreement
    The proposed regulations provided that the information reporting is 
required for a ``suit, agreement, or otherwise'' pursuant to section 
162(f)(1). A commenter noted that this rule is inconsistent with the 
statutory language of section 6050X, which only concerns a ``suit or 
agreement.'' The final

[[Page 4978]]

regulations clarify that a government or governmental entity involved 
in a suit or agreement to which section 6050X(a)(2) applies must file 
an information return for payment amounts described in section 
6050X(a)(1).
    Another commenter recommended that the final regulations clarify 
that a suit or agreement is treated as binding under applicable law 
even if all appeals have not been exhausted. The final regulations 
generally adopt this recommendation.
3. Payor
    The final regulations define ``payor'' as the person, as defined in 
section 7701(a)(1), which, pursuant to an order or agreement, has paid 
or incurred, or is liable to pay or incur, an amount to, or at the 
direction of, the government or governmental entity in relation to the 
violation or potential violation of any law. In general, the payor will 
be the person to which section 162(f) and Sec.  1.162-21 apply.
    One commenter recommended that the final regulations provide that 
governments and governmental entities do not have a reporting 
requirement, and do not need to furnish a written statement, pursuant 
to section 6050X for the amounts described in section 6050X(a)(1) that 
tax-exempt, non-profit payors are required to pay. Another commenter 
recommended that the final regulations provide that the information 
reporting requirement should apply only for civil, not criminal, cases. 
A third commenter recommended that the final regulations provide that 
the information reporting requirement applies only to payors involved 
in a trade or business and not to individual payors.
    The final regulations do not adopt these recommendations because 
they are inconsistent with section 6050X. Section 6050X does not carve 
out an exception for criminal cases, individuals, including those not 
in a trade or business, and tax-exempt organizations.
    The final regulations require the appropriate official to include 
the TIN of the payor on the information return filed regarding the 
payor. Commenters asked how the appropriate official of a government or 
governmental entity may secure a payor's TIN. If the appropriate 
official does not already have the payor's TIN, the appropriate 
official must request the TIN. The TIN may be requested in any manner. 
The appropriate official must notify the payor that the law requires 
the payor to furnish a TIN for inclusion on the information return and 
that failure to furnish the TIN may subject the payor to a penalty 
under section 6723. The payor may provide the TIN in any manner 
including orally, in writing, or electronically. If the payor furnishes 
the TIN in writing, no particular form is required.
4. Threshold Amount
    Section 6050X(a)(2)(B) provides the Secretary with the authority to 
adjust the statutory reporting threshold of $600 as necessary to ensure 
the efficient administration of the internal revenue laws. Based on 
comments received prior to the publication of the proposed regulations 
from governments and governmental entities concerned about the burden 
of information reporting and to ensure the efficient administration of 
the internal revenue laws, the Treasury Department and the IRS 
determined that a threshold higher than $600 was appropriate to address 
these concerns. The proposed regulations provided that reporting is 
required if the aggregate amount of all orders and agreements for the 
violation, investigation, or inquiry equals or exceeds $50,000 
(threshold amount). Anticipating possible compliance burdens on filers, 
the Treasury Department and the IRS requested comments about the 
proposed $50,000 threshold. In particular, the Treasury Department and 
the IRS requested data on the annual number of relevant orders issued, 
or agreements entered, by governments or governmental entities and the 
financial, time, and administrative burdens associated with different 
threshold amounts. After publication of the proposed regulations, the 
Treasury Department and the IRS received several requests from 
governments and governmental entities to raise the proposed $50,000 
threshold amount, but none of the comments provided data to support 
those requests. As a result, the final regulations maintain the 
proposed threshold amount and provide that reporting is required for 
payment amounts equal to or in excess of $50,000.
    Commenters described several situations in which the government or 
governmental entity may be uncertain about its reporting obligation 
because it is not clear that the suit or agreement requires the payor 
to make payments described in section 6050X(a)(1) that equal or exceed 
the threshold amount. In one situation, the order or agreement 
described in section 6050X(a)(1) requires the payor to make several 
payments for a violation, investigation, or inquiry, each described in 
section 6050X(a)(2) and each for less than the threshold amount, but 
the aggregate amount of all payments pursuant to the order or agreement 
equals or exceeds the threshold amount. In another situation, an order 
or agreement involving more than one violation, investigation, or 
inquiry, each described in section 6050X(a)(2), requires the payor to 
make several payments, each described in section 6050X(a)(1), and each 
for less than the threshold amount, but the aggregate amount of all 
payments pursuant to the order or agreement equals or exceeds the 
threshold amount.
    The commenter recommended that, in these two situations, the final 
regulations should treat each payment amount separately to determine if 
the aggregate amount involved in the order or agreement equals or 
exceeds the threshold amount. The final regulations do not provide 
rules for every circumstance to which section 6050X(a)(2)(A)(ii) could 
apply. Form 1098-F and its instructions will contain additional 
guidance regarding the threshold amount.
    Another commenter described a situation in which, pursuant to 
separate orders or agreements, the payor is required to pay separate 
amounts, all less than the threshold amount, for multiple acts or 
omissions in violation of the same law but the aggregate amount of the 
payments to be made pursuant to all orders and agreements equals or 
exceeds the threshold amount. The commenter requested that, in this 
situation, the final regulations treat each order and agreement 
separately. This situation is addressed by section 6050X(a)(2)(A)(ii), 
which provides that the government or governmental entity must file an 
information return for a suit or agreement if ``the aggregate amount 
involved in all court orders and agreements with respect to the 
violation, investigation, or inquiry'' equals or exceeds the threshold 
amount. Therefore, the final regulations do not adopt the rule proposed 
by the commenter. The final regulations also provide that in this 
situation, the appropriate official must file only one information 
return for all amounts the payor is required to pay pursuant to these 
orders or agreements.
5. Requirement To File Return
    The appropriate official of a government or governmental entity 
must comply with the information reporting requirements of section 
6050X and the related regulations by filing Form 1098-F, Fines, 
Penalties, and Other Amounts, or any successor form, as provided by the 
instructions, with Form 1096, Annual Summary and Transmittal of U.S. 
Information Returns, on or before the annual due date as

[[Page 4979]]

provided in the final regulations. Under the final regulations, the 
information return filed by the government or governmental entity with 
the IRS must provide the amount a payor is required to pay, pursuant to 
section 6050X(a)(1)(A) and Sec.  1.6050X-1(b)(1)(i), as a result of the 
order or agreement, the separate amounts required to be paid as 
restitution, remediation, or to come into compliance with a law, 
pursuant to section 6050X(a)(1)(B) and (a)(1)(C) and Sec.  1.6050X-
1(b)(1)(ii), as a result of the order or agreement, the payor's TIN, 
and any additional information required by the information return and 
the related instructions.
    The Treasury Department and the IRS received comments requesting 
that the final rules require information reporting only for amounts 
paid directly to a government or governmental entity. A commenter also 
requested final rules pursuant to which the government or governmental 
entity could provide the reporting information to the payor and require 
the payor to file the information return. None of these suggestions 
were adopted in the final regulations because they are inconsistent 
with the explicit language of section 6050X.
    A commenter inquired whether the government or governmental entity 
reports the payment amount identified in the order or agreement, or 
only the amount the payor ultimately pays. Another commenter 
recommended that the reporting requirement apply only to payment 
amounts described in sections 162(f)(1) and 6050X(a)(1)(A) that are 
actually collected by governments and governmental entities. Section 
6050X(a)(1) mandates reporting for ``the amount required to be paid as 
a result of the suit or agreement'' for a violation of any law, or an 
investigation or inquiry into the potential violation of any law, as 
well as for restitution, remediation, and to come into compliance with 
a law. Therefore, the final regulations do not adopt the commenter's 
recommendation. Instead, the final regulations clarify that governments 
and governmental entities have a reporting obligation for the amounts, 
described in section 6050X(a)(1) and Sec.  1.6050X-1(b)(1)(i) and (ii), 
required to be paid pursuant to the order or agreement.
    A commenter inquired whether the IRS would consider using website 
reporting instead of requiring reporting on a form. Section 6050X 
prescribes reporting that is more suitable on a form. Furthermore, 
section 6050X(b) also requires governments and governmental entities to 
furnish written statements to payors. Thus, even if the final 
regulations permitted governments and governmental entities to report 
information to the IRS via a website, they would still need to provide 
a written statement to payors, which could not be accomplished by a 
website. To minimize the burden on governments or governmental 
entities, the final regulations permit the appropriate official to 
comply with the requirements to furnish written statements to payors 
via the Form 1098-F or another document that contains the required 
information if the document conforms to applicable guidance relating to 
substitute statements.
    A commenter expressed concerns about the information reporting 
requirements resulting from an order or agreement, pursuant to which 
payments are made over the course of several years. To minimize the 
burden on governments and governmental entities and to ensure the 
efficient administration of the internal revenue laws, the final 
regulations do not require an appropriate official to file information 
returns for each taxable year in which a payor makes a payment pursuant 
to a single order or agreement. Instead, the appropriate official must 
file only one information return to report the amounts required by 
section 6050X(a)(1).
    Some commenters inquired about the application of the reporting 
obligation to governments and governmental entities for specific types 
of administrative and certain other categories of proceedings. The 
final regulations do not address the application of the reporting 
obligation to specific statutes or types of proceedings because the 
final regulations are intended to provide broad rules of general 
application based on the underlying principles of sections 162(f) and 
6050X rather than narrow rules with limited application that risk 
excluding a certain ``violation of any law or the investigation or 
inquiry . . . into the potential violation of any law.''
    One commenter observed that the payors and the governments and 
governmental entities may have incentives to enter into an agreement 
concerning the filing of information returns such that payors may 
improperly attempt to claim deductions to which they are not entitled 
and governments and governmental entities do not have to incur the 
burden of filing information returns and furnishing written statements. 
The commenter recommended that the final regulations treat any 
agreements between payors and governments or governmental entities not 
to file information returns as invalid and unenforceable. The final 
regulations do not adopt this recommendation because section 162(f) 
applies to the taxpayer regardless of whether the appropriate official 
files an information return with the IRS and furnishes a written 
statement to the payor.
6. Due Dates
    Section 6050X(a)(3) provides that the information return shall be 
filed at the time the agreement is entered into, as determined by the 
Secretary, not at the time of payment, as recommended by a commenter. 
Further, section 6050X(b) requires the written statement to be 
furnished to the payor at the same time the information return is filed 
with the IRS. Under the proposed regulations, the information return 
was required to be filed on or before January 31 of the year following 
the calendar year in which the order or agreement, becomes binding 
under applicable law.
    A commenter requested that appropriate officials of governments and 
governmental entities be given more time to comply with the 
requirement. As requested, the final regulations provide, pursuant to 
section 6071(a), that information returns filed with the IRS on paper 
are due on or before February 28 of the year following the calendar 
year in which the order or agreement, becomes binding under applicable 
law. In accordance with section 6071(b), information returns filed 
electronically are due on or before March 31 of such year. However, to 
increase the likelihood that payors have the information necessary to 
timely prepare their income tax returns and to avoid burdening 
governments and governmental entities with having to determine the tax 
year of each payor, the final regulations require the appropriate 
official to furnish the written statement on or before January 31 of 
such year.
7. Rules for Multiple Payors
    The final regulations describe the application of the information 
reporting requirements if, pursuant to the order or agreement, the 
aggregate amount multiple payors are required to pay, or the costs to 
provide the property or the service, equals or exceeds the threshold 
amount. If, pursuant to the order or agreement, more than one payor is 
individually liable for some or all of the payment amount, the final 
regulations require the appropriate official to file an information 
return for the separate amount that each individually liable payor is 
required to pay, even if a payor's payment liability is less than the 
threshold amount, and to furnish a written statement containing this 
information to each payor. If more than one person, as defined in 
section

