These synopses are intended only as aids to the reader in
Agency decision
Ask Donna
What actually matters in this document.
Text
HIGHLIGHTS
OF THIS ISSUE
Bulletin No. 2021–6
February 8, 2021
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
ADMINISTRATIVE
Notice 2021-6, page 822.
Notice 2021-6 waives the requirement to file and furnish
certain 1099 series forms relating to specified grants, payments, subsidies and loan forgiveness excludible from income under various COVID-19 relief acts. The notice does
not waive information reporting requirements to file and furnish Forms 1098 and 1098-T with respect to those amounts.
ADMINISTRATIVE; EMPLOYMENT TAX
Notice 2021-11, page 827.
Notice 2021-11 modifies Notice 2020-65 by providing additional tax relief to taxpayers affected by the Coronavirus Disease (COVID-19) emergency, pursuant to the Consolidated
Appropriations Act, 2021. Notice 2020-65, issued on August
28, 2020, gave employers the option to defer the employee
portion of Social Security taxes (for employees whose wages
are below a certain amount) from September 1, 2020, to December 31, 2020. Any taxes deferred under Notice 2020-65
were to be withheld and paid ratably from employee wages
between January 1, 2021, until April 30, 2021. However, the
Consolidated Appropriations Act, 2021, signed into law December 27, 2020, extended the period that the deferred taxes are to be withheld and paid ratably. The period is now for
the entire year − from January 1, 2021, through December
31, 2021. Penalties, interest and additions to tax will now
start to apply on January 1, 2022, for any unpaid balances.
Notice 2021-11 makes changes to Notice 2020-65 to reflect
this extended period.
INCOME TAX
Notice 2021-12, page 828.
This notice extends the temporary relief from certain requirements under § 42 for qualified low-income housing projects
and under §§ 142(d) and 147(d) for qualified residential rentFinding Lists begin on page ii.
al projects that was provided in Notice 2020-53, 2020-30
I.R.B. 151 in response to the continuing Coronavirus Disease
2019 (COVID-19) pandemic. This notice also provides relief
for additional § 42 requirements not previously addressed in
Notice 2020-53.
Rev. Proc. 2021-11, page 833.
This Revenue Procedure provides methods for calculating
W-2 wages for purposes of section 199A(g)(1)(B)(i), which,
for certain specified agricultural or horticultural cooperatives
provides a limitation based on W-2 wages to the amount of
a deduction under section 199A(g)(1)(A) of 9 percent of the
lesser of qualified production activities income or taxable income of a Specified Cooperative. This Revenue Procedure
also modifies Revenue Procedure 2019-11, 2019-09 I.R.B.
742, to amend the method for determining W-2 wages for
taxpayers with short taxable years.
Rev. Rul. 2021-4, page 724.
Federal rates; adjusted federal rates; adjusted federal longterm rate, and the long-term tax exempt rate. For purposes
of sections 382, 1274, 1288, 7872 and other sections of
the Code, tables set forth the rates for February 2021.
T.D. 9946, page 726.
The final regulations provide guidance on section 162(f) of
the Internal Revenue Code (Code), as amended in 2017, concerning the deduction of certain fines, penalties, and other
amounts. The final regulations also provide guidance relating
to the information reporting requirements under new section
6050X of the Code with respect to those fines, penalties,
and other amounts.
T.D. 9947, page 748.
These final regulations provide guidance to cooperatives to
which sections 1381 through 1388 of the Internal Revenue
Code (Code) apply (Cooperatives) and their patrons regarding the deduction provided by section 199A(a) of the Code
for qualified business income (QBI), as well as guidance to
specified agricultural or horticultural cooperatives (Specified
Cooperatives) and their patrons regarding the deduction provided by section 199A(g) of the Code for eligible domestic
production activities undertaken by Specified Cooperatives.
