[Federal Register Volume 85, Number 93 (Wednesday, May 13, 2020)]
[Proposed Rules]
[Pages 28524-28539]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08649]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-104591-18]
RIN 1545-BO67


Denial of Deduction for Certain Fines, Penalties, and Other 
Amounts; Information With Respect to Certain Fines, Penalties, and 
Other Amounts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide 
guidance on section 162(f) of the Internal Revenue Code (Code), as 
amended by legislation enacted in 2017, concerning the deduction of 
certain fines, penalties, and other amounts. This document also 
contains proposed regulations that provide guidance relating to the 
information reporting requirements under new section 6050X of the Code 
with respect to those fines, penalties, and other amounts. The proposed 
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 
(nongovernmental entities) in relation to the violation of a law or 
investigations or inquiries by such governments, governmental entities, 
or nongovernmental entities into the potential violation of a law. The 
proposed regulations also affect governments, governmental entities, 
and

[[Page 28525]]

nongovernmental entities subject to the related reporting requirement.

DATES: Written or electronic comments and requests for a public hearing 
must be received by July 13, 2020. Requests for a public hearing must 
be submitted as prescribed in the ``Comments and Requests for a Public 
Hearing'' section.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-104591-
18) by following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The IRS expects to have limited personnel available to 
process public comments that are submitted on paper through mail. Until 
further notice, any comments submitted on paper will be considered to 
the extent practicable. The Department of the Treasury (Treasury 
Department) and the IRS will publish for public availability any 
comment submitted electronically, and to the extent practicable on 
paper, to its public docket.
    Send paper submissions to: CC:PA:LPD:PR (REG-104591-18), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations on 
amended section 162(f), Sharon Y. Horn (202) 317-4426; concerning the 
information reporting requirement, Nancy L. Rose (202) 317-5147; 
concerning submissions of comments and/or requests for a public 
hearing, Regina Johnson, (202) 317-5177 (not toll-free numbers). 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

    This document contains proposed revisions to 26 CFR part 1 under 
section 162(f) and proposed additions to 26 CFR part 1 under section 
6050X. The proposed revisions implement the disallowance of deductions 
for amounts paid or incurred to, or at the direction of, a government, 
governmental entity, or nongovernmental entity in relation to the 
violation, or investigation or inquiry into the potential violation, of 
a law under section 162(f), as 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). The proposed additions implement the reporting 
requirements, under section 6050X, added to the Code by section 
13306(b) of the TCJA.
    Prior law under section 162(f) was enacted in 1969. Public Law 91-
172, 83 Stat. 487 (1969). Unless certain exceptions applied, prior law 
under section 162(f) disallowed an ordinary and necessary deduction, 
under section 162(a), for any fine or similar penalty paid to a 
government for the violation of a law. This provision codified existing 
case law that denied an ordinary and necessary business expense 
deduction for fines or similar penalties because ``allowance of the 
deduction would frustrate sharply defined national or State policies 
proscribing the particular types of conduct evidenced by some 
governmental declaration thereof.'' See S. Rep. No. 552-91 at 273--274 
(1969). On February 20, 1975, the Treasury Department and the IRS 
issued final regulations concerning prior law under section 162(f) (TD 
7345, 40 FR 7437) (1975 regulations). See Sec.  1.162-21. Amendments 
were published on July 11, 1975 (T.D. 7366, 40 FR 29290). Section 
1.162-21(a) of the 1975 regulations describe the term ``paid to'' a 
government. Section 1.162-21(b)(1) of the 1975 regulations describes 
certain amounts that constitute fines or similar penalties; Sec.  
1.162-21(b)(2) provides that compensatory damages paid to a government 
do not constitute a fine or penalty. Section 1.162-21(c) provides 
examples to illustrate the application of the 1975 regulations.
    As amended by section 13306(a)(1) of 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, governmental entity, or nongovernmental 
entity in relation to the violation of a law or the investigation or 
inquiry by such government or governmental entity into the potential 
violation of a law.
    Section 162(f)(5) describes certain self-regulating nongovernmental 
entities treated as governmental entities. Because section 162(f)(5) 
treats these nongovernmental entities as governmental entities, 
exclusively for purposes of section 162(f) and the related provisions 
of section 6050X, the term ``governmental entities'' includes those 
nongovernmental entities treated as governmental entities.
    Section 162(f)(2) provides an exception to the general rule and 
allows a taxpayer to deduct certain amounts paid or incurred that are 
otherwise allowable under chapter 1 for restitution, remediation, or 
paid to come into compliance with a law. Section 162(f)(3) provides an 
exception to the general rule for amounts paid or incurred with respect 
to private party suits; section 162(f)(4) provides an exception for 
certain taxes due.
    Under section 162(f)(2)(A)(i) and (ii), section 162(f)(1) shall not 
disallow a deduction for 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 the 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) states that restitution, remediation, and 
amounts paid 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.
    To the extent that the amount paid would otherwise be deductible 
under chapter 1, section 162(f)(2)(A)(iii), (f)(3), and (f)(4) provide 
that section 162(f)(1) shall not disallow a deduction for amounts paid 
or incurred (1) as restitution for failure to pay any tax imposed under 
Title 26 had it been timely paid; (2) pursuant to an order or agreement 
with respect to a suit in which no government or governmental entity is 
a party; or (3) as taxes due.
    Section 13306(b) of the TCJA added new section 6050X. Section 
6050X(a)(1) and 6050X(a)(2)(A) requires the appropriate official of any 
government or any entity described in section 162(f)(5), involved in a 
suit, agreement, or otherwise to which section 162(f) applies, 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; (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

[[Page 28526]]

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, agreement, or otherwise 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 the date of the enactment of the TCJA (December 22, 2017). 
However, they do not apply to amounts paid or incurred under any 
binding order 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 April 9, 2018, the IRS published Notice 2018-23, 2018-15 I.R.B. 
474, to provide transitional guidance on the identification requirement 
of section 162(f)(2)(A)(ii) and the information reporting requirement 
under section 6050X. Notice 2018-23 provides that information reporting 
is not required until the date specified in proposed regulations under 
section 6050X. Notice 2018-23 also provides that, until the Treasury 
Department and the IRS issue proposed regulations, the identification 
requirement is treated as satisfied if the order or agreement 
specifically states on its face that an amount is paid or incurred as 
restitution, remediation, or to come into compliance with a law.
    Under these proposed regulations, the identification requirement 
applies to taxable years beginning on or after the date the proposed 
regulations are adopted as final regulations. Until that date, 
taxpayers, governments, and governmental entities may rely on the 
identification requirement as provided in Notice 2018-23. 
Alternatively, if taxpayers, governments, and governmental entities, 
apply the rules in their entirety and in a consistent manner, 
taxpayers, governments, and governmental entities may rely on the 
proposed regulations.