[[Page 4980]]

7701(a)(1), is a party to an order or agreement, there is no 
information reporting requirement, or requirement to furnish a written 
statement, with respect to any person who does not have a payment 
obligation or obligation for costs to provide services or to provide 
property.
    The final regulations provide that, if an order or agreement, 
identifies multiple jointly and severally liable payors, the 
appropriate official must file an information return for each payor to 
report the information required by Sec.  1.6050X-1(b)(1)(i) and (ii) on 
the amount to be paid by all jointly and severally liable payors. The 
appropriate official must furnish a written statement containing this 
information to each of those payors, regardless of which payor makes 
the payment.
    A commenter wrote that the rules requiring reporting would be 
challenging to implement when multiple payors are required to make 
payments. However, under section 6050X(a)(1)(3), the appropriate 
official has an obligation to file an information return when an order 
or agreement becomes binding, not when the payments are made, so there 
is no need for governments or governmental entities to track the 
receipt of payments in order to comply with section 6050X or the 
related final regulations.
    Another commenter recommended that the payment obligation of each 
payor be examined separately to determine whether the amount each payor 
is required to pay, or the costs to provide the property or the 
service, equals or exceeds the threshold amount. However, in the case 
of joint and several liability, each payor is responsible for the 
entire amount, which requires reporting of, and furnishing a statement 
to, each payor. In the case where a payor is individually liable for an 
amount below the threshold amount, the payor may still attempt to 
deduct some or all of the payment amount all of the payors are required 
to pay, so filing an information return for each of the payors' 
liabilities is useful for tax administration.
    One commenter asked for clarification that the government or 
governmental entity is not obligated to file an information return with 
the IRS if, after an order or agreement has become binding under 
applicable law, the payor pursues another party for contribution. 
Because any payment the payor receives from another party in a 
subsequent proceeding will not be subject to section 162(f), the 
government or governmental entity will not have an obligation to file 
an information return for any payment made by the other party.
8. Payment Amount Not Identified
    Commenters expressed concern that it is difficult for governments 
and governmental entities to estimate the payment amount pursuant to 
the order or agreement, and whether the aggregate amount equals or 
exceeds the information reporting threshold, when the order or 
agreement does not specify an amount. The Treasury Department and the 
IRS agree, which is why the regulations do not require governments or 
governmental entities to estimate payment amounts. Accordingly, if some 
or all of the payment amount is not identified in the order or 
agreement, the regulations direct governments and governmental entities 
to the instructions to Form 1098-F, or any successor form.
    Some orders or agreements may identify a payment described in 
section 6050X(a)(1)(A) and identify a payment or an obligation to 
provide property or to provide services, as restitution, remediation, 
or an amount paid to come into compliance with a law, as described in 
section 6050X(a)(1)(B), but not identify some or all of the payment 
amounts the payor must pay, or some or all of the cost to provide 
property or services. The final regulations provide that, if the 
government or governmental entity reasonably expects that the aggregate 
amount the payor must pay, and the costs the payor will pay or incur to 
provide services or to provide property, pursuant to the order or 
agreement, will equal or exceed the threshold amount, the appropriate 
official of such government or governmental entity must file an 
information return on Form 1098-F, or any successor form, as provided 
in the instructions to the Form 1098-F, and furnish a written statement 
to the payor with the information supplied to the IRS on Form 1098-F.
    Similarly, a commenter noted that some orders or agreements may 
require a payor to make payments described in section 6050X(a)(1) for 
which reporting is required and other payments for which reporting is 
not required under section 6050X. The commenter recommended that if it 
is not clear for which payment amount the government or governmental 
entity has a reporting requirement, the rule under the proposed 
regulations for a payment amount not identified should apply. The 
Treasury Department and the IRS generally agree with this 
recommendation. Therefore, if, under the circumstances described by the 
commenter, the government or governmental entity reasonably expects 
that the aggregate amount the payor must pay, and the costs the payor 
must pay to provide services or to provide property, will equal or 
exceed the threshold amount, the appropriate official of such 
government or governmental entity must file an information return.
9. Material Change
    Under the proposed regulations, if there was a material change to 
the terms of an order or agreement for which an appropriate official of 
a government or governmental entity filed an information return, the 
appropriate official had to file a corrected information return with 
the IRS and furnish an amended written statement to the payor. The 
Treasury Department and the IRS have concluded that material changes to 
an order or agreement will generally result in a new order or agreement 
subject to the rules under section 6050X and Sec.  1.6050X-1. For this 
reason, and because the final regulations under Sec.  1.162-21 do not 
include a material change rule, the final regulations have removed the 
material change rule from Sec.  1.6050X-1.

Applicability Dates

    The rules of Sec.  1.162-21 apply to taxable years beginning on or 
after the date of publication of this Treasury decision in the Federal 
Register, except that such rules do not apply to amounts paid or 
incurred under any order or agreement, pursuant to a suit, agreement, 
or otherwise, that became binding under applicable law before such 
date, determined without regard to whether all appeals have been 
exhausted or the time for filing an appeal has expired. The rules of 
Sec.  1.6050X-1 apply only to orders and agreements, pursuant to suits 
and agreements, that become binding under applicable law on or after 
January 1, 2022, determined without regard to whether all appeals have 
been exhausted or the time for filing an appeal has expired.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Executive Orders 12866 and 13563 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, of 
reducing costs, of harmonizing rules, and of promoting flexibility.

[[Page 4981]]

    The regulations have been designated by the Office of Information 
and Regulatory Affairs (OIRA) as subject to review under Executive 
Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) 
between the Treasury Department and by the Office of Management and 
Budget (OMB) regarding review of tax regulations.

A. Background

    Prior to the Tax Cuts and Jobs Act (TCJA), section 162(f) of the 
Code disallowed a deduction for any fine or similar penalty paid to a 
government for the violation of any law. This provision, enacted in 
1969, codified existing case law that denied business deductions for 
fines or similar penalties. The general rule of section 162(f)(1), as 
amended by section 13306(a) of the TCJA, disallows any deduction for 
amounts paid or incurred (whether by suit, agreement, or otherwise) to, 
or at the direction of, a government or governmental entity or certain 
nongovernmental entities treated as governmental entities, in relation 
to the violation of any law or the investigation or inquiry by such 
government or entity into the potential violation of any law. Section 
13306(a) also provides certain exceptions to this disallowance. Section 
162(f)(2)(A)(i) and (ii) does not disallow deduction for amounts that 
(1) the taxpayer establishes were paid or incurred as restitution 
(including remediation of property) or to come into compliance with a 
law, and (2) are identified in the court order or settlement agreement 
as restitution, remediation, or to come into compliance with a law.
    In addition, under prior law, the Treasury Department and the IRS 
did not receive information returns from governments or governmental 
entities that received fines or penalties. Section 6050X of the Code, 
enacted by section 13306(b) of the TCJA, requires appropriate officials 
to file an information return if the aggregate amount involved in all 
orders or agreements relating to the violation, investigation, or 
inquiry is $600 or more. The information return must include (1) the 
amount required to be paid as a result of the order or agreement; (2) 
any amount that constitutes restitution or remediation of property; and 
(3) any amount required to be paid for the purpose of coming into 
compliance with a law that was violated or involved in the 
investigation or inquiry. Section 6050X provides the Secretary with the 
authority to adjust the $600 reporting threshold in order to ensure 
efficient tax administration.
    Proposed regulations regarding these provisions were previously 
issued on May 13, 2020 (REG-104591-18) (proposed regulations).