These final regulations also provide guidance on section
199A(b)(7), the statutory rule requiring patrons of Specified
Cooperatives to reduce their QBI deduction under section
199A(a). In addition, these final regulations include a definition of patronage and nonpatronage sourced items under
section 1388 of the Code, and revise existing regulations
under section 1382 of the Code to reference this definition.
Finally, these final regulations remove the final and temporary
regulations under former section 199. These final regulations
affect Cooperatives as well as patrons that are individuals,
partnerships, S corporations, trusts, and estates engaged in
domestic trades or businesses.
INCOME TAX; ADMINISTRATIVE
T.D. 9948, page 801.
Notice 2021-13, page 832.
This document contains final regulations relating to the excise
taxes imposed on certain amounts paid for transportation of
persons and property by air. Specifically, the final regulations
relate to the exemption for amounts paid for certain aircraft
management services. The final regulations also amend, revise, redesignate, and remove provisions of existing regulations that are out-of-date or obsolete and generally update
the existing regulations to incorporate statutory changes,
case law, and other published guidance. The final regulations
affect persons that provide air transportation of persons and
property, and persons that pay for those services.
Notice 2021-8, page 823.
Notice 2021-8 provides a waiver of an amount of the
addition to tax under § 6654 for underpayment of estimated income tax by individual taxpayers, where the
underpayment is attributable to the amendment to §
461(l)(1)(B) made by the CARES Act. The relief, which
is not automatic, applies only for the purpose of calculating installments of estimated income tax of an affected individual taxpayer that were due on or before July
15, 2020, with respect to the taxable year that began
during 2019.
This notice provides partnerships with relief from certain
penalties due to the inclusion of incorrect information in reporting their partners’ beginning capital account balances on
the 2020 Schedules K-1 (Form 1065) and the 2020 Schedules K-1 (Form 8865) as outlined in the 2020 Instructions for
Form 1065, U.S. Return of Partnership Income. This notice
also provides relief from accuracy-related penalties for any
taxable year for the portion of an imputed underpayment attributable to the inclusion of incorrect information in a partner’s beginning capital account balance reported by a partnership for the 2020 taxable year.
The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative
Rulings. Bank Secrecy Act Administrative Rulings are issued
by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
February 8, 2021
Bulletin No. 2021–6
Part I
Section 1274.—
Determination of Issue
Price in the Case of Certain
Debt Instruments Issued for
Property
(Also Sections 42, 280G, 382, 467, 468, 482, 483,
1288, 7520, 7872.)
Rev. Rul. 2021-4
This revenue ruling provides various
prescribed rates for federal income tax
AFR
110% AFR
120% AFR
130% AFR
AFR
110% AFR
120% AFR
130% AFR
150% AFR
175% AFR
AFR
110% AFR
120% AFR
130% AFR
Short-term adjusted AFR
Mid-term adjusted AFR
Long-term adjusted AFR
February 8, 2021
purposes for February 2021 (the current month). Table 1 contains the shortterm, mid-term, and long-term applicable federal rates (AFR) for the current
month for purposes of section 1274(d)
of the Internal Revenue Code. Table 2
contains the short-term, mid-term, and
long-term adjusted applicable federal
rates (adjusted AFR) for the current
month for purposes of section 1288(b).
Table 3 sets forth the adjusted federal long-term rate and the long-term
tax-exempt rate described in section
382(f). Table 4 contains the appropri-
ate percentages for determining the
low-income housing credit described in
section 42(b)(1) for buildings placed in
service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service
after July 30, 2008, shall not be less
than 9%. Finally, Table 5 contains the
federal rate for determining the present
value of an annuity, an interest for life
or for a term of years, or a remainder or
a reversionary interest for purposes of
section 7520.