Explanation of Provisions

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

    The proposed regulations revise Sec.  1.162-21 and provide 
operational and definitional guidance concerning the application of 
section 162(f), as amended by the TCJA. The terms used in section 
162(f), and throughout these proposed regulations, are defined in 
proposed Sec.  1.162-21(f) and discussed in this section. In addition, 
this section describes the exceptions to the general rule of section 
162(f)(1). Proposed Sec.  1.162-21(g) provides examples for the 
application of this section.
A. General Rule
    Proposed Sec.  1.162-21(a) provides generally that a taxpayer may 
not take a deduction under any provision of chapter 1 (see section 161, 
and the related regulations, concerning items allowed as deductions) 
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. This general rule 
applies regardless of whether 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.
    Proposed Sec.  1.162-21(b) describes an exception to the general 
rule, 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.
    In general, section 6050X imposes a reporting requirement on 
governments and governmental entities with respect to the payment 
amount identified pursuant to certain suits, agreements, or otherwise. 
Proposed Sec.  1.6050X-1 provides rules for complying with the 
reporting requirement.
    Under sections 162(f) and 6050X and proposed Sec. Sec.  1.162-21 
and 1.6050X-1, 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.
B. Definitions
    Proposed Sec.  1.162-21(f) provides definitions relating to section 
162(f).
Government, Governmental Entity, or Nongovernmental Entity Treated as a 
Governmental Entity
    The definition of ``government or governmental entity'' under 
proposed Sec.  1.162-21(f)(1) reflects the term ``paid to'' a 
government as described in the 1975 regulations but uses the term 
``territory'' instead of ``possession'' and ``Commonwealth'' and 
includes additional territories. The definition of government or 
governmental entity under proposed Sec.  1.162-21(f)(1) also includes 
(1) the government of a federally recognized Indian tribal government 
or a subdivision of an Indian tribal government; (2) a political 
subdivision of, or corporation or other entity serving as an agency or 
instrumentality of, any government; or (3) a nongovernmental entity 
treated as a governmental entity. Under proposed Sec.  1.162-
21(f)(2)(i), certain nongovernmental entities are treated as 
governmental entities.
    Proposed Sec.  1.162-21(f)(2)(ii) adopts the definition of a 
nongovernmental entity in section 162(f)(5) in its entirety. Proposed 
Sec.  1.162-21(f)(2)(ii) provides that a nongovernmental entity is 
treated as a governmental entity if it (1) exercises self-regulatory 
powers (including imposing sanctions) in connection with a qualified 
board or exchange (as defined in section 1256(g)(7)); or (2) exercises 
self-regulatory powers, including adopting, administering, or enforcing 
laws and imposing sanctions, as part of performing an essential 
governmental function. Although nongovernmental entities are not 
governmental entities, for purposes of proposed Sec. Sec.  1.162-21 and 
1.6050X-1 only, the term ``governmental entities'' includes the 
nongovernmental entities treated as governmental entities.
Restitution and Remediation
    Under proposed Sec.  1.162-21(f)(3)(i), 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 a law. In response to Notice 2018-23, commenters disagreed 
about whether restitution, for purposes of section 162(f), includes 
forfeiture and disgorgement.

[[Page 28527]]

    Forfeiture and disgorgement focus on the unjust enrichment of the 
wrongdoer, not the harm to the victim. In Kokesh v. Securities and 
Exchange Commission, 137 S. Ct. 1635, 1643 (2017), the Supreme Court 
held that disgorgement, when imposed as a sanction for violating a 
Federal securities law, was treated as a penalty for purposes of the 
related five-year statute of limitations because ``[t]he primary 
purpose of disgorgement orders is to deter violations of the securities 
laws by depriving violators of their ill-gotten gains.'' In Nacchio v. 
United States, 824 F.3d 1370 (Fed. Cir. 2016), cert. denied, 137 S. Ct. 
2239 (2017), the United States Court of Appeals for the Federal Circuit 
noted that, ``[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.'' Nacchio, 824 F.3d at 1378 (citing United 
States v. Joseph, 743 F.3d 1350, 1354 (11th Cir. 2014)).
    Section 162(f)(2)(A)(i)(I) provides that restitution and 
remediation payments relate to the damage or harm caused, or that may 
be caused, by the violation, or the potential violation, of a law. The 
statute does not characterize restitution or remediation in connection 
with an unjust enrichment to a wrongdoer. Consistent with the statutory 
language, proposed Sec.  1.162-21(f)(3)(i) provides that the purpose of 
restitution or remediation is to restore the person or property, in 
whole or in part, to the same or substantially similar position or 
condition as before the harm caused by the taxpayer's violation, or 
potential violation, of a law. Hence, under proposed Sec.  1.162-
21(f)(3)(iii)(B)-(C), restitution, remediation, and amounts paid to 
come into compliance with a law do not include any amount paid or 
incurred which the taxpayer elects to pay in lieu of a fine or penalty 
or as forfeiture or disgorgement. In addition, under proposed Sec.  
1.162-21(f)(3)(iii)(D), 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. In addition, proposed Sec.  1.162-
21(f)(3)(iii)(A) adopts the rule in section 162(f)(2)(B) to exclude any 
amounts paid or incurred as reimbursement to the government or 
governmental entity for investigation costs or litigation costs from 
restitution or remediation.
Coming Into Compliance With a Law
    Under proposed Sec.  1.162-21(f)(3)(ii), a payment for a specific 
corrective action, or to provide specific property, is treated as an 
amount paid to come into compliance with a law. Proposed Sec.  1.162-
21(f)(3)(iii) lists amounts that will not be treated as paid or 
incurred to come into compliance with a law.
C. Investigation or Inquiry Into a Potential Violation of a Law
    In response to Notice 2018-23, a commenter requested clarification 
that an amount paid or incurred in relation to the investigation or 
inquiry into the potential violation of a law does not include amounts 
paid in the ordinary course of business as required by law. In general, 
section 162(f) does not disallow a deduction for amounts paid or 
incurred for audits, inspections, or reviews conducted in the ordinary 
course of business if the payment is otherwise deductible as an 
ordinary and necessary business expense and is not related to the 
violation of a law or the investigation or inquiry into the potential 
violation of a law as described in section 162(f)(1). The Treasury 
Department and the IRS request comments about specific examples of 
audits, inspections, or reviews conducted in the ordinary course of 
business that are not investigations or inquiries of potential 
violations of law intended to fall within the ambit of section 162(f).
D. Material Change
    A commenter asked for clarification that an amendment to an order 
or agreement, entered into before December 22, 2017, that does not 
change the nature or purpose of the payment obligation or create a new 
payment obligation, does not cause the order or agreement to be treated 
as entered into after December 22, 2017. Proposed Sec.  1.162-21(e) 
provides that, if the parties to an order or agreement, that became 
binding under applicable law, before December 22, 2017, make a material 
change to the terms of this original order or agreement on or after the 
applicability date of the final regulations, proposed Sec.  1.162-21(a) 
will apply to any amounts paid or incurred, or any obligation to 
provide property or services, after the date of the material change. 
Material changes are described in proposed Sec.  1.162-21(e)(2).
E. 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.
    Proposed Sec.  1.162-21(b)(3)(i) provides 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.
    Commenters requested that the regulations address the documents, or 
other evidence, that a taxpayer may present to meet the establishment 
requirement. In addition, commenters expressed concern that it may be 
difficult for taxpayers to meet the requirement when the government has 
control of the information that establishes the amount identified in 
the order or agreement. Proposed Sec.  1.162-21(b)(3)(ii) provides a 
non-exhaustive list of documents that taxpayers may use to satisfy the 
establishment requirement. Reporting of the amount by a government or 
governmental entity under section 6050X and proposed Sec.  1.6050X-1(a) 
alone does not satisfy the establishment requirement. The Treasury 
Department and the IRS request comments about other evidence and 
supporting documentation taxpayers may use to meet the establishment 
requirement.
F. 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 proposed Sec.  1.162-21(b)(2)(i), 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, proposed Sec.  1.162-
21(b)(2)(ii) requires the order or agreement to specifically state that 
the payment, and the amount of 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.''
    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, multiple damage awards, or 
involves multiple