B. Need for the Regulations

    Following the passage of the TCJA, the Treasury Department and the 
IRS received several questions and comments from Federal, state, local, 
and tribal governments, as well as the public, regarding the meaning of 
various provisions in each section and issues not explicitly addressed 
in the statute. The Treasury Department and the IRS have determined 
that such comments warrant the issuance of further guidance.
    In addition, the Treasury Department and the IRS have determined 
that increasing the reporting threshold to reduce the reporting burden 
and to enhance the efficiency of tax administration is appropriate.

C. Overview of the Regulations

    The regulations provide guidance regarding sections 162(f) and 
6050X. The following analysis provides further detail regarding the 
anticipated impacts of the regulations. Part I.D specifies the baseline 
for the economic analysis. Part I.E.1. summarizes the economic effects 
of the rulemaking, relative to this baseline. Part I.E.2. describes the 
economic effects of specific provisions covering (1) the reporting 
threshold, (2) the timing of information reporting, and (3) information 
reporting requirements when payment amounts are not identified.

D. Baseline

    In this analysis, the Treasury Department and the IRS assess the 
benefits and costs of the final regulations relative to a no-action 
baseline reflecting anticipated Federal income tax-related behavior in 
the absence of these regulations.

E. Economic Analysis of the Regulation

I. Summary of Economic Effects

    The regulations under section 162(f) provide definitions for 
restitution, remediation, and amounts paid to come into compliance with 
the law. These definitions clarify for taxpayers which amounts paid or 
incurred may be deductible under the statute. The regulations also 
clarify (1) how the taxpayer meets the establishment requirement; and 
(2) how the order or agreement meets the identification requirement.
    The Treasury Department and the IRS have determined that the burden 
reduction associated with the regulations for section 162(f) is modest. 
In addition, while the regulations reduce uncertainty for taxpayers, 
they are unlikely to affect economic decision-making because most of 
the amounts to be paid or incurred which are subject to section 162(f) 
are non-discretionary.
    The regulations under section 6050X provide certainty and 
consistency for affected governments and governmental entities by 
defining and clarifying the statute's terms and rules. Further, the 
regulations use the authority provided by the statute to the Secretary 
to set information reporting requirements to minimize the burden on 
governments and governmental entities and to ensure the efficient 
administration of the internal revenue laws. Most importantly, the 
regulations increase the reporting threshold from $600 to $50,000, 
thereby eliminating information reporting requirements for 
approximately 1 to 5 million orders or agreements. Using the midpoint 
of this range (3 million), the estimated burden reduction from this 
exercise of regulatory discretion is $74 million (2018 dollars) per 
year relative to the no-action baseline.
    This reduction in compliance burden is the only meaningful economic 
effect of the regulations. The regulations do not have meaningful 
effects on the tax liability of taxpayers, the deductibility of amounts 
paid to, or at the directions of, governments and governmental 
entities, or the incentive for individuals or businesses to engage in 
violations of the law.

II. Economic Analysis of Specific Provisions

A. Reporting Threshold

    Section 6050X requires governments and governmental entities which 
enter orders or agreements to which section 162(f) applies to file an 
information return if the aggregate amount paid or incurred in all 
orders or agreements relating to the violation, investigation, or 
inquiry is equal to or exceeds a threshold of $600. Section 6050X also 
provides the Secretary with the authority to adjust the statutory 
reporting threshold as necessary to ensure efficient tax 
administration. In response to multiple comments received prior to the 
issuance of the proposed regulations from governments and governmental 
entities concerned about the burden of information reporting for 
smaller payments amounts pursuant to orders or agreements, the 
regulations raise the reporting threshold to $50,000. In the proposed 
regulations, the Treasury Department and the IRS solicited data on the 
annual number of orders or agreements by governments or governmental 
entities that could inform the determination of the appropriate

[[Page 4982]]

threshold amount. The Treasury Department and the IRS did not receive 
any such data.
    The Treasury Department and the IRS considered a range of 
alternative thresholds including the statutory threshold of $600, along 
with much higher thresholds suggested by some commenters. Upon 
consideration of both the enforcement needs of the IRS and the 
reporting burden on governments and governmental entities, the Treasury 
Department and the IRS exercised the authority provided to the 
Secretary by the statute to set the reporting threshold amount at 
$50,000.
    The Treasury Department and the IRS do not know of any data on the 
number of orders or agreements requiring taxpayers to pay amounts to, 
or at the direction of, governments or governmental entities, or the 
distribution of these amounts, such as the number that are above or 
below $600. Based on communications with stakeholders, the Treasury 
Department and the IRS estimate that the increase in reporting 
threshold from $600 to $50,000 will reduce the number of required 
information returns by approximately 1 to 5 million. The Treasury 
Department and the IRS further estimate that the average time to 
complete the information return is between 0.387 and 0.687 hours. Using 
the midpoint of each of these ranges (3 million information returns and 
.537 hours) and a labor cost of $46 per hour,\1\ the Treasury 
Department and the IRS estimate that increasing the reporting threshold 
will reduce annual compliance burdens by $74 million dollars (2018 
dollars) per year. It should be noted that many of the lower level 
fines and penalties are likely to be assessed on non-businesses that 
are not able to deduct business expenses so they would be unaffected by 
the extent to which governments or governmental entities are subject to 
reporting requirements.
---------------------------------------------------------------------------

    \1\ This data point is derived by the IRS as part of the burden 
analysis described in the Paperwork Reduction Act section below.
---------------------------------------------------------------------------

    Increasing the reporting threshold from $600 to $50,000 is unlikely 
to have a significant effect on revenues because fines over $50,000 
likely account for the vast majority of fines and penalties in terms of 
dollar values. Based on financial reporting values disclosed on tax 
returns of C corporations, S corporations and partnerships, firms with 
over $50,000 in total fines and penalties account for 99 percent of all 
fines and penalties. However, these data should be interpreted with 
caution. Financial reporting of fines and penalties includes both 
international and domestic fines, and all fines and penalties are 
aggregated into yearly totals. Furthermore, firms with less than $10 
million in assets are not required to provide financial reporting 
values with their tax returns.

B. Time of Reporting

    Section 6050X provides that the government or governmental entity 
shall file the information return at the time the order is issued or 
the agreement is entered into, as determined by the Secretary. The 
Treasury Department and the IRS received comments from governments and 
governmental entities prior to the issuance of the proposed regulations 
observing that it would be burdensome and inefficient for them to file 
information returns each time an order or agreement becomes binding 
under applicable law. Several commenters suggested that annual filing 
of information returns would meaningfully reduce this reporting burden. 
The Treasury Department and the IRS agree with this comment and have 
adopted it in the regulations. The Treasury Department and the IRS have 
not estimated the difference in compliance burden between these two 
alternatives because they do not have suitable data or models to do so.
    Several commenters also expressed uncertainty and concern about the 
information reporting requirements for an order or agreement pursuant 
to which payments are made over the course of several years. To reduce 
uncertainty, and to minimize the burden on governments and governmental 
entities, the regulations clarify that information reporting is 
required only for the year in which the order or agreement becomes 
binding under applicable law, and not required for each taxable year in 
which a payor makes a payment.
    The Treasury Department and the IRS considered requiring 
information reporting at the time the order is issued or the agreement 
is entered. The Treasury Department and the IRS also considered 
requiring information reporting in each year in which an amount is paid 
or incurred pursuant to the order or agreement. However, both 
alternative approaches were determined to impose unnecessary burden for 
governments and governmental entities without creating accompanying 
benefits for tax administration or for taxpayers.
    Under the proposed regulations, the information return was required 
to be filed with the IRS, and a written statement furnished to the 
payor, on or before January 31 of the year following the calendar year 
in which the order or agreement becomes binding under applicable law, 
even if all appeals have not been exhausted for the suit or agreement. 
In response to the proposed regulations, a commenter requested that 
governments and governmental entities be given more time to comply with 
the requirements. As requested, the final regulations are revised to 
provide that information returns filed with the IRS on paper are due on 
or before February 28 of the year following the calendar year in which 
the order or agreement becomes binding under applicable law and 
information returns filed electronically are due on or before March 31 
of such year. However, to increase the likelihood that payors have the 
information necessary to timely prepare their income tax returns, the 
final regulations still require governments and governmental entities 
to furnish the written statements to payors on or before January 31 of 
such year.