REV. RUL. 2021-4 TABLE 1
Applicable Federal Rates (AFR) for February 2021
Period for Compounding
Annual
Semiannual
Quarterly
Short-term
0.12%
0.12%
0.12%
0.13%
0.13%
0.13%
0.14%
0.14%
0.14%
0.16%
0.16%
0.16%
Mid-term
0.56%
0.56%
0.56%
0.62%
0.62%
0.62%
0.67%
0.67%
0.67%
0.73%
0.73%
0.73%
0.84%
0.84%
0.84%
0.98%
0.98%
0.98%
Long-term
1.46%
1.45%
1.45%
1.61%
1.60%
1.60%
1.75%
1.74%
1.74%
1.90%
1.89%
1.89%
Annual
0.09%
0.43%
1.10%
REV. RUL. 2021-4 TABLE 2
Adjusted AFR for February 2021
Period for Compounding
Semiannual
0.09%
0.43%
1.10%
724
Quarterly
0.09%
0.43%
1.10%
Monthly
0.12%
0.13%
0.14%
0.16%
0.56%
0.62%
0.67%
0.73%
0.84%
0.98%
1.45%
1.59%
1.73%
1.88%
Monthly
0.09%
0.43%
1.10%
Bulletin No. 2021–6
REV. RUL. 2021-4 TABLE 3
Rates Under Section 382 for February 2021
Adjusted federal long-term rate for the current month
Long-term tax-exempt rate for ownership changes during the current month (the highest of
the adjusted federal long-term rates for the current month and the prior two months.)
1.10%
1.10%
REV. RUL. 2021-4 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for February 2021
Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July
30, 2008, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income housing credit
7.23%
Appropriate percentage for the 30% present value low-income housing credit
3.10%
REV. RUL. 2021-4 TABLE 5
Rate Under Section 7520 for February 2021
Applicable federal rate for determining the present value of an annuity, an interest for life or a
term of years, or a remainder or reversionary interest
Section 42.—Low-Income
Housing Credit
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
February 2021. See Rev. Rul. 2021-4,page 724.
Section 280G.—Golden
Parachute Payments
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
February 2021. See Rev. Rul. 2021-4,page 724.
Section 382.—Limitation
on Net Operating Loss
Carryforwards and
Certain Built-In Losses
Following Ownership
Change
The adjusted applicable federal long-term rate
is set forth for the month of February 2021. See
Rev. Rul. 2021-4,page 724.
Section 467.—Certain
Payments for the Use of
Property or Services
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
February 2021. See Rev. Rul. 2021-4,page 724.
Section 468.—Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The applicable federal short-term rates are set
forth for the month of February 2021. See Rev. Rul.
2021-4,page 724.
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
February 2021. See Rev. Rul. 2021-4,page 724.
.6%
Section 483.—Interest on
Certain Deferred Payments
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
February 2021. See Rev. Rul. 2021-4,page 724.
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of
February 2021. See Rev. Rul. 2021-4,page 724.
Section 7520.—Valuation
Tables
The applicable federal mid-term rates are set
forth for the month of February 2021. See Rev. Rul.
2021-4,page 724.
Section 7872.—Treatment
of Loans With BelowMarket Interest Rates
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
February 2021. See Rev. Rul. 2021-4,page 724.
Bulletin No. 2021–6
725
February 8, 2021
26 CFR 1.162-21; 26 CFR 1.6050X-1
T.D. 9946
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Denial of Deduction for
Certain Fines, Penalties,
and Other Amounts;
Related Information
Reporting Requirements
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations providing guidance on section 162(f) of the Internal Revenue Code
(Code), as amended in 2017, concerning
the deduction of certain fines, penalties,
and other amounts. This document also
contains final regulations providing guidance relating to the information reporting
requirements under new section 6050X of
the Code with respect to those fines, penalties, and other amounts. The final regulations affect taxpayers that pay or incur
amounts to, or at the direction of, governments, governmental entities or certain
nongovernmental entities treated as governmental entities relating to the violation
of any law or investigations or inquiries
by such governments, governmental entities, or nongovernmental entities into the
potential violation of any law. The final
regulations also affect governments, governmental entities, and nongovernmental
entities subject to the related reporting requirements.
DATES: Effective date: These regulations
are effective on January 14, 2021.