[[Page 28528]]

taxpayers because it is unlikely that the order or agreement will 
distinguish the amount 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. Therefore, the 
commenters recommended that the regulations exclude these orders and 
agreements from the identification requirement of section 
162(f)(2)(A)(ii) altogether. The proposed regulations do not adopt the 
commenters' recommendation because such an exception would be 
inconsistent with the statute. The Treasury Department and the IRS 
request comments on how taxpayers may meet the identification 
requirement with respect to lump-sum payments, multiple damage awards, 
and multiple taxpayers.
    One commenter expressed the concern that it is beyond the expertise 
of a government or governmental entity to place a value on restitution 
or remediation costs, or costs to come into compliance with a law. 
Another stated that, in general, the compliance or restitution 
provisions of an order or agreement may not include quantified amounts 
because neither the up-front, nor ultimate, costs can be determined. 
The Treasury Department and the IRS request comments about orders or 
agreements meeting the identification requirement, including when an 
order or agreement identifies a payment amount which is less than the 
amount the taxpayer establishes was paid as restitution, remediation, 
or to come into compliance with a law.
    Other commenters explained that an order or agreement may require 
the taxpayer to provide services, provide property, or undertake 
specific action, to satisfy the legal obligation. These commenters 
requested that the regulations provide a rule that an order or 
agreement may meet the identification requirement if it identifies the 
in-kind settlement or the specified performance as restitution, 
remediation, or amount paid to come into compliance with a law, even if 
an actual payment amount is not identified.
    To treat taxpayers that, pursuant to the order or agreement, in 
whole or in part, discharge their liability in-kind in the same manner 
as taxpayers who make a monetary payment, and to administer the statute 
in a manner consistent with congressional intent, proposed Sec.  1.162-
21(b)(2)(iii) addresses how an order or agreement may meet the 
identification requirement with respect to any amount paid or incurred 
that is not identified. The proposed rule provides, 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 
aggregate amount the taxpayer must pay, the order or agreement must 
describe the damage done, harm suffered, or manner of noncompliance 
with a law, and describe the action required by the taxpayer (such as 
incurring costs to provide services or to provide property) with 
respect to the damage, harm, or noncompliance.
    Under proposed Sec.  1.162-21(b)(2)(iv), the IRS may challenge the 
characterization of an amount identified under proposed Sec.  1.162-
21(b)(2). No deduction is allowable unless the identification 
requirement is met. H.R. Rep. No. 115-466, at 430 (2017). Reporting of 
the amount by a government or governmental entity under section 6050X 
and proposed Sec.  1.6050X-1(a) alone does not satisfy the 
identification requirement.
G. Suits Between Private Parties
    If the amount is otherwise deductible under chapter 1, section 
162(f)(3) allows a deduction for an amount paid or incurred pursuant to 
an order or agreement in which no government or governmental entity is 
a party to a suit. Therefore, section 162(f)(1) disallows a deduction 
for amounts paid or incurred to, or at the direction of, a government 
or governmental entity only when a government or governmental entity is 
a complainant or investigator with respect to the violation or 
potential violation of a law. A court-directed payment or the entry of 
a judgment in a lawsuit between private parties is not a payment made 
at the direction of a government. H.R. Rep. No. 115-466, at 430 (2017). 
Proposed section 1.162-21(c)(1) provides that section 162(f)(1) does 
not apply to any amount paid or incurred by reasons of any order or 
agreement in a suit in which no government or governmental entity is a 
party.
H. Taxes and Related Interest
    Section 162(f)(4) provides that section 162(f)(1) does not apply to 
any amount paid or incurred as ``taxes due.'' ``Taxes due'' includes 
interest on taxes but not interest, if any, with respect to any related 
penalties imposed. See Joint Committee on Taxation, General Explanation 
of Public Law 115-97, at 194 (December 2018). Proposed Sec.  1.162-
21(c)(2) provides that proposed Sec.  1.162-21(a) does not apply to 
amounts paid or incurred as otherwise deductible taxes or related 
interest. However, if penalties are imposed with respect to those 
otherwise deductible taxes, proposed Sec.  1.162-21(a) disallows a 
deduction for the interest paid with respect to such penalties.
I. Failure To Pay Title 26 Tax
    In accordance with section 162(f)(2)(A)(iii), proposed Sec.  1.162-
21(c)(3) provides that, in the case of any amount paid or incurred as 
restitution for failure to pay tax imposed under Title 26, section 
162(f)(1) does not disallow a deduction otherwise allowed under chapter 
1. For example, section 162(f)(1) and proposed Sec.  1.162-21(a) do not 
disallow a deduction of an amount paid or incurred as restitution for 
failure to pay 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 section 275(a)(1) provides that no deduction is allowed for 
Federal income taxes.
J. Taxable Year of Deduction
    Under proposed Sec.  1.162-21(d)(1), deductions allowed under 
proposed Sec. Sec.  1.162-21(b) or (c), are taken into account under 
the rules of section 461 and the related regulations, or the rules 
specifically applicable to the allowed deduction, such as the rules of 
Sec.  1.468B-3(c).
K. Tax Benefit Income
    If the deduction allowed under proposed Sec.  1.162-21(b) or (c) 
results in a tax benefit to the taxpayer, proposed Sec.  1.162-21(d)(2) 
requires the taxpayer to 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.