C. Payment Amount Not Identified

    When the expected amount paid or incurred pursuant to an order or 
agreement equals or exceeds the threshold amount, section 6050X 
requires governments or governmental entities to file an information 
return including: (1) The amount required to be paid as a result of the 
order or agreement; (2) any amount that constitutes restitution or 
remediation of property; and (3) any amount required to be paid for the 
purpose of coming into compliance with a law that was violated or 
involved in the investigation or inquiry. However, some orders or 
agreements may involve uncertain payments or costs to provide property 
or services without identifying some or all of the aggregate amount the 
payor must pay, or some or all of the aggregate cost to provide 
property or services. The Treasury Department and the IRS received 
comments expressing concern that amounts paid or incurred are often 
difficult to assess, and strict valuation requirements would impose 
undue burden on governments and governmental entities. For situations 
in which the amount is not identified, the regulations direct 
governments and governmental entities to the instructions to Form 1098-
F. To address commenters' concerns, these instructions will permit 
governments and governmental entities to report the threshold amount of 
$50,000 when the amount is unknown but expected to equal or exceed 
$50,000. This rule is necessary to improve taxpayer compliance.
    The Treasury Department and the IRS considered requiring 
governments and

[[Page 4983]]

governmental entities to provide an estimate of each amount to be paid 
or incurred; however this approach was rejected because it would impose 
significant burden on governments and governmental entities. The 
Treasury Department and the IRS did not estimate the difference in 
compliance burden between the final regulation and this alternative 
approach because they do not have suitable data or models to do so.

Paperwork Reduction Act

Collection of Information--Form 1098-F

    In general, the collection of information in the regulations is 
required under section 6050X of the Code. The collection of information 
in these regulations is set forth in Sec.  1.6050X-1. The IRS intends 
that the collection of information pursuant to section 6050X will be 
conducted by way of Form 1098-F, Fines, Penalties, and Other Amounts. 
Form 1098-F will be used by all governments, governmental entities, and 
nongovernmental entities treated as governmental entities with a 
reporting requirement. The Treasury Department and the IRS request 
comments on all aspects of information collection burdens related to 
the regulations. In addition, when available, drafts of IRS forms are 
posted for comment at www.irs.gov/draftforms.
    The current status of the PRA submissions related to section 6050X 
are provided in the following table.

----------------------------------------------------------------------------------------------------------------
               Form                          Type of filer               OMB No.                Status
----------------------------------------------------------------------------------------------------------------
1098-F...........................  Governments, Governmental              1545-2284  Form 1098-F is approved
                                    Entities, And Certain                             through 1/31/2023.
                                    Nongovernmental Entities.
----------------------------------------------------------------------------------------------------------------


                                        Related New or Revised Tax Forms
----------------------------------------------------------------------------------------------------------------
                                                              Revision of existing      Number of respondents
                                           New                        form                (2018, estimated)
----------------------------------------------------------------------------------------------------------------
Form 1098-F.................  Yes.........................  .......................  90,100 (85,500 small
                                                                                      governmental
                                                                                      jurisdictions, 4,500 large
                                                                                      governmental jurisdictions
                                                                                      and 100 nongovernmental
                                                                                      entities).
----------------------------------------------------------------------------------------------------------------

    A reasonable burden estimate for the average time to complete Form 
1098-F is between 0.387 and 0.687 hours (approximately 23 to 41 
minutes). This estimate is based on survey data collected from similar 
information return filers. In addition, the increase in the reporting 
threshold under section 6050X will lead to a decrease in the number of 
information returns filed by approximately 1 million to 5 million 
returns. Using the midpoint of these ranges, or 3 million and 0.537 
hours, the estimated burden reduction is $74 million per year.
    Estimated average time per form: .537 hours.
    Estimated number of respondents: 90,100.
    Estimated total annual burden hours: 48,383.70.
    Estimated change in number of information returns resulting from 
increased reporting threshold: (3,000,000).
    Estimated change in burden (hours): (1,611,150).
    Estimated change in burden (Dollars): ($74,161,235).
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6) requires 
agencies to ``prepare and make available for public comment an initial 
regulatory flexibility analysis,'' which will ``describe the impact of 
the rule on small entities.'' 5 U.S.C. 603(a). Section 605(b) of the 
RFA allows an agency to certify a rule if the rulemaking is not 
expected to have a significant economic impact on a substantial number 
of small entities.
    Pursuant to the RFA, the Secretary of the Treasury hereby certifies 
that these regulations will not have a significant economic impact on a 
substantial number of small entities within the meaning of section 
601(6) of the RFA.
    The RFA generally applies to regulations that affect small 
businesses, small organizations, and small governmental jurisdictions. 
For purposes of the RFA, small governmental jurisdictions are 
governments of cities, counties, towns, townships, villages, school 
districts, or special districts with a population of less than 50,000. 
This rule would affect States, as well as local governments, some of 
which may meet the definition of small governmental jurisdiction. 
Approximately 90,100 governments, governmental entities, and 
nongovernmental entities treated as governmental entities may be 
subject to the reporting requirements of section 6050X. Of those 
governments and governmental entities, approximately 85,500 (or 95%) 
are small governmental jurisdictions.
    Although the regulations may affect a substantial number of small 
governmental jurisdictions, the economic impact of the regulations is 
not expected to be significant. The regulations set a reporting 
threshold that is higher than the minimum required by statute and also 
provide for governments and governmental entities to file annual 
returns. Both of these provisions reduce the potential burden on small 
governmental jurisdictions. In particular, the increase in the 
reporting threshold will lead to a decrease in the number of 
information returns filed by approximately 1 million to 5 million 
returns. Using the midpoint of this range, or 3 million, the estimated 
burden reduction is $74 million per year (2018 dollars). It is 
estimated that after reading and learning about the requirements of the 
regulations, the burden associated with filing the annual form is 
approximately 23 to 41 minutes and the average cost per information 
return is approximately $24.72, which would not result in a significant 
economic impact on small entities.
    Pursuant to section 7805(f) of the Code, the proposed rule 
preceding this rulemaking was submitted to the Chief Counsel for the 
Office of Advocacy of the Small Business Administration for comment on 
its impact on small entities and no comments were received.

Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)

[[Page 4984]]

requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
state, local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. This rule does not include any Federal mandate that may 
result in expenditures by state, local, or tribal governments, or by 
the private sector in excess of that threshold.

Executive Order 13132: Federalism

    Executive Order 13132 (entitled Federalism) prohibits an agency 
from publishing any rule that has Federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive Order. These rules do not have Federalism 
implications, and do not impose substantial direct compliance costs on 
state and local governments or preempt state law, within the meaning of 
the Executive Order. The compliance costs, if any, are imposed on state 
and local governments by section 6050X, as enacted by the TCJA. 
Notwithstanding, the Treasury Department and the IRS consulted with the 
National League of Cities and the National Governors Association prior 
to the issuance of the proposed regulations. Pursuant to the 
requirements set forth in section 8(a) of Executive Order 13132, the 
Treasury Department and the IRS certify that they have complied with 
the requirements of Executive Order 13132.

Congressional Review Act

    The Administrator of the Office of Information and Regulatory 
Affairs of the Office of Management and Budget has determined that this 
is a major rule for purposes of the Congressional Review Act (5 U.S.C. 
801 et seq.) (CRA)). Under 5 U.S.C. 801(3), a major rule takes effect 
60 days after the rule is published in the Federal Register.
    Notwithstanding this requirement, 5 U.S.C. 808(2) allows agencies 
to dispense with the requirements of 5 U.S.C. 801 when the agency for 
good cause finds that such procedure would be impracticable, 
unnecessary, or contrary to the public interest and the rule shall take 
effect at such time as the agency promulgating the rule determines. 
Pursuant to 5 U.S.C. 808(2), the Treasury Department and the IRS find, 
for good cause, that a 60-day delay in the effective date is 
unnecessary and contrary to the public interest.
    Following the amendments to section 162(f) and enactment of section 
6050X by the TCJA, the Treasury Department and the IRS published IRS 
published Notice 2018-23, 2018-15 I.R.B. 474, to provide transitional 
guidance on the identification requirement of section 162(f) and the 
information reporting requirement under section 6050X and to solicit 
comments from the public and affected governments and governmental 
entities on issues related to the implementation of section 162(f) and 
section 6050X. Subsequently, on May 13, 2020, the Treasury Department 
and the IRS published a notice of proposed rulemaking (REG-104591-18) 
in the Federal Register (85 FR 28524) providing additional guidance for 
taxpayers and governments and governmental entities on the deduction 
disallowance rules in section 162(f) and the associated reporting 
requirements in section 6050X. However, as demonstrated by the wide 
variety of public comments in response to the proposed regulations 
received, taxpayers and governments and governmental entities continue 
to express uncertainty regarding the proper application of the relevant 
statutory rules under section 162(f) and section 6050X. These final 
regulations provide crucial guidance for taxpayers and governments and 
governmental entities on how to apply the relevant statutory rules. In 
certain cases, failure to comprehend the proper application of the 
requirements of section 162(f) can prevent taxpayers from claiming 
appropriate deductions, resulting in them paying potentially higher 
taxes than required during a time of economic difficulty.\2\ In 
addition, governments and governmental entities will require several 
months to update or develop data collection and reporting systems to 
comply with the rules under section 6050X. However, governments and 
governmental entities will need to know that the final regulations are 
effective before incurring necessary costs to timely comply with the 
final regulations. Accordingly, the Treasury Department and the IRS 
have determined that the rules in this Treasury decision will take 
effect on the date of filing for public inspection in the Federal 
Register.
---------------------------------------------------------------------------

    \2\ See Executive Order 13924 (May 19, 2020) 85 FR 31,353-54.
---------------------------------------------------------------------------

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, Notices and other guidance 
cited in this document are published in the Internal Revenue Bulletin 
and are available from the Superintendent of Documents, U.S. Government 
Publishing Office, Washington, DC 20402, or by visiting the IRS website 
at http://www.irs.gov.