Applicability dates: For dates of applicability, see §§1.162-21(g) and 1.6050X-1(g).
FOR FURTHER INFORMATION CONTACT: Concerning the regulations on
amended section 162(f), Sharon Y. Horn
February 8, 2021
(202) 317-4426; concerning the information reporting requirement, Nancy L.
Rose (202) 317-5147. The phone numbers
above may also be reached by individuals
who are deaf or hard of hearing, or who
have speech disabilities, through the Federal Relay Service toll-free at (800) 8778339.
SUPPLEMENTARY INFORMATION:
Background
Prior to its amendment in 2017, section 162(f) disallowed an ordinary and
necessary business expense deduction under section 162(a) for any fine or similar
penalty paid to a government for the violation of any law. On February 20, 1975, the
Treasury Department and the IRS issued
final regulations under the prior version
of section 162(f) (TD 7345, 40 FR 7437),
which were amended on July 11, 1975
(TD. 7366, 40 FR 29290) (together the
1975 regulations).
Section 162(f) was amended by section 13306(a) of Public Law No. 115-97,
131 Stat. 2054 (2017), commonly referred
to as the Tax Cuts and Jobs Act (TCJA).
Section 6050X was added to the Code by
section 13306(b) of the TCJA.
As amended by the TCJA, the general rule of section 162(f)(1) provides that
no deduction otherwise allowable under
chapter 1 of the Code (chapter 1) shall be
allowed for any amount paid or incurred
(whether by suit, agreement, or otherwise)
to, or at the direction of, a government or
governmental entity in relation to the violation of any law or the investigation or inquiry by such government or governmental entity into the potential violation of any
law. Section 162(f)(5) describes certain
self-regulating nongovernmental entities
that are treated as governmental entities
for purposes of section 162(f). As used
in this preamble, the term “governmental
entities” includes nongovernmental entities treated as governmental entities under
section 162(f)(5).
Section 162(f)(2) provides an exception to the general disallowance rule in
section 162(f)(1) for certain amounts
paid or incurred for restitution, remediation, or to come into compliance with
a law. Under section 162(f)(2)(A)(i) and
(ii), section 162(f)(1) does not apply to
726
amounts that (i) the taxpayer establishes were paid or incurred as restitution
(including remediation of property) or
to come into compliance with a law (establishment requirement), and (ii) are
identified in a court order (order) or settlement agreement (agreement) as restitution, remediation, or amounts paid or
incurred to come into compliance with
a law (identification requirement). Section 162(f)(2)(B) provides that amounts
paid for restitution, remediation, and to
come into compliance with a law do not
include any amount paid or incurred as
reimbursement to a government or governmental entity for the costs of any investigation or litigation.
Section 162(f)(3) provides an exception to the general rule for amounts paid or
incurred related to private party suits and
section 162(f)(4) provides an exception
for certain taxes due.
Section 6050X(a)(1) and 6050X(a)
(2)(A) requires the appropriate official
of any government or governmental entity involved in a suit or agreement described in section 6050X(a)(2)(A)(i) to
file an information return if the aggregate
amount involved in all orders or agreements with respect to the violation, investigation, or inquiry is $600 or more.
Section 6050X(a)(2)(B) authorizes the
Secretary of the Treasury or his delegate (Secretary) to adjust the threshold
amount for filing the information return as necessary to ensure the efficient
administration of the internal revenue
laws. Pursuant to section 6050X(a)(1),
the information return must set forth (1)
the amount required to be paid as a result of the order or agreement to which
section 162(f)(1) applies; (2) any amount
required to be paid as a result of the order
or agreement that constitutes restitution
or remediation of property; and (3) any
amount required to be paid as a result of
the order or agreement for the purpose of
coming into compliance with a law that
was violated or involved in the investigation or inquiry.