2. Reporting Information With Respect to Certain Fines, Penalties, and 
Other Amounts

    The purpose of the proposed 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 with respect to 
certain suits or agreements to which section 162(f) and proposed Sec.  
1.162-21(f)(4) apply.
    In general, under proposed Sec.  1.6050X-1(a), if the aggregate 
amount a payor is required to pay pursuant to an order or agreement 
with respect to a violation, investigation, or inquiry to which section 
162(f) and proposed Sec.  1.162-21 apply equals or exceeds the 
threshold amount under proposed Sec.  1.6050X-1(g)(5), the appropriate 
official of a government or governmental

[[Page 28529]]

entity that is a party to the order or agreement must file an 
information return with the IRS with respect to the amounts or incurred 
paid and any additional information required by the information return 
and the related instructions, including the payor's taxpayer 
identification number. 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.
    Reporting of the amount by a government or governmental entity 
under section 6050X and proposed Sec.  1.6050X-1(a) alone does not 
satisfy the identification requirement under section 162(f)(2)(A)(ii) 
and proposed Sec.  1.162-21(b)(2)(ii) or the establishment requirement 
under section 162(f)(2)(A)(i) and proposed Sec.  1.162-21(b)(3).
A. Definitions
Government, Governmental Entity, or Nongovernmental Entity Treated as a 
Governmental Entity
    To lessen the administrative burden on certain entities, the 
proposed definition of ``government or governmental entity'' in Sec.  
1.6050X-1(g)(2) is narrower than the definition provided in proposed 
Sec.  1.162-21(f)(1) because it requires reporting only from certain of 
the governments and governmental entities described in proposed Sec.  
1.162-21(f)(1). Specifically, the government of the United States, a 
State, or the District of Columbia, under proposed Sec.  1.162-
21(f)(1)(i), or a political subdivision, or a corporation or other 
entity serving as an agency or instrumentality, thereof, are each 
treated under the proposed regulations as a government or governmental 
entity that must comply with the information reporting requirements of 
section 6050X and proposed Sec.  1.6050X-1. In addition, a 
nongovernmental entity, under proposed Sec.  1.162-21(f)(2), 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, also must comply with 
the information reporting requirements of section 6050X and proposed 
Sec.  1.6050X-1.
    In contrast, as a result of government-to-government consultation 
with tribal leaders, the Treasury Department and the IRS have 
determined that imposing the reporting requirements of section 6050X 
and proposed Sec.  1.6050X-1 on Indian tribal governments, as defined 
in section 7701(a)(40), subdivisions of Indian tribal governments, as 
determined in accordance with section 7871(d), or a corporation or 
other entity serving as an agency or instrumentality of any Indian 
tribal government would not contribute to the efficient administration 
of the internal revenue laws. Additionally, consistent with general 
principles of comity, the proposed definition of ``government or 
governmental entity'' in Sec.  1.6050X-1(g)(2) excludes foreign 
governments, governments of U.S. territories, or any political 
subdivision, or corporation or other entity serving as an agency or 
instrumentality, thereof.
    Although a particular entity is excluded from the information 
reporting requirements of section 6050X and proposed Sec.  1.6050X-1, 
amounts paid or incurred to all categories of entities described in 
proposed Sec.  1.162-21(f)(1) are subject to the limitations on 
deductibility set forth in proposed Sec.  1.162-21.
Appropriate Official
    Section 6050X(c) defines ``appropriate official'' of a government 
or governmental entity as the officer or employee having control of the 
suit, investigation, or inquiry, or an appropriately designated person. 
Proposed Sec.  1.6050X-1(g)(1) adopts this statutory definition and 
further provides that the appropriate official may instead be the 
officer or employee of the government or governmental entity assigned 
to comply with the information reporting requirements of section 6050X.
    One commenter observed that more than one government or 
governmental entity may be involved in the same order or agreement and 
suggested that the appropriate official be an official from only one 
government or governmental entity. The Treasury Department and the IRS 
agree with this comment generally. To minimize the burden on 
governments or governmental entities from having to report the same 
amount more than once, and to ensure the efficient administration of 
the internal revenue laws, proposed Sec.  1.6050X-1(g)(1)(ii)(A) 
provides a general rule that, 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, for example as the first signatory, on the most recently 
executed order or agreement is responsible for complying with all 
section 6050X information reporting and furnishing requirements. To 
provide governments or governmental entities with greater flexibility, 
proposed Sec.  1.6050X-1(g)(1)(ii)(B) permits the governments or 
governmental entities to appoint one or more other appropriate 
officials to be responsible for complying with the information 
reporting and furnishing requirements. The Treasury Department and the 
IRS request comments about assigning an appropriate official to comply 
with the information reporting and furnishing requirements if more than 
one government or governmental entity are parties to the order or 
agreement.
Payor
    Proposed Sec.  1.6050X-1(g)(4) defines ``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 a law. In 
general, the payor will be the person to which section 162(f) and 
proposed Sec.  1.162-21 apply.
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 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 have determined that a threshold higher 
than $600 is appropriate to address these concerns. Proposed Sec.  
1.6050X-1(g)(5) provides that reporting is required for payment amounts 
equal to or in excess of $50,000 (threshold amount).
    The Treasury Department and the IRS request comments concerning the 
proposed threshold amount in consideration of the anticipated 
compliance burden on filers. In particular, the Treasury Department and 
the IRS request data on the annual number of relevant orders issued, or 
agreements entered into, by governments or governmental entities as 
well as the financial, time, and administrative burdens associated with 
different threshold amounts.
B. Requirement To File Return
    Under proposed Sec.  1.6050X-1(b)(1), the information return filed 
by the government or governmental entity must provide the aggregate 
amount a

[[Page 28530]]