Drafting Information

    The principal author of these regulations is Sharon Y. Horn of 
Associate Chief Counsel (Income Tax and Accounting), IRS. However, 
other personnel from the Treasury Department and the IRS participated 
in their development.

List of Subjects in 26 CFR Part 1

    Income taxes; Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *
    Section 1.6050X-1 also issued under 26 U.S.C. 6050X(a), (b).
* * * * *

0
Par. 2. Section 1.162-21 is revised to read as follows:


Sec.  1.162 -21  Denial of deduction for certain fines, penalties, and 
other amounts.

    (a) Deduction Disallowed. Except as otherwise provided in this 
section, no deduction is allowed under chapter 1 of the Internal 
Revenue Code (Code) for any amount that is paid or incurred--
    (1) By suit, settlement agreement (agreement), or otherwise, as 
defined in paragraph (e)(5) of this section;
    (2) To, or at the direction of, a government, as defined in 
paragraph (e)(1) of this section, or a governmental entity, as defined 
in paragraph (e)(2) of this section; and
    (3) In relation to the violation, or investigation or inquiry by 
such government or governmental entity into the potential violation, of 
any civil or criminal law.
    (i) An amount that is paid or incurred in relation to the violation 
of any civil or criminal law includes a fine or penalty.
    (ii) An investigation or inquiry into the potential violation of 
any law does not include routine investigations or inquiries, such as 
audits or inspections, of regulated businesses that are not related to 
any evidence of wrongdoing

[[Page 4985]]

or suspected wrongdoing, but are conducted to ensure compliance with 
the rules and regulations applicable to those businesses.
    (b) Exception for restitution, remediation, and amounts paid to 
come into compliance with a law--(1) In general. Paragraph (a) of this 
section does not apply to amounts paid or incurred for restitution 
(including remediation) or to come into compliance with a law, as 
defined in paragraphs (e)(4) of this section, provided that both the 
identification and the establishment requirements of paragraphs (b)(2) 
and (b)(3) of this section are met.
    (2) Identification requirement--(i) In general. A court order 
(order) or an agreement, as defined in paragraph (e)(5) of this 
section, identifies a payment by stating the nature of, or purpose for, 
each payment each taxpayer is obligated to pay and the amount of each 
payment identified.
    (ii) Meeting the identification requirement. The identification 
requirement is met if an order or agreement specifically states the 
amount of the payment described in paragraph (b)(2)(i) of this section 
and that the payment constitutes restitution, remediation, or an amount 
paid to come into compliance with a law. If the order or agreement uses 
a different form of the required words (such as ``remediate'' or 
``comply with a law'') and describes the purpose for which restitution 
or remediation will be paid or the law with which the taxpayer must 
comply, the order or agreement will be treated as stating that the 
payment constitutes restitution, remediation, or an amount paid to come 
into compliance with a law. Similarly, if an order or agreement 
specifically describes the damage done, harm suffered, or manner of 
noncompliance with a law and describes the action required of the 
taxpayer to provide restitution, remediation, or to come into 
compliance with any law, as defined in paragraph (e)(4) of this 
section, the order or agreement will be treated as stating that the 
payment constitutes restitution, remediation, or an amount paid to come 
into compliance with any law. Meeting the establishment requirement of 
paragraph (b)(3) of this section alone is not sufficient to meet the 
identification requirement of paragraph (b)(2) of this section.
    (iii) Payment amount not identified. (A) If the order or agreement 
identifies a payment as restitution, remediation, or to come into 
compliance with a law but does not identify some or all of the amount 
the taxpayer must pay or incur, the identification requirement may be 
met for any payment amount not identified if the order or agreement 
describes the damage done, harm suffered, or manner of noncompliance 
with a law, and describes the action required of the taxpayer, such as 
paying or incurring costs to provide services or to provide property.
    (B) If the order or agreement identifies a lump-sum payment or 
multiple damages award as restitution, remediation, or to come into 
compliance with a law but does not allocate some or all of the amount 
the taxpayer must pay or incur among restitution, remediation, or to 
come into compliance with a law, or does not allocate the total payment 
amount among multiple taxpayers, the identification requirement may be 
met for any payment amount not specifically allocated if the order or 
agreement describes the damage done, harm suffered, or manner of 
noncompliance with a law, and describes the action required of the 
taxpayer, such as paying or incurring costs to provide services or to 
provide property.
    (3) Establishment requirement--(i) Meeting the establishment 
requirement. The establishment requirement is met if the taxpayer, 
using documentary evidence, proves the taxpayer's legal obligation, 
pursuant to the order or agreement, to pay the amount identified as 
restitution, remediation, or to come into compliance with a law; the 
amount paid or incurred; the date the amount was paid or incurred; and 
that, based on the origin of the liability and the nature and purpose 
of the amount paid or incurred, the amount the taxpayer paid or 
incurred was for restitution or remediation, as defined in paragraph 
(e)(4)(i) of this section or to come into compliance with any law, as 
defined in paragraph (e)(4)(ii) of this section. If the amount is paid 
or incurred to a segregated fund or account, as described in paragraphs 
(e)(4)(i)(A)(2) and (3), (e)(4)(i)(B), or (e)(4)(i)(C) of this section, 
the taxpayer may meet the establishment requirement even if each 
ultimate recipient, or each ultimate use, of the payment is not 
designated or is unknown. A taxpayer will not meet the establishment 
requirement if the taxpayer fails to prove that the taxpayer paid or 
incurred the amount identified as restitution, remediation, or to come 
into compliance with a law; the amount paid; the date the amount was 
paid or incurred; or that the amount the taxpayer paid or incurred was 
for the nature and purpose identified in the order or agreement as 
required by paragraph (b)(2)(i) of this section, or was made for the 
damage done, harm suffered, noncompliance, or to provide property or 
services as described in (b)(2)(iii) of this section. Meeting the 
identification requirement of paragraph (b)(2) of this section is not 
sufficient to meet the establishment requirement of paragraph (b)(3) of 
this section.
    (ii) Substantiating the establishment requirement. The documentary 
evidence described in paragraph (b)(3)(i) of this section includes, but 
is not limited to, receipts; the legal or regulatory provision related 
to the violation or potential violation of any law; documents issued by 
the government or governmental entity relating to the investigation or 
inquiry, including court pleadings filed by the government or 
governmental entity requesting restitution, remediation, or demanding 
that defendant take action to come into compliance with the law; 
judgment; decree; documents describing how the amount to be paid was 
determined; and correspondence exchanged between the taxpayer and the 
government or governmental entity before the order or agreement became 
binding under applicable law, determined without regard to whether all 
appeals have been exhausted or the time for filing an appeal has 
expired.
    (c) Other exceptions--(1) Suits between private parties. Paragraph 
(a) of this section does not apply to any amount paid or incurred by 
reason of any order or agreement in a suit in which no government or 
governmental entity is a party or any order or agreement in a suit 
pursuant to which a government or governmental entity enforces its 
rights as a private party.
    (2) Taxes and related interest. Paragraph (a) of this section does 
not apply to amounts paid or incurred as otherwise deductible taxes or 
related interest. However, if penalties are imposed relating to such 
taxes, paragraph (a) of this section applies to disallow a deduction 
for such penalties and interest payments related to such penalties.
    (3) Failure to pay title 26 tax. In the case of any amount paid or 
incurred as restitution for failure to pay tax imposed under title 26 
of the United States Code, paragraph (a) of this section does not 
disallow a deduction for title 26 taxes, such as excise and employment 
taxes, which are equal to or less than the deduction otherwise allowed 
under chapter 1 of the Code if the tax had been timely paid.
    (d) Application of general principles of Federal income tax law--
(1) Taxable year of deduction. If, under paragraph (b) or (c) of this 
section, the taxpayer is allowed a deduction for the amount paid or 
incurred pursuant to an order or agreement, the deduction is taken into

[[Page 4986]]