Section 6050X(a)(3) provides that the
government or governmental entity shall
file the information return at the time the
agreement is entered into, as determined
by the Secretary. Section 6050X(b) requires the government or governmental
entity to furnish to each person who is a
Bulletin No. 2021–6
party to the suit or agreement a written
statement, at the time the information return is filed with the IRS, that includes
(1) the name of the government or entity
and (2) the information submitted to the
IRS.
Under section 13306(a)(2) and (b)
(3) of the TCJA, the amendments to section 162(f) and new section 6050X apply
to amounts paid or incurred on or after
December 22, 2017, the date of enactment
of the TCJA. However, they do not apply
to amounts paid or incurred under any
binding order issued or agreement entered
into, before December 22, 2017, and, if
such order or agreement requires court approval, the required approval is obtained
before December 22, 2017.
On May 13, 2020, the Internal Revenue
Service published a notice of proposed
rulemaking (REG-104591-18) in the Federal Register (85 FR 28524) providing
guidance on the deduction disallowance
rules in section 162(f) and the associated
reporting requirements in section 6050X.
No public hearing on the proposed regulations was requested and accordingly no
public hearing was held.
The Treasury Department and the IRS
received written comments in response
to the proposed regulations. All comments were considered and are available
at www.regulations.gov or upon request.
After full consideration of the comments
received on the proposed regulations,
this Treasury decision adopts the proposed regulations with modifications in
response to such comments as described
in the Summary of Comments and Explanation of Revisions.
Summary of Comments and
Explanation of Revisions
Most of the comments addressing the
proposed regulations are summarized in
this Summary of Comments and Explanation of Revisions. However, comments
merely summarizing or interpreting the
proposed regulations, recommending statutory revisions, or addressing issues that
are outside the scope of the final regulations are not discussed.
Part I of this Summary of Comments and Explanation of Revisions addresses §1.162-21 and Part II addresses
§1.6050X-1.
Bulletin No. 2021–6
I. Denial of Deduction for Certain Fines,
Penalties, and Other Amounts
A. General rule
The proposed regulations revise
§1.162-21 and provide operational and
definitional guidance concerning the application of section 162(f), as amended
by the TCJA. The proposed regulations
provide generally that a taxpayer may not
take a deduction under any provision of
chapter 1 for amounts (1) paid or incurred
by suit, agreement, or otherwise; (2) to, or
at the direction of, a government or governmental entity; (3) in relation to the violation, or investigation or inquiry into the
potential violation, of any civil or criminal law. The proposed regulations also
describe an exception to the general rule,
under section 162(f)(2), which allows a
deduction for certain amounts identified
in the order or agreement as restitution,
remediation, or paid or incurred to come
into compliance with a law and the taxpayer establishes that the amount was paid
or incurred for the purpose identified.
The final regulations provide generally that a taxpayer may not take a deduction under any provision of chapter 1
for amounts (1) paid or incurred by suit,
agreement, or otherwise; (2) to, or at the
direction of, a government or governmental entity; (3) in relation to the violation,
or investigation or inquiry by such government or governmental entity into the
potential violation, of any civil or criminal
law. This general rule applies whether or
not the taxpayer admits guilt or liability
or pays the amount imposed for any other
reason, including to avoid the expense or
uncertain outcome of an investigation or
litigation. An admission of guilt or liability is not necessary because section 162(f)
(1) contemplates a broader disallowance,
as demonstrated by the disallowance of
any amount paid or incurred, to, or at the
direction of, a government or governmental entity in relation to the “investigation
or inquiry” into the “potential violation of
any law.”
1. Suit, agreement, or otherwise
Under the proposed regulations, suit,
agreement, or otherwise includes, but is
not limited to, settlement agreements;
727
non-prosecution agreements; deferred
prosecution agreements; judicial proceedings; administrative adjudications;
decisions issued by officials, committees,
commissions, or boards of a government
or governmental entity; and any legal actions or hearings in which a liability for
the taxpayer is determined or pursuant to
which the taxpayer assumes liability.
