4970 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

the Department,’’ including the Commissioner of 

CBP. 6 U.S.C. 112(a)(3). 

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. 

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, 

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] 

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 

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 §§ 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 selfregulating nongovernmental entities that 

are treated as governmental entities for 


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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 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 

§ 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 

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 


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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 § 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 

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. 

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 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 


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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 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 § 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 


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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 

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 § 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 


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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 


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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 


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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 § 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. 

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 


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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 

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 


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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 

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 


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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. 

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 § 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. 


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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 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 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 


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1This data point is derived by the IRS as part of 

the burden analysis described in the Paperwork 

Reduction Act section below. 

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 

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 


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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 

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 Entities, And Certain Nongovernmental Entities.1545–2284 Form 1098–F is approved through 1/31/ 

2023. 

RELATED NEW OR REVISED TAX FORMS

New Revision of existing form Number of respondents 

(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) 


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2See Executive Order 13924 (May 19, 2020) 85 

FR 31,353–54. 

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. 

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 

■ 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 


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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 


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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 

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, 


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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 


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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 


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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 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. 

■ Par. 3. Add § 1.6050X–1 to read as 

follows: 

§ 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 

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 

§ 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 


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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 

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 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: 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: 

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) 


khammond on DSKJM1Z7X2PROD with RULES