account under the rules of section 461 and the related regulations, or 
under a provision specifically applicable to the allowed deduction, 
such as Sec.  1.468B-3(c).
    (2) Tax benefit rule applies. If the deduction allowed under 
paragraphs (b) or (c) of this section results in a tax benefit to the 
taxpayer, the taxpayer must include in income, under sections 61 and 
111, the recovery of any amount deducted in a prior taxable year to the 
extent the prior year's deduction reduced the taxpayer's tax liability.
    (i) A tax benefit to the taxpayer includes a reduction in the 
taxpayer's tax liability for a prior taxable year or the creation of a 
net operating loss carryback or carryover.
    (ii) A taxpayer's recovery of any amount deducted in a prior 
taxable year includes, but is not limited to--
    (A) Receiving a refund, recoupment, rebate, reimbursement, or 
otherwise recovering some or all of the amount the taxpayer paid or 
incurred, or
    (B) Being relieved of some or all of the payment liability under 
the order or agreement.
    (e) Definitions. For section 162(f) and Sec.  1.162-21, the 
following definitions apply:
    (1) Government. A government means--
    (i) The government of the United States, a State, or the District 
of Columbia;
    (ii) The government of a territory of the United States, including 
American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the 
U.S. Virgin Islands;
    (iii) The government of a foreign country;
    (iv) An Indian tribal government, as defined in section 
7701(a)(40), or a subdivision of an Indian tribal government, as 
determined in accordance with section 7871(d); or
    (v) A political subdivision (such as a local government unit) of a 
government described in paragraph (e)(1)(i), (ii), or (iii) of this 
section.
    (2) Governmental entity. A governmental entity means--
    (i) A corporation or other entity serving as an agency or 
instrumentality of a government (as defined in paragraph (e)(1) of this 
section), or
    (ii) A nongovernmental entity treated as a governmental entity as 
described in paragraph (e)(3) of this section.
    (3) Nongovernmental entity treated as a governmental entity. A 
nongovernmental entity treated as a governmental entity is an entity 
that--
    (i) Exercises self-regulatory powers (including imposing sanctions) 
in connection with a qualified board or exchange, as defined in section 
1256(g)(7); or
    (ii) Exercises self-regulatory powers, including adopting, 
administering, or enforcing rules and imposing sanctions, as part of 
performing an essential governmental function.
    (4) Restitution, remediation of property, and amounts paid to come 
into compliance with a law--(i) Amounts for restitution or remediation. 
An amount is paid or incurred for restitution or remediation pursuant 
to paragraph (b)(1) of this section if it is paid or incurred to 
restore, in whole or in part, the person, as defined in section 
7701(a)(1); government; governmental entity; property; environment; 
wildlife; or natural resources harmed, injured, or damaged by the 
violation or potential violation of any law described in paragraph 
(a)(3) of this section to the same or substantially similar position or 
condition as existed prior to such harm, injury or damage.
    (A) Environment, wildlife, or natural resources. Restitution or 
remediation of the environment, wildlife, or natural resources includes 
amounts paid or incurred for the purpose of conserving soil, air, or 
water resources, protecting or restoring the environment or an 
ecosystem, improving forests, or providing a habitat for fish, 
wildlife, or plants. The amounts must be paid or incurred--
    (1) To, or at the direction of, a government or governmental entity 
to be used exclusively for the restitution or remediation of a harm to 
the environment, wildlife, or natural resources;
    (2) To a segregated fund or account established by a government or 
governmental entity and, pursuant to the order or agreement, the 
amounts are not disbursed to the general account of the government or 
governmental entity for general enforcement efforts or other 
discretionary purposes; or
    (3) To a segregated fund or account established at the direction of 
a government or governmental entity.
    (4) Paragraph (e)(4)(i)(A) of this section applies only if there is 
a strong nexus or connection between the purpose of the payment and the 
harm to the environment, natural resources, or wildlife that the 
taxpayer has caused or is alleged to have caused.
    (B) Disgorgement or forfeiture. Provided the identification and 
establishment requirements of paragraphs (b)(2) and (b)(3) of this 
section are met, restitution may include amounts paid or incurred as 
disgorgement or forfeiture, if paid or incurred at the direction of a 
government or governmental entity directly to the person, as defined in 
section 7701(a)(1), harmed by the violation or potential violation of 
any law or to, or at the direction of, the government or governmental 
entity, to establish a segregated fund or account for the benefit of 
such harmed person. This paragraph (e)(4)(i)(B) does not apply if the 
order or agreement identifies the payment amount as in excess of the 
taxpayer's net profits or, pursuant to the order or agreement, the 
amounts are disbursed to the general account of the government or 
governmental entity for general enforcement efforts or other 
discretionary purposes.
    (C) Segregated funds or accounts. Provided the identification and 
establishment requirements of paragraphs (b)(2) and (b)(3) of this 
section are met, restitution or remediation may include amounts paid or 
incurred, pursuant to an order or agreement, to a segregated fund or 
account to restore, in whole or in part, the person, as defined in 
section 7701(a)(1); government; governmental entity; property; 
environment; wildlife; or natural resources harmed, injured, or damaged 
by the violation or potential violation of any law described in 
paragraph (a)(3) of this section. This paragraph (e)(4)(i)(C) does not 
apply if, pursuant to the order or agreement, the amounts are disbursed 
to the general account of the government or governmental entity for 
general enforcement efforts or other discretionary purposes.
    (ii) Amounts to come into compliance with a law. An amount is paid 
or incurred to come into compliance with a law that the taxpayer has 
violated, or is alleged to have violated, by performing services; 
taking action, such as modifying equipment; providing property; or 
doing any combination thereof to come into compliance with that law.
    (iii) Amounts not included. Regardless of whether the order or 
agreement identifies them as such, restitution, remediation, and 
amounts paid to come into compliance with a law do not include any 
amount paid or incurred--
    (A) As reimbursement to a government or governmental entity for 
investigation costs or litigation costs incurred in such government or 
governmental entity's investigation into, or litigation concerning, the 
violation or potential violation of any law; or
    (B) At the taxpayer's election, in lieu of a fine or penalty.
    (5) Suit, agreement, or otherwise. A suit, agreement, or otherwise 
includes,

[[Page 4987]]

but is not limited to, suits; settlement agreements; orders; non-
prosecution agreements; deferred prosecution agreements; judicial 
proceedings; administrative adjudications; decisions issued by 
officials, committees, commissions, or boards of a government or 
governmental entity; and any legal actions or hearings which impose a 
liability on the taxpayer or pursuant to which the taxpayer assumes 
liability.
    (f) Examples. The application of this section is illustrated by the 
following examples.
    (1) Example 1. (i) Facts. Corp. A enters into an agreement with 
State Y's environmental enforcement agency (Agency) for violating state 
environmental laws. Pursuant to the agreement, Corp. A pays $40X to the 
Agency in civil penalties, $80X in restitution for the environmental 
harm that the taxpayer has caused, $50X for remediation of contaminated 
sites, and $60X to conduct comprehensive upgrades to Corp. A's 
operations to come into compliance with the state environmental laws.
    (ii) Analysis. The identification requirement is satisfied for 
those amounts the agreement identifies as restitution, remediation, or 
to come into compliance with a law. If Corp. A meets the establishment 
requirement, as provided in paragraph (b)(3), paragraph (a) of this 
section will not disallow Corp. A's deduction for $80X in restitution 
and $50X for remediation. Under paragraph (a) of this section, Corp. A 
may not deduct the $40X in civil penalties. Paragraph (a) of this 
section will not disallow Corp. A's deduction for the $60X paid to come 
into compliance with the state environmental laws. See section 161, 
concerning items allowed as deductions, and section 261, concerning 
items for which no deduction is allowed, and the regulations related to 
sections 161 and 261.
    (2) Example 2. (i) Facts. Corp. A enters into an agreement with 
State T's securities agency (Agency) for violating a securities law by 
inducing B to make a $100X investment in Corp. C stock, which B lost 
when the Corp. C stock became worthless. As part of the agreement, 
Corp. A agrees to pay $100X to B as restitution for B's investment 
loss, incurred as a result of Corp. A's actions. The agreement 
specifically states that the $100X payment by Corp. A to B is 
restitution. The agreement also requires Corp. A to pay a $40X penalty 
for violating Agency law. Corp. A pays the $140X.
    (ii) Analysis. Corp. A's $100X payment to B is identified in the 
agreement as restitution. If Corp. A establishes, as provided in 
paragraph (b)(3) of this section, that the amount paid was for that 
purpose, paragraph (a) of this section will not disallow Corp. A's 
deduction for the $100X payment. Under paragraph (a) of this section, 
Corp. A may not deduct its $40X payment to the Agency because it was 
paid for Corp. A's violation of Agency law.
    (3) Example 3. (i) Facts. Corp. B is under investigation by State 
X's environmental enforcement agency for a potential violation of State 
X's law governing emissions standards. Corp. B enters into an agreement 
with State X under which it agrees to upgrade the engines in a fleet of 
vehicles that Corp. B operates to come into compliance with State X's 
law. Although the agreement does not provide the specific amount Corp. 
B will incur to upgrade the engines to come into compliance with State 
X's law, it identifies that Corp. B must upgrade existing engines to 
lower certain emissions. Under the agreement, Corp. B also agrees to 
construct a nature center in a local park for the benefit of the 
community. Instead of paying $12X, to come into compliance with State 
X's law, Corp. B pays $15X to upgrade the engines to a standard higher 
than that which the law requires. Corp. B presents evidence to 
establish that it would cost $12X to upgrade the engines to come into 
compliance with State X's law.
    (ii) Analysis. Because the agreement describes the specific action 
Corp. B must take to come into compliance with State X's law, and Corp. 
B provides evidence, as described in paragraph (b)(3)(ii) of this 
section, to establish that the agreement obligates it to incur costs to 
come into compliance with a law, paragraph (a) of this section will not 
disallow Corp. B's deduction for the $12X Corp. B incurs to come into 
compliance. Corp. B may also deduct the $3X if it is otherwise 
deductible under chapter 1 of the Code. However, Corp. B may not deduct 
the amounts paid to construct the nature center because no facts exist 
to establish that the amount was paid either to come into compliance 
with a law or as restitution or remediation.
    (4) Example 4. (i) Facts. Corp. D enters into an agreement with 
governmental entity, Trade Agency, for engaging in unfair trade 
practices in violation of Trade Agency laws. The agreement requires 
Corp. D to pay $80X to a Trade Agency fund, through disgorgement of net 
profits, to be used exclusively to pay restitution to the consumers 
harmed by Corp. D's violation of Trade Agency law. Corp. D pays $80X to 
Trade Agency fund and Trade Agency disburses all amounts in the 
restitution fund to the harmed consumers.
    (ii) Analysis. The agreement identifies the $80X payment to the 
fund as restitution. Trade Agency uses the funds exclusively to provide 
restitution to the harmed consumers and does not use it for 
discretionary or general enforcement purposes. If Corp. D establishes, 
as provided in paragraph (b)(3) of this section, that the $80X 
constitutes restitution under paragraph (e)(4)(i)(B) of this section, 
paragraph (a) of this section does not apply.
    (5) Example 5. (i) Facts. B, a regulated banking institution, is 
subject to the supervision of, and annual examinations by governmental 
entity, R. In the ordinary course of its business, B is required to pay 
annual assessment fees to R, which fees are used to support R in 
supervising and examining banking institutions to ensure a safe and 
sound banking system. Following an annual examination conducted in the 
ordinary course of B's business, R issues a letter to B identifying 
concerns with B's internal compliance functions. B takes corrective 
action to address R's concerns by investing in its internal compliance 
functions. R does not conduct an investigation or inquiry into B's 
potential violation of any law.
    (ii) Analysis. The payment of annual assessment fees by B to R in 
the ordinary course of business is not related to the violation of any 
law or the investigation or inquiry into the potential violation of any 
law. In addition, B's costs of taking the corrective action are not 
related to the violation of any law or the investigation or inquiry 
into the potential violation of any law as described in section 
162(f)(1). Paragraph (a) of this section will not disallow the 
deduction of the annual assessment fees and the cost of the corrective 
actions.
    (6) Example 6. (i) Facts. B, a regulated banking institution, is 
subject to the supervision of, and annual examinations by governmental 
entity, R. Following an annual examination conducted in the ordinary 
course of B's business, R pursues an enforcement action against B for 
violation of banking laws. B and R enter a settlement agreement, 
pursuant to which B agrees to undertake certain improvements to come 
into compliance with banking laws and to pay R $20X for violation of 
banking laws. B pays the $20X.
    (ii) Analysis. If the agreement meets the identification 
requirement of paragraph (b)(2) of this section and B meets the 
establishment requirement of paragraph (b)(3) of this section, 
paragraph (a) of this section will not