Commenters asked that the final regulations exclude administrative and certain
other categories of proceedings from the
definition of suit, agreement, or otherwise.
The final regulations do not adopt this recommendation because the statute’s use of
the phrase “suit, agreement, or otherwise”
indicates that Congress intended for section 162(f)(1) to apply broadly to both formal legal proceedings as well as other less
formal proceedings.
The preamble to the proposed regulations under section 6050X explains
that an order or agreement is treated as
binding under applicable law even if all
appeals have not been exhausted with respect to the suit, agreement, or otherwise.
A commenter recommended that the final
regulations provide that the same meaning
applies for the term “binding” order or
agreement under section 162(f). The final
regulations generally adopt this recommendation.
2. To, or at the direction of, a government
or governmental entity
One commenter asked for clarification
that, if a deduction is otherwise allowable
under chapter 1, section 162(f)(1) does not
disallow a deduction for amounts paid for
the taxpayer’s own legal fees and related
expenses incurred in defending a prosecution or other action or proceeding, including an investigation or inquiry into a
potential violation of any law. Legal fees
and other expenses, such as stenographic
and printing charges, paid or incurred in
the defense of a prosecution or civil action arising from a violation of any law, or
an investigation or inquiry into a potential
violation of any law, are not amounts paid
or incurred to, or at the direction of, a government or governmental entity. Thus it is
clear that section 162(f)(1) does not disallow a deduction for such amounts, and
there is no need to clarify this rule in final
regulations.
February 8, 2021
The proposed regulations provide a
definition of “government or governmental entity.” The definition in the final regulations has been reorganized to provide
a definition of a government in §1.16221(e)(1) and to provide a definition of a
“governmental entity” in §1.162-21(e)(2).
The definitions are based on the definition
in the proposed regulations but clarify that
a political subdivision of a government includes a local government unit. No comments were received on the definition of
“government or governmental entity” in
the proposed regulations.
The proposed regulations define a
nongovernmental entity treated as a governmental entity as an entity that exercises self-regulatory powers (including
imposing sanctions) in connection with a
qualified board or exchange, as defined in
section 1256(g)(7), or exercises self-regulatory powers, including adopting, administering, or enforcing laws and imposing
sanctions, as part of performing an essential governmental function. The final regulations revise the definition to clarify that
self-regulatory powers include enforcing
rules, not laws. A commenter recommended that the definition of “essential governmental function” under section 115 should
apply to section 162(f)(5). The final regulations do not adopt this recommendation
because section 115 does not define the
term “essential governmental function.”
The final regulations clarify that a governmental entity includes a nongovernmental
entity treated as a governmental entity.
3. Violation of any law
Commenters asked that the final regulations provide a definition of a “violation
of any law.” The final regulations do not
adopt this recommendation because they
are intended to provide broad rules of
general application based on the underlying principles of section 162(f) rather than
narrow rules with limited application. The
final regulations provide several examples to illustrate the application of section 162(f) to violations of any law.
Commenters also requested clarification that “technical violations” of any
law, such as vendor overcharge errors
remedied in the ordinary course of business, are not violations of any law. The
commenters did not further define what
February 8, 2021
constitutes a “technical violation.” Without a more comprehensive definition, the
commenters’ requests may be inconsistent
with the general rule in the final regulations. Therefore, the final regulations do
not adopt this comment.
Commenters recommended that the final regulations clarify that the phrase “in
relation to the violation of any law or the investigation or inquiry by such government
or [governmental] entity into the potential
violation of any law” do not apply to a government or governmental entity enforcing
its legal rights, including defending against
claims, as a private party. The Treasury Department and the IRS agree that, in general,
unless a government contracting or similar
statute provides otherwise, a government’s
recovery of vendor overcharge errors are in
the nature of private party recoveries and
not payments made to, or at the direction
of, a government or governmental entity
in relation to the violation of any law or
the investigation or inquiry into the potential violation of any law. Similarly, as discussed with respect to private party suits in
Part I.B.6 of this Summary of Comments
and Explanation of Revisions, a violation
of any law does not include any order or
agreement in a suit in which a government
or governmental entity enforces rights as a
private party.