payor is required to pay 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 as a result of the order or agreement, 
and any additional information required by the information return and 
the related instructions.
    Section 6050X(a)(3) requires the information return to be filed at 
the time the agreement is entered into, as determined by the Secretary. 
Commenters observed that it would be burdensome and inefficient to file 
information returns each time an agreement is entered into or an order 
is issued. In order to reduce the reporting burden, several commenters 
suggested that the regulations require annual filing of information 
returns to be made by a specific date in the year following the date 
the agreement is entered into or the order is issued. The Treasury 
Department and the IRS agree with this comment and have adopted it in 
the proposed regulations. Accordingly, the appropriate official of a 
government or governmental entity must comply with the information 
reporting requirement of proposed Sec.  1.6050X-1(a) and (b) by filing 
Form 1098-F, Fines, Penalties, and Other Amounts (or any successor 
form), with Form 1096, Annual Summary and Transmittal of U.S. 
Information Returns, on or before the annual due date as provided in 
proposed Sec.  1.6050X-1(b)(2).
    Several commenters expressed concerns about the information 
reporting requirements with respect to an order or agreement pursuant 
to which payments are made over the course of several years. To 
minimize the burden on governments or governmental entities and to 
ensure the efficient administration of the internal revenue laws, 
proposed Sec.  1.6050X-1 does 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 for the 
aggregate amount identified in the order or agreement.
C. Requirement To Furnish Written Statement
    Proposed Sec.  1.6050X-1(c) requires the appropriate official of a 
government or governmental entity who fulfills the requirement under 
section 6050X(a) and proposed Sec.  1.6050X-1(a)(1) to furnish a 
written statement to each payor with respect to which it is required to 
file an information return under paragraphs (a)(1) and (b) of Sec.  
1.6050X-1. For purposes of tax administration, the requirement to 
``furnish'' written statements requires that those with a reporting 
obligation must provide statements to certain recipients containing the 
information reported to the IRS and, in some cases, additional 
information. Under section 6050X, the payor is the recipient. The 
written statement must include the information that was reported on the 
information return and a legend that identifies the statement as 
important tax information that is being furnished to the IRS. To 
minimize the burden on governments or governmental entities, the 
proposed regulations permit the appropriate official to comply with the 
requirements under section 6050X(b) and proposed Sec.  1.6050X-1(a)(2) 
by furnishing a copy of Form 1098-F to the payor. Regardless of when 
the appropriate official furnishes the statement to the payor, the 
timing of any deduction allowed under proposed Sec.  1.162-21 is 
governed by the general principles of Federal income tax law, as set 
forth in proposed Sec.  1.162-21(d).
D. Due Dates
    Section 6050X(a)(3) provides that the information return shall be 
filed at a time the agreement is entered into, as determined by the 
Secretary. 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 proposed Sec.  1.6050X-1(b)(2), the 
information return must 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, even if all appeals have not been 
exhausted with respect to the suit, agreement, or otherwise.
    The return is due on or before January 31 whether it is filed on 
paper or electronically. Although the due date for filing electronic 
Forms 1098-F under proposed Sec.  1.6050X-1(b)(2) differs from the 
general March 31 due date provided in section 6071(b), which applies 
with respect to electronically filed information returns under sections 
6041 through 6050Y, the specific provisions of section 6050X take 
precedence over the general March 31 due date. To ensure that the payor 
has the information necessary to prepare the payor's income tax return, 
and as directed by section 6050X(b), proposed Sec.  1.6050X-1(c)(3) 
requires the appropriate official to furnish the written statement, 
under proposed Sec.  1.6050X-1(c)(1), on or before the date that the 
appropriate official files the Form 1098-F with the IRS (January 31).
E. Rules for Multiple Payors
    Proposed Sec.  1.6050X-1(d) describes the application of paragraphs 
(a), (b), and (c) of Sec.  1.6050X-1 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, 
proposed Sec.  1.6050X-1(d)(1) requires 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 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.
    Proposed Sec.  1.6050X-1(d)(2) provides that, if an order or 
agreement identifies multiple jointly and severally liable payors, the 
appropriate official must file an information return for each payor 
reporting the aggregate 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.
F. Payment Amount Not Identified
    Some orders or agreements may 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, 
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. Proposed Sec.  1.6050X-1(e) provides that, if the government 
or governmental entity expects, under the facts and circumstances, that 
the amount the payor must pay, plus any other costs the payor will 
incur, 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

[[Page 28531]]

on Form 1098-F. For example, if the United States Environmental 
Protection Agency (EPA) issues an order requiring a payor to come into 
compliance with the underlying legal requirements of the Clean Water 
Act, 33 U.S.C. 1251 et seq., by undertaking work, and the EPA expects, 
under the facts and circumstances, that the payor will incur $50,000 or 
more of costs to come into compliance with the law, the EPA must file 
Form 1098-F and furnish a written statement including this information, 
as directed by the form and form instructions, to the payor.
    The Treasury Department and the IRS request comments about 
reporting of payment amounts that are not identified and the factors 
governments and governmental entities may consider to determine if the 
amounts are expected to equal or exceed the threshold amount.
G. Material Change
    If there is a material change to the terms of an order or 
agreement, as defined in proposed Sec.  1.162-21(e)(2) for which the 
appropriate official has filed an information return, proposed Sec.  
1.6050X-1(f) requires the appropriate official to update the IRS by 
filing a corrected information return, and to furnish an amended 
written statement to the payor, with respect to the entire order or 
agreement, and not just the terms modified. The proposed rules require 
the appropriate official to file the corrected Form 1098-F, on paper or 
electronically, as provided by the General Instructions for Certain 
Information Returns, on or before January 31 of the year following the 
calendar year in which the parties make a material change to the terms 
of the order or agreement. The proposed rules also require the 
appropriate official to furnish an amended written statement to the 
payor on or before the date that the corrected Form 1098-F is filed 
with the IRS.

Proposed Applicability Dates

    The rules of proposed Sec.  1.162-21 are proposed to apply to 
taxable years beginning on or after the date of publication of the 
Treasury decision adopting the rules of proposed Sec.  1.162-21 as 
final regulations in the Federal Register, except that such rules do 
not apply to amounts paid or incurred under any order or agreement 
which became binding under applicable law before such date. Until that 
date, taxpayers may rely on the rules of proposed Sec.  1.162-21, for 
any order or agreement, but only if the taxpayers apply the rules in 
their entirety and in a consistent manner. See section 7805(b)(7). 
Additionally, the rules of proposed Sec.  1.6050X-1 are proposed to 
apply only to orders and agreements that become binding under 
applicable law on or after January 1, 2022.

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. The 
preliminary E.O. 13771 designation is regulatory.
    The proposed regulations have been designated 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. The 
Office of Information and Regulatory Affairs (OIRA) has designated the 
proposed rulemaking as significant under section 1(c) of the Memorandum 
of Agreement. Accordingly, the proposed regulations have been reviewed 
by OMB.
A. Background
    Prior to the TCJA, section 162(f) of the Code disallowed a 
deduction for any fine or similar penalty paid to a government for the 
violation of a 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 a law or the investigation or inquiry by such 
government or entity into the potential violation of a law. Section 
13306(a) also provides certain exceptions to this disallowance. Section 
162(f)(2) 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 with respect 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.
B. Need for the Proposed Regulations
    The Treasury Department and the IRS have 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 Proposed Regulations
    The proposed regulations provide guidance regarding sections 162(f) 
and 6050X. The following analysis provides further detail regarding the 
anticipated impacts of the proposed 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.

[[Page 28532]]

D. Baseline
    The Treasury Department and the IRS have assessed the benefits and 
costs of the proposed regulations relative to a no-action baseline 
reflecting anticipated Federal income tax-related behavior in the 
absence of these proposed regulations.
E. Economic Analysis of the Proposed Regulation
I. Summary of Economic Effects
    The proposed section 162(f) regulations 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 proposed 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 proposed regulations for 
section 162(f) is modest. In addition, while the proposed regulations 
reduce uncertainty for taxpayers, they are unlikely to affect firms' 
economic decision-making because most of the amounts to be paid or 
incurred which are subject to section 162(f) are non-discretionary.
    The proposed 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 
proposed 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 proposed regulations increase the reporting threshold 
from $600 to $50,000, thereby eliminating information reporting 
requirements for an estimated 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. The Treasury Department and the IRS 
acknowledge that limited quantitative data makes estimates of the 
number of affected orders and agreements uncertain, and request 
comments or data that can help improve these estimates.
II. Economic Analysis of Specific Provisions
    The effects of the information reporting requirements are discussed 
in more detail in sections II.A, B, and C. The Treasury Department and 
the IRS solicit comments on the economics of each of the items 
discussed subsequently and of any other items of the proposed 
regulations not discussed in this section. The Treasury Department and 
the IRS particularly solicit comments that provide data, other 
evidence, or models that could enhance the rigor of the process by 
which provisions might be developed for the final regulations.
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 with respect 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 from 
governments and governmental entities concerned about the burden of 
information reporting for smaller payment amounts pursuant to orders or 
agreements, the proposed regulations raise the reporting threshold to 
$50,000. The Treasury Department and the IRS request comments on this 
proposed threshold amount. In particular, data on the annual number of 
orders or agreements by governments or governmental entities would be 
helpful.
    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 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 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 to non-businesses that are not able to deduct business 
expenses so they would be unaffected by any reporting requirement.
---------------------------------------------------------------------------