[[Page 4988]]

disallow the deduction of the costs of the corrective actions to come 
into compliance with banking laws. However, B may not deduct the $20X 
paid to R because the amount was not paid to come into compliance with 
a law or as restitution or remediation.
    (7) Example 7. (i) Facts. Corp. C contracts with governmental 
entity, Q, to design and build a rail project within five years. Corp. 
C does not complete the project. Q sues Corp. C for breach of contract 
and damages of $10X. A jury finds Corp. C breached the contract and 
Corp. C pays $10X to Q.
    (ii) Analysis. The suit arose out of a proprietary contract, 
wherein Q enforced its rights as a private party. Paragraph (a) of this 
section will not disallow Corp. C's deduction of the payment of $10X 
pursuant to this suit.
    (8) Example 8. (i) Facts. Corp. C contracts with governmental 
entity, Q, to design and build a rail project within five years. Site 
conditions cause construction delays and Corp. C asks Q to pay $50X in 
excess of the contracted amount to complete the project. After Q pays 
for the work, it learns that, at the time it entered the contract with 
Corp. C, Corp. C knew that certain conditions at the project site would 
make it challenging to complete the project within five years. Q sues 
Corp. C for withholding critical information during contract 
negotiations in violation of the False Claims Act (FCA). The court 
enters a judgment in favor of Q pursuant to which Corp. C will pay Q 
$50X in restitution and $150X in treble damages. Corp. C pays the 
$200X.
    (ii) Analysis. The suit pertains to Corp. C's violation of the FCA. 
The order identifies the $50X Corp. C is required to pay as 
restitution, as described in paragraph (b)(2) of this section. If Corp. 
C establishes, as provided in paragraph (b)(3) of this section, that 
the amount paid was for restitution, paragraph (a) of this section will 
not disallow Corp. C's deduction for the $50X payment. Under paragraph 
(a) of this section, Corp. C may not deduct the $150X paid for the 
treble damages imposed for violation of the FCA because the order did 
not identify all or part of the payment as restitution.
    (9) Example 9. (i) Facts. Corp. T operates a truck fleet company 
incorporated in State A. State A requires that all vehicles registered 
in State A have a vehicle emissions test every two years. Corp. T's 40 
trucks take the emissions test on March 1 for which it pays the $15 per 
vehicle. Under State A law, if a vehicle fails the emissions test, the 
vehicle owner has 30 days to certify to State A that the vehicle has 
been repaired and has passed the emissions test. State A imposes a $1X 
penalty per vehicle for failure to comply with this 30-day rule. Twenty 
trucks pass; twenty trucks fail. Corp. T does not submit the required 
certification to State A for the twenty trucks that failed the 
emissions test. State A imposes a $40X penalty against Corp. T. Corp. T 
pays the $40X.
    (ii) Analysis. Emissions tests are conducted in the ordinary course 
of operating a truck fleet company and, therefore, paragraph (a) of 
this section does not apply to the $600 Corp. T pays for the emissions 
tests. However, Corp. T may not deduct the $40X penalty for failure to 
comply with State A requirements because the amount is required to be 
paid to a government in relation to the violation of a law.
    (10) Example 10. (i) Facts. Corp. G operates a chain of 20 grocery 
stores in County X. Under County X health and food safety code and 
regulations, Corp. G is subject to annual inspections for which Corp. G 
is required to pay an inspection fee of $40 per store. Pursuant to the 
annual inspection, the County X health inspector finds violations of 
County X's health and food safety code and regulations in three of 
Corp. G's 20 stores. County X bills Corp. G $800 for the annual 
inspection fees for the 20 stores and a $1,000 fine for each of the 
three stores, for a total fine of $3,000, for violations of the health 
and food safety code. Corp. G pays the fees and fines.
    (ii) Analysis. Paragraph (a) of this section will not disallow 
Corp. G's deduction for the $800 inspection fees paid in the ordinary 
course of a regulated business. Under paragraph (a) of this section, 
Corp. G may not deduct the $3,000 fine for violation of the County X 
health code and food safety ordinances because it was paid to a 
government in relation to the violation of a law.
    (11) Example 11. (i) Facts. Corp. G operates a chain of grocery 
stores in County X. Under County X health and food safety code and 
regulations, Corp. G is subject to annual inspections. Pursuant to an 
annual inspection, the County X health inspector finds that the 
refrigeration system in one of Corp. G's stores does not keep food at 
the temperature required by the health and food safety code and 
regulations. The County X health inspector issues a warning letter 
instructing Corp. G to correct the violation and bring the 
refrigeration system into compliance with the law before a reinspection 
in 60 days or face the imposition of fines if it fails to comply. Corp. 
G pays $10,000 to bring its refrigeration system into compliance with 
the law.
    (ii) Analysis. Provided the identification and establishment 
requirements of paragraphs (b)(2) and (b)(3), respectively, of this 
section are met, paragraph (a) of this section will not disallow Corp. 
G's deduction for the $10,000 it pays to bring its refrigeration system 
into compliance with the law.
    (12) Example 12. (i) Facts. Corp. G operates a chain of grocery 
stores in County X. Under County X health and food safety code and 
regulations, Corp. G is subject to annual inspections. Pursuant to an 
annual inspection, the County X health inspector finds that the 
refrigeration system in one of Corp. G's stores does not keep food at 
the temperature required by the health and food safety code and 
regulations. The County X health inspector issues a warning letter 
instructing Corp. G to correct the violation and bring the 
refrigeration system into compliance with the law before a reinspection 
in 60 days or face the imposition of fines if it fails to comply. The 
County X health inspector later reinspects the refrigeration system. 
Corp. G pays a reinspection fee of $80. During the reinspection, the 
health inspector finds that Corp. G did not bring its refrigeration 
system into compliance with the law. The health inspector issues a 
citation imposing a $250 fine on Corp. G. Corp. G pays the $250 fine.
    (ii) Analysis. Paragraph (a) of this section will disallow Corp. 
G's deduction for the $80 inspection fee because it is paid in relation 
to the investigation or inquiry by County X into the potential 
violation of a law. Paragraph (a) of this section will also disallow 
Corp. G's deduction for the $250 fine paid for violation of the law.
    (13) Example 13. (i) Facts. Accounting Firm was convicted of 
embezzling $500X from Bank in violation of State X law. The court 
issued an order requiring Accounting Firm to pay $100X in restitution 
to Bank. The court also issued an order of forfeiture and restitution 
for $400X, which was seized by the State X officials. Accounting Firm 
paid $100X to Bank. The $400X seized was deposited with Fund within the 
State X treasury and, at the discretion of the State X Attorney 
General, was used to support law enforcement programs.
    (ii) Analysis. Although the order identified the amount forfeited 
as restitution, paragraph (a) of this section will disallow Accounting 
Firm's deduction for the $400X forfeited because, under paragraph 
(e)(4)(i)(B)(I) of this section, it does not constitute restitution. If 
Accounting Firm establishes, as provided in paragraph (b)(3) of this 
section, that the $100X constitutes restitution under paragraph 
(e)(4)(i), paragraph (a) of this section

[[Page 4989]]

will not disallow Accounting Firm's deduction for the $100X paid, 
provided the $100X is otherwise deductible under chapter 1.
    (g) Applicability date. The rules of this section apply to taxable 
years beginning on or after January 19, 2021, except that such rules do 
not apply to amounts paid or incurred under any order or agreement 
pursuant to a suit, agreement, or otherwise, which became binding under 
applicable law before such date, determined without regard to whether 
all appeals have been exhausted or the time for filing appeals has 
expired.