Commenters asked the Treasury Department and the IRS how section 162(f)
applies to amounts paid or incurred pursuant to certain statutes that contain
provisions that may apply without any
finding of a violation of law, such as the
Comprehensive Environmental Response,
Compensation, and Liability Act of 1980
(CERCLA). CERCLA contains cleanup
requirements and reimbursement provisions that generally apply even though
there has been no violation of law. CERCLA also contains penalty provisions for
specific violations of law. Although section 162(f) and the final regulations generally will not apply to CERCLA cleanup requirements and reimbursements required
to be paid or incurred by provisions that
apply without any violation of law, section 162(f) and the final regulations will
apply to penalties required to be paid or
incurred for violations of law, including
penalties required to be paid or incurred
by reason of a violation of specific CERCLA provisions.
728
4. Investigation or inquiry into the
potential violation of any law
The Treasury Department and the IRS
received several requests for additional
guidance concerning “the investigation or
inquiry by [a] government or [governmental] entity into the potential violation of
any law.” Commenters requested that the
final regulations: (1) provide that an investigation or inquiry by such government
into the potential violation of any law does
not include a routine investigation, inquiry, audit, review, or inspection; (2) clarify when a routine investigation, inquiry,
audit, review, or inspection ends and a
non-routine investigation or inquiry begins; (3) clarify whether payments related
to an investigation or inquiry are deductible if the investigation or inquiry ends
without a finding of a violation of any law;
and (4) provide examples of routine investigations, inquiries, audits, reviews, or
inspections that are not non-routine investigations or inquiries. In addition, some of
the commenters requested guidance that is
unique to an industry or a statute.
The Treasury Department and the IRS
agree that, in general, section 162(f)(1)
does not disallow a deduction for amounts
paid or incurred in connection with investigations or inquiries of regulated businesses or industries conducted in the ordinary course of business if the payment
is otherwise deductible as an ordinary and
necessary business expense. Accordingly,
the final regulations provide, in general,
that amounts paid or incurred for routine
investigations or inquiries, such as audits
or inspections, required to ensure compliance with rules and regulations applicable
to the business or industry, which are not
related to any evidence of wrongdoing or
suspected wrongdoing, are not amounts
paid or incurred relating to the potential violation of any law. Therefore, section 162(f)(1) will not apply to disallow
an otherwise deductible ordinary and necessary business expense for amounts paid
or incurred for these routine investigations
or inquiries. Examples to illustrate the application of this rule are provided in the
final regulations.
In contrast, section 162(f)(1) explicitly disallows a deduction for amounts paid
or incurred for an investigation or inquiry
by the government or governmental entity
Bulletin No. 2021–6
relating to the potential violation of any
law. Therefore, the final regulations do
not adopt the commenters’ recommendation that section 162(f)(1) does not apply
to amounts paid or incurred where, at the
conclusion of the investigation or inquiry,
there is no finding of wrongdoing, because
the recommendation is inconsistent with
section 162(f)(1).
The final regulations clarify that the investigation or inquiry must be one that is
conducted by the government or governmental entity. Examples to illustrate the
application of this rule are provided in the
final regulations.
5. Fine or penalty
The proposed regulations disallow a
deduction for payments made, at the taxpayer’s election, in lieu of a fine or penalty. No comments were received regarding
this provision and it is retained in the final
regulations. One commenter asked that
the final regulations adopt a definition for
“fine or penalty,” and expressly state that
both are not deductible. Although the final regulations do not provide a definition
of “fine or penalty,” they provide that an
amount that is paid or incurred in relation
to the violation of any civil or criminal
law includes a fine or penalty.
B. Exception to general rule
Section 162(f)(2) provides an exception to the general disallowance rule for
certain amounts identified in the order or
agreement as, and established by the taxpayer to be, paid or incurred for restitution
or remediation, or to come into compliance with a law. The final regulations provide definitions and other guidance on the
operation of this exception.
1. Restitution and remediation
a. General
The proposed regulations provide that
an amount is paid or incurred for restitution or remediation if it restores, in whole
or in part, the person, as defined in section 7701(a)(1); the government; the
governmental entity; or property harmed
by the violation or potential violation of
any law. Commenters requested clarifi-
Bulletin No. 2021–6
cation as to what comprises restitution or
remediation and requested modifications
to the proposed definitions. A commenter
recommended that the final regulations
distinguish between civil and criminal
restitution and disallow the deduction for
amounts paid as criminal restitution. The
final regulations do not adopt this rule
because section 162(f)(2) does not distinguish between civil and criminal restitution and applies to “restitution (including
remediation of property) for damage or
harm which was or may be caused by the
violation of any law or the potential violation of any law.” Emphasis added. Nonetheless, it may be harder for a taxpayer to
establish that an amount paid is restitution
in the criminal context because of the punitive purpose underlying most criminal
liability.
b. Restitution or remediation of the
environment
One commenter asked whether the
definition of “property” for which restitution or remediation may be provided
includes the environment. Another commenter noted that restitution or remediation cannot redress irreparable harms to
the environment or natural resources, such
as, killing wildlife or destroying a species
or an ecosystem caused by the violation
of any law. The commenter recommended
that the final regulations provide a special
restitution and remediation rule to address
amounts paid or incurred for irreparable
harm to the environment, natural resources, or wildlife. The Treasury Department
and the IRS agree, provided the identification and establishment requirements are
met and the restitution or remediation has
a strong nexus or connection to the harm
to the environment, natural resources, or
wildlife that the taxpayer has caused or is
alleged to have caused. The final regulations revise the definition of “restitution,
remediation of property, and amounts
paid to come into compliance with a law”
to clarify that, if otherwise deductible
under chapter 1, an amount is paid or incurred for restitution or remediation of the
environment, wildlife, or natural resources if it is paid or incurred for the purpose
of conserving soil, air, or water resources,
protecting or restoring the environment
or an ecosystem, improving forests, or
729
providing a habitat for fish, wildlife, or
plants, and has the requisite nexus with
the harm that the taxpayer has caused or
is alleged to have caused. Such amounts
may include payments described in
§1.162-21(e)(4)(A), to be used exclusively for the restitution or remediation of a
harm to the environment, wildlife, or natural resources that the taxpayer has caused
or is alleged to have caused or paid to a
segregated fund or account established by,
or at the direction of, the government or
governmental entity for the restitution or
remediation of harm to the environment,
wildlife, or natural resources that the taxpayer has caused or is alleged to have
caused, provided, pursuant to the order or
agreement, the amounts are not disbursed
to the general account of the government
or governmental entity for general enforcement efforts or other discretionary
purposes.
c. Disgorgement or forfeiture
Under the proposed regulations, the
section 162(f)(2) exception to the general
deduction disallowance rule does not apply to forfeiture or disgorgement. Therefore, the proposed regulations treat any
amount paid or incurred as forfeiture or
disgorgement as, per se, disallowed under
section 162(f)(1). To support excluding
disgorgement from the definition of restitution, remediation, or amounts paid to
come into compliance with a law, the preamble to the proposed regulations quotes
Kokesh v. Securities and Exchange Commission, 137 S. Ct. 1635, 1643 (2017)
(“‘[t]he primary purpose of disgorgement
orders is to deter violations of the securities laws by depriving violators of their
ill-gotten gains’”). In Kokesh, the Supreme
Court determined that disgorgement,
when imposed as a sanction for violating
a Federal securities law, constitutes a penalty under the related five-year statute of
limitations because disgorgement is imposed to deter violations of securities laws
by depriving violators of their ill-gotten
gains and because the funds are dispersed
to the United States Treasury to redress a
wrong to the public at large caused by the