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

    Increasing the reporting threshold from $600 to $50,000 is unlikely 
to have a significant effect on revenues as 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% of all fines and 
penalties. However, this 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.
    The Treasury Department and the IRS solicit comments on this 
threshold and cost estimates and particularly solicit comments that 
provide data that would enhance the rigor by which the threshold is 
decided for the final regulations.
B. Time of Reporting
    Section 6050X provides that the government or governmental entity 
shall file the information return at the time the order or agreement is 
entered into, as determined by the Secretary. The Treasury Department 
and the IRS received comments from governments and governmental 
entities observing that it would be burdensome and inefficient to file 
information returns each time an order or agreement becomes binding 
under applicable law. Several commenters suggested that

[[Page 28533]]

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 proposed regulations.
    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 proposed 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.
    The Treasury Department and the IRS solicit comments on the timing 
of reporting and particularly solicit comments that provide data 
regarding how timing of reporting affects compliance burdens.
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 proposed 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 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 for governments and 
governmental entities.
D. Summary
    In summary, the proposed section 162(f) regulations and section 
6050X regulations result in modest burden reduction, with the exception 
of the increase in the threshold amount, which is estimated to reduce 
burden by $74 million (2018 dollars) per year. The Treasury Department 
and the IRS projected that the proposed regulations, taken together, 
would have a non-revenue economic effect of less than $100 million 
(2018 dollars) per year. The Treasury Department and the IRS request 
comments on the economic effects of these proposed regulations.

Paperwork Reduction Act

Collection of Information--Form 1098-F

    In general, the collection of information in the proposed 
regulations is required under section 6050X of the Internal Revenue 
Code (the Code). The collection of information in these proposed 
regulations is set forth in proposed Sec.  1.6050X-1. The IRS intends 
that the collection of information pursuant to section 6050X will be 
conducted by way of Form 1098-F, Fines, Penalties, and Other Amounts. 
For purposes of the PRA, the reporting burden associated with the 
collection of information with respect to section 6050X will be 
reflected in the IRS Forms 14029 Paperwork Reduction Act Submission 
associated with Form 1098-F. 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 proposed regulations. In 
addition, when available, drafts of IRS forms are posted for comment at 
www.irs.gov/draftforms.
    The current status of the PRA submissions related to section 6050X 
are provided in the following table.

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

Related New or Revised Tax Forms

----------------------------------------------------------------------------------------------------------------
                                                                      Revision of    No. of respondents  (2018,
                                                   New               existing form           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 issuers. In addition, the increase in the reporting 
threshold under section 6050X will lead to a decrease in the number of 
information returns filed by between 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.

[[Page 28534]]

    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).
    The Treasury Department and the IRS request comments on all aspects 
of these estimates.
    Comments on the collection of information in proposed Sec.  
1.6050X-1(a) should be sent to the Office of Management and Budget, 
Attn: Desk Officer for the Department of the Treasury at 
[email protected] or Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by June 12, 2020.
    Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the duties of the IRS, including whether the 
information will have practical utility (including underlying 
assumptions and methodology);
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    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 proposed 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 proposed 
rulemaking is not expected to have a significant economic impact on a 
substantial number of small entities.
    Pursuant to the RFA, it is hereby certified that these proposed 
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 proposed 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 proposed 
regulations is not likely to be significant. The proposed 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 between 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. The Treasury Department and the IRS request 
comments on the burden associated with filing the annual form.
    Notwithstanding this certification, the Treasury Department and the 
IRS invite comments on any impact this rule would have on small 
entities. Pursuant to section 7805(f) of the Code, this notice of 
proposed rulemaking will be submitted to the Chief Counsel for the 
Office of Advocacy of the Small Business Administration for comment on 
its impact on small entities.
Unfunded Mandates Reform Act
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
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 proposed 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 have engaged in efforts to consult and work cooperatively with 
affected State and local officials in the process of developing the 
proposed rules by participating in a teleconference with the National 
League of Cities on September 27, 2019, and the National Governors 
Association on October 2, 2019. 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

[[Page 28535]]

the requirements of Executive Order 13132.
Executive Order 13175: Consultation and Coordination With Indian Tribal 
Governments
    Executive Order 13175 (entitled Consultation and Coordination with 
Indian Tribal Governments) requires consultation and collaboration with 
tribal officials in the development of Federal policies that may have 
tribal implications. In order to obtain tribal input in accordance with 
Executive Order 13175 and consistent with Treasury's Tribal 
Consultation Policy (80 FR 57434, September 23, 2015), the Treasury 
Department and the IRS held a Tribal Consultation with tribal officials 
on September 12, 2019. The Treasury Department and the IRS will obtain 
additional input on the tribal implications of the proposed rules 
before publishing them as final rules.

Comments and Requests for a Public Hearing

    Before these proposed amendments to the regulations are adopted as 
final regulations, consideration will be given to comments that are 
submitted timely to the IRS as prescribed in the preamble under the 
ADDRESSES section. The Treasury Department and the IRS request comments 
on all aspects of the proposed regulations. Any electronic comments 
submitted, and to the extent practicable any paper comments submitted, 
will be made available at www.regulations.gov or upon request.
    A public hearing will be scheduled if requested in writing by any 
person who timely submits electronic or written comments. Requests for 
a public hearing are also encouraged to be made electronically. If a 
public hearing is scheduled, notice of the date and time for the public 
hearing will be published in the Federal Register. Announcement 2020-4, 
2020-17 IRB 1, provides that until further notice, public hearings 
conducted by the IRS will be held telephonically. Any telephonic 
hearing will be made accessible to people with disabilities.

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.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

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

    Authority: 26 U.S.C. 7805 * * *.

    Section 1.6050X-1 also issued under 26 U.S.C. 6050X(a), (b).
* * * * *
0
Par. 2. Section 1.162-21 is revised to read as follows:


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

    (a) Deduction Disallowed. Except as otherwise provided in this 
section, no deduction is allowed under chapter 1 of the Internal 
Revenue Code (Code) for any amount that is paid or incurred--
    (1) By suit, settlement agreement (agreement), or otherwise;
    (2) To or at the direction of a government or governmental entity, 
as defined in paragraph (f)(1) of this section, or a nongovernmental 
entity, as defined in paragraph (f)(2) of this section; and
    (3) In relation to the violation, or investigation or inquiry into 
the potential violation, of any civil or criminal law.
    (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, 
remediation, or to come into compliance with a law, as defined in 
paragraph (f)(3) 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 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 presumed to be met if an order or agreement specifically 
states that the payment, and the amount of the payment, described in 
paragraph (b)(2)(i) of this section, constitutes restitution, 
remediation, or an amount paid to come into compliance with a law or if 
the order or agreement uses a different form of the required words, 
such as, ``remediate'' or ``comply with a 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. 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 
aggregate amount the taxpayer must pay, the identification requirement 
may be met, with respect to 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.
    (iv) Challenge by the IRS. The IRS may challenge the 
characterization of an amount identified under paragraph (b)(2) of this 
section. To rebut the presumption described in paragraph (b)(2)(ii) of 
this section, the IRS must develop sufficient contrary evidence that 
the amount paid or incurred was not for the purpose identified in the 
order or agreement.
    (3) Establishment requirement--(i) Meeting the establishment 
requirement. The establishment requirement is met if the taxpayer 
substantiates, with documentary evidence, 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, and the date the amount was paid or incurred. 
Meeting the identification requirement of paragraph (b)(2) of this 
section alone 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 a law; documents issued by 
the government or governmental entity relating to the investigation or 
inquiry; documents describing how the amount to be paid

[[Page 28536]]

was determined; and correspondence exchanged between the taxpayer and 
the government or governmental entity before the order or agreement 
became binding under applicable law.
    (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.
    (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 with respect to 
these taxes, paragraph (a) of this section applies to disallow a 
deduction for any interest payments related to the penalties imposed.
    (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 which is otherwise allowed 
under chapter 1 of the Code.
    (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 
account under the rules of section 461 and the related regulations, or 
under a provision specifically applicable to the allowed deduction, 
such as Sec.  1.468B-3(c).
    (2) Tax benefit rule applies. If the deduction allowed under 
paragraphs (b) or (c) of this section results in a tax benefit to the 
taxpayer, the taxpayer must include in income, under sections 61 and 
111, the recovery of any amount deducted in a prior taxable year to the 
extent the prior year's deduction reduced the taxpayer's tax liability.
    (i) A tax benefit to the taxpayer includes a reduction in the 
taxpayer's tax liability for that 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) Material change to order or agreement--(1) In general. If the 
parties to an order or agreement, entered before December 22, 2017, 
make a material change to the terms of that order or agreement on or 
after the applicability date in paragraph (h) of this section, 
paragraph (a) of this section applies to any amounts paid or incurred, 
or any obligation to provide property or services, after the date of 
the material change.
    (2) Material change. A material change to the terms of an order or 
agreement under paragraph (e)(1) of this section may include: Changing 
the nature or purpose of a payment obligation; or changing, adding to, 
or removing a payment obligation, an obligation to provide services, or 
an obligation to provide property. A material change does not include 
changing a payment date or changing the address of a party to the order 
or agreement.
    (f) Definitions. For purposes of section 162(f) and Sec.  1.162-21, 
the following definitions apply:
    (1) Government or governmental entity. A government or governmental 
entity 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 of (i), (ii), or (iii), or a 
corporation or other entity serving as an agency or instrumentality of 
any of paragraph (f)(1)(i)-(f)(iv) of this section.
    (2) Nongovernmental entity treated as a governmental entity. (i) A 
nongovernmental entity described in paragraph (f)(2)(ii) of this 
section is treated as a governmental entity.
    (ii) A nongovernmental entity treated as governmental entity is an 
entity that--
    (A) Exercises self-regulatory powers (including imposing sanctions) 
in connection with a qualified board or exchange (as defined in section 
1256(g)(7)); or
    (B) Exercises self-regulatory powers, including adopting; 
administering; or enforcing laws and imposing sanctions, as part of 
performing an essential governmental function.
    (3) Restitution, remediation of property, and amounts paid to come 
into compliance with a law. (i) An amount is paid or incurred for 
restitution or remediation pursuant to paragraph (b)(1) of this section 
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 a law described in paragraph 
(a)(3) of this section.
    (ii) 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.
    (iii) 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) To reimburse the government or governmental entity for 
investigation costs or litigation costs;
    (B) At the payor's election, in lieu of a fine or penalty;
    (C) As forfeiture or disgorgement; or
    (D) To the extent the payment or contribution does not meet the 
requirements of paragraph (f)(3)(i) or (ii) of this section, to an 
entity; fund, including a restitution, remediation, or other fund; 
group; government or governmental entity.
    (4) Suit, agreement, or otherwise. A 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, 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.
    (g) Examples. The application of this section may be illustrated by 
the following examples.
    (1) Example 1. Identification and establishment requirements--(i) 
Facts. Corp. A enters into an agreement with State Y's environmental 
enforcement agency (Agency) for violating state environmental laws. 
Under the terms of the agreement, Corp. A must pay $40,000 to the 
Agency in civil penalties, $80,000 in restitution for environmental 
harm, $50,000 for remediation of contaminated sites, and $60,000 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

[[Page 28537]]

restitution, remediation, or to come into compliance with a law. If 
Corp. A establishes, as provided in paragraph (b)(3) of this section, 
that the amounts it paid or incurred are for restitution, remediation, 
and to come into compliance with state environmental laws, paragraph 
(a) of this section does not preclude Corp. A from deducting $190,000. 
Under paragraph (a) of this section, Corp. A may not deduct the $40,000 
in civil penalties. Section 162(f) and Sec.  1.162-21(a) will not 
disallow Corp. A's deduction for the $60,000 paid to come into 
compliance with the state environmental laws. However, Corp. A may 
deduct the $60,000 paid only if, under the facts and circumstances, the 
payment would be otherwise deductible under chapter 1 of the Code. 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. Restitution--(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 $100,000 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 $100,000 to B as restitution for 
B's investment loss, incurred as a result of Corp. A's actions. The 
agreement specifically states that the $100,000 payment by Corp. A to B 
is restitution. The agreement also requires Corp. A to pay a $40,000 
fine to the Agency as a result of Corp. A's misconduct.
    (ii) Analysis. Corp. A's $100,000 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, Corp. A may deduct the $100,000 payment. Paragraph (a) of this 
section precludes Corp. A from deducting its payment of $40,000 to the 
Agency because the payment of a fine is not treated as restitution, 
remediation, or as paid to come into compliance with a law.
    (3) Example 3. Amount paid to come into compliance with a law--(i) 
Facts. Corp. B, an accrual method taxpayer, 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 bring certain machinery, already in compliance with 
State X law, up to a standard higher than that which the law requires, 
and to construct a nature center in a local park for the benefit of the 
community. Corp. B presents evidence, as described in paragraph 
(b)(3)(ii) of this section, to substantiate that the expenses Corp. B 
will incur to upgrade the engines will be amounts paid 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 presents invoices to establish that the agreement obligates it to 
incur costs to come into compliance with a law, paragraph (a) of this 
section would not preclude a deduction for the amounts Corp. B incurs 
to come into compliance. However, Corp. B may not deduct the amounts 
paid to bring its machinery up to a higher standard than required by 
State X's law or to construct the nature center because no facts exist 
to establish that either amount was paid to come into compliance with a 
law or as restitution or remediation.
    (4) Example 4. At the direction of a government--(i) Facts. Corp. D 
enters into an agreement with governmental entity, Consumer Board, for 
violating consumer protection laws by failing to provide debt-relief 
services it promised its customers. The agreement requires Corp. D to 
pay $60,000 as restitution to the customers harmed by Corp. D's 
violation of the law.
    (ii) Analysis. At the direction of Consumer Board, Corp. D must pay 
$60,000 to its customers as a result of its violation of the law. The 
agreement identifies the $60,000 as restitution. Provided Corp. D 
establishes, under paragraph (b)(3) of this section, that the $60,000 
constitutes restitution, paragraph (a) does not apply.
    (h) Applicability date. The rules of this section are proposed to 
apply to taxable years beginning on or after the date of publication of 
the Treasury decision adopting these rules as final regulations is 
published in the Federal Register, except that such rules do not apply 
to amounts paid or incurred under any order or agreement that became 
binding under applicable law before such date. Until that date, 
taxpayers may rely on these proposed rules for any order or agreement, 
but only if the taxpayers apply the rules in their entirety and in a 
consistent manner.
0
Par. 3. Add Sec.  1.6050X-1 to read as follows:


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

    (a) Information reporting requirement. The appropriate official (as 
described in paragraph (g)(1) of this section) of a government or 
governmental entity (as described in paragraph (g)(2) of this section) 
or nongovernmental entity treated as a governmental entity (as 
described in paragraph (g)(3) of this section) that is a party to a 
suit, agreement, or otherwise to which section 162(f) and Sec.  1.162-
21(f)(4) apply, must--
    (1) File an information return (as described in paragraph (b) of 
this section) if the aggregate amount the payor (as described in 
paragraph (g)(4) of this section) is required to pay pursuant to all 
court orders (orders) and settlement agreements (agreements), with 
respect to the violation of a law, or the investigation or inquiry into 
the potential violation of a law, equals or exceeds the threshold 
amount provided in paragraph (g)(5) of this section; and
    (2) Furnish a written statement as described in paragraph (c) of 
this section to each payor.
    (b) Requirement to file return--(1) Content of information return. 
The information return must provide the following:
    (i) The aggregate amount required to be paid to, or at the 
direction of, a government or governmental entity as a result of the 
order or agreement;
    (ii) The separate amounts required to be paid as restitution, 
remediation, or to come into compliance with a law, as defined in Sec.  
1.162-21(f)(3), as a result of the order or agreement; and
    (iii) Any additional information required by the information return 
and the related instructions.
    (2) Form, manner, and time of reporting. The appropriate official 
required, under paragraph (a)(1) of this section, to file an 
information return must file Form 1098-F, Fines, Penalties, and Other 
Amounts, (or any successor form), with Form 1096, Annual Summary and 
Transmittal of U.S. Information Returns. The information return must be 
filed with the Internal Revenue Service (IRS) on or before January 31 
of the year following the calendar year in which the order or agreement 
becomes binding under applicable law. The January 31 due date applies 
to both paper and electronically filed information returns.

[[Page 28538]]

    (c) Requirement to furnish written statement--(1) In general. The 
appropriate official must furnish a written statement to each payor 
with respect to 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 with respect 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 with respect to 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 (see Sec.  601.601) or other guidance relating to substitute 
statements.
    (3) Time for furnishing written statement. The appropriate official 
must furnish the written statement to the payor on or before the date 
that the appropriate official files the Form 1098-F with the IRS, as 
provided in paragraph (b)(2) of this section.
    (d) Rules for multiple payors--(1) Multiple payors--individual 
liability. If, pursuant to an order or agreement, the sum of the 
aggregate amount that multiple individually liable payors must pay with 
respect to a violation, investigation, or inquiry equals, or exceeds, 
the threshold amount under paragraph (g)(5) 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 an amount that, in the aggregate, equals or exceeds the 
threshold amount under paragraph (g)(5) 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 the aggregate amount 
required to be paid by all of the payors. 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, as provided by Sec.  1.162-
21(b)(2)(iii), the order or agreement identifies a payment (or the cost 
to provide property or to provide services) as restitution, 
remediation, or an amount paid to come into compliance with a law (as 
defined in Sec.  1.162-21(f)(3)), but does not identify some or all of 
the aggregate amount the payor must pay (or some or all of the 
aggregate cost to provide property or to provide services) and, under 
the facts and circumstances, the government or governmental entity 
expects the amount to equal or exceed the threshold amount under 
paragraph (g)(5) of this section, for purposes of paragraphs (a), (b), 
and (c) of this section, the appropriate 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.
    (f) Material change. If the parties make a material change, as 
described in Sec.  1.162-21(e)(2), to the terms of an order or 
agreement for which an appropriate official has filed Form 1098-F (or 
any successor form), the appropriate official must update the IRS by 
filing a corrected Form 1098-F (or any successor form), as provided by 
the form instructions, with respect to the entire amended order or 
agreement, not just the terms modified. The appropriate official must 
file the corrected Form 1098-F with the IRS on or before January 31 of 
the year following the calendar year in which the parties make a 
material change to the terms of the order or agreement. The appropriate 
official must furnish an amended written statement to the payor on or 
before the date that the appropriate official files the corrected Form 
1098-F with the IRS.
    (g) Definitions. For purposes of this section, the following 
definitions apply--
    (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 paragraphs (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 
paragraphs (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 (g)(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 or governmental entity. For purposes of this 
section, government or governmental entity means--
    (i) The government of the United States, a State, or the District 
of Columbia; or
    (ii) A political subdivision of, or a corporation or other entity 
serving as an agency or instrumentality of any of paragraph (g)(2)(i) 
of this section.
    (3) Nongovernmental entity treated as governmental entity. For 
purposes of this section, the definition of nongovernmental entity set 
forth in Sec.  1.162-21(f)(2) applies.
    (4) Payor. The payor is the person (as defined in section 
7701(a)(1)) who, 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 a law. In general, the payor will 
be the person to which section 162(f) and Sec.  1.162-21 of the 
regulations apply.
    (5) Threshold amount. The threshold amount is $50,000.
    (h) Applicability date. The rules of this section are proposed to 
apply only to orders and agreements that become

[[Page 28539]]

binding under applicable law on or after January 1, 2022.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-08649 Filed 5-12-20; 8:45 am]
BILLING CODE P