0
Par. 3. Add Sec.  1.6050X-1 to read as follows:


Sec.  1.6050X-1   Information reporting for fines, penalties, and other 
amounts by governments, governmental entities, and nongovernmental 
entities treated as governmental entities.

    (a) Information reporting requirement. The appropriate official, as 
defined in paragraph (f)(1) of this section, of a government, as 
defined in paragraph (f)(2) of this section, a governmental entity, as 
defined in paragraph (f)(3) of this section, or nongovernmental entity 
treated as a governmental entity, as defined in paragraph (f)(4) of 
this section, that is a party to a suit or agreement to which section 
6050X(a)(1) and (a)(2) applies, must--
    (1) File an information return, as described in paragraph (b) of 
this section, if the aggregate amount the payor, as defined in 
paragraph (f)(5) of this section, is required to pay pursuant to all 
court orders (orders) and settlement agreements (agreements), relating 
to the violation of any law, or the investigation or inquiry into the 
potential violation of any law, equals or exceeds the threshold amount 
provided in paragraph (f)(6) of this section;
    (2) Furnish a written statement as described in paragraph (c) of 
this section to each payor; and
    (3) Request the payor's taxpayer identification number (TIN) if it 
is not already known, and notify the payor that the law requires the 
payor to furnish a TIN for inclusion on the information return and that 
the payor may be subject to a penalty for failure to furnish the TIN. 
See sections 6723, 6724(d)(3), and Sec.  301.6723-1 of this chapter. 
The TIN may be requested in any manner, and the payor may provide the 
TIN in any manner, including orally, in writing, or electronically. If 
the TIN is furnished in writing, no particular form is required. Form 
W-9, Request for Taxpayer Identification Number and Certification, may 
be used, or the request may be incorporated into documents related to 
the order or agreement.
    (b) Requirement to file return--(1) Content of information return. 
The information return must provide the following:
    (i) The amount required to be paid to, or at the direction of, a 
government or governmental entity, pursuant to section 6050X(a)(1)(A), 
as a result of the orders and/or agreements;
    (ii) The separate amounts required to be paid as restitution, 
remediation, or to come into compliance with a law, as described in 
section 6050X(a)(1)(B) and (C), as a result of the orders and/or 
agreements;
    (iii) The payor's TIN; and
    (iv) Any additional information required by the information return 
and the related instructions.
    (2) Form and manner of reporting. The appropriate official required 
to file an information return, under paragraph (a)(1) of this section, 
must file Form 1098-F, Fines, Penalties, and Other Amounts, or any 
successor form, as provided by the instructions, with Form 1096, Annual 
Summary and Transmittal of U.S. Information Returns.
    (3) Multiple orders and/or agreements. The appropriate official 
must file only one Form 1098-F for amounts required to be paid as a 
result of multiple orders and/or agreements with respect to the 
violation, investigation, or inquiry.
    (4) Time of reporting. Returns required to be made under paragraph 
(a) of this section must be filed with the Internal Revenue Service 
(IRS) on or before February 28 (March 31 if filed electronically) of 
the year following the calendar year in which the orders and/or 
agreements become binding under applicable law, determined without 
regard to whether all appeals have been exhausted or the time for 
filing an appeal has expired.
    (c) Requirement to furnish written statement--(1) In general. The 
appropriate official must furnish a written statement to each payor for 
which it is required to file an information return under paragraphs 
(a)(1) and (b) of this section. The written statement must include:
    (i) The information that was reported to the IRS relating to such 
payor; and
    (ii) A legend that identifies the statement as important tax 
information that is being furnished to the IRS.
    (2) Copy of the Form 1098-F. The appropriate official may satisfy 
the requirement of this paragraph (c) by furnishing a copy of the Form 
1098-F, or any successor form, filed regarding the payor, or another 
document that contains the information required by paragraph (c)(1) of 
this section if the document conforms to applicable revenue procedures 
or other guidance relating to substitute statements. See Sec.  601.601 
of this chapter.
    (3) Time for furnishing written statement. The appropriate official 
must furnish the written statement to the payor on or before January 31 
of the year following the calendar year in which the order or agreement 
becomes binding under applicable law, determined without regard to 
whether all appeals have been exhausted or the time for filing an 
appeal has expired.
    (d) Rules for multiple payors--(1) Multiple payors--individual 
liability. If, pursuant to an order or agreement, multiple individually 
liable payors are liable to pay, for the violation of any law, or the 
investigation or inquiry into the potential violation of any law, an 
amount that, in the aggregate, equals, or exceeds, the threshold amount 
under paragraph (f)(6) of this section, the appropriate official must 
file an information return under paragraphs (a)(1) and (b) of this 
section to report the amount required to be paid by each payor, even if 
a payor's payment liability is less than the threshold amount. The 
appropriate official must furnish a written statement, under paragraph 
(c) of this section, to each payor. If more than one person, as defined 
in section 7701(a)(1), is a party to an order or agreement, there is no 
information reporting requirement, or requirement to furnish a written 
statement, with respect to any person who does not have a payment 
obligation or obligation for costs to provide services or to provide 
property.
    (2) Multiple payors--joint and several liability. If, pursuant to 
an order or agreement, multiple payors are jointly and severally liable 
to pay, for the violation of any law, or the investigation or inquiry 
into the potential violation of any law, an amount that, in the 
aggregate, equals or exceeds the threshold amount under paragraph 
(f)(6) of this section, the appropriate official must file an 
information return, under paragraphs (a)(1) and (b) of this section for 
each of the jointly and severally liable payors. Each information 
return must report all amounts required to be paid by all of the payors 
pursuant to the order or agreement. The appropriate official must 
furnish a written statement, under paragraph (c) of this section, to 
each of the jointly and severally liable payors.
    (e) Payment amount not identified. If some or all of the payment 
amount is not identified, as described in Sec.  1.162-21(b)(2)(iii), 
for paragraphs (a), (b), and (c) of this section, the appropriate

[[Page 4990]]

official must file an information return, and furnish the written 
statement to the payor, as provided by the instructions to Form 1098-F, 
or any successor form, including instructions as to the amounts (if 
any) to include on Form 1098-F, only if the government or governmental 
entity reasonably expects that the aggregate amount required to be paid 
or incurred pursuant to the order or agreement, relating to the 
violation of any law, or the investigation or inquiry into the 
potential violation of any law, will equal or exceed the threshold 
amount under paragraph (f)(6) of this section.
    (f) Definitions. The following definitions apply under this 
section:
    (1) Appropriate official--(i) One government or governmental 
entity. If the government or governmental entity has not assigned one 
of its officers or employees to comply with the reporting requirements 
of paragraph (a), (b), and (c) of this section, the term appropriate 
official means the officer or employee of a government or governmental 
entity having control of the suit, investigation, or inquiry. If the 
government or governmental entity has assigned one of its officers or 
employees to comply with the reporting requirements of paragraph (a), 
(b), and (c) of this section, such officer or employee is the 
appropriate official.
    (ii) More than one government or governmental entity--(A) In 
general. If more than one government or governmental entity is a party 
to an order or agreement, only the appropriate official of the 
government or governmental entity listed first on the most recently 
executed order or agreement is responsible for complying with all 
reporting requirements under paragraphs (a), (b), and (c) of this 
section, unless another appropriate official is appointed by agreement 
under paragraph (f)(1)(ii)(B) of this section.
    (B) By agreement. The governments or governmental entities that are 
parties to an order or agreement may agree to appoint one or more other 
appropriate officials to be responsible for complying with the 
information reporting requirements of paragraphs (a), (b), and (c) of 
this section.
    (2) Government. For purposes of this section, government means the 
government of the United States, a State, the District of Columbia, or 
a political subdivision (such as a local government unit) of any of the 
foregoing.
    (3) Governmental entity. For purposes of this section, governmental 
entity means--
    (i) A corporation or other entity serving as an agency or 
instrumentality of a government (as defined in paragraph (f)(2) of this 
section), or
    (ii) A nongovernmental entity treated as a governmental entity as 
described in paragraph (f)(4) of this section.
    (4) Nongovernmental entity treated as governmental entity. For 
purposes of this section, the definition of nongovernmental entity 
treated as a governmental entity as set forth in Sec.  1.162-21(e)(3) 
applies but does not include a nongovernmental entity of a territory of 
the United States, including American Samoa, Guam, the Northern Mariana 
Islands, Puerto Rico, or the U.S. Virgin Islands, a foreign country, or 
an Indian tribe.
    (5) Payor. The payor is the person, as defined in section 
7701(a)(1), which, pursuant to an order or agreement, has paid or 
incurred, or is liable to pay or incur, an amount to, or at the 
direction of, a government or governmental entity in relation to the 
violation or potential violation of any law. In general, the payor will 
be the person to which section 162(f) and Sec.  1.162-21 of the 
regulations apply.
    (6) Threshold amount. The threshold amount is $50,000.
    (g) Applicability date. The rules of this section apply only to 
orders and agreements, pursuant to suits and agreements, which become 
binding under applicable law on or after January 1, 2022, determined 
without regard to whether all appeals have been exhausted or the time 
for filing an appeal has expired.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: January 7, 2021.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2021-00741 Filed 1-14-21; 4:15 pm]
BILLING CODE 4830-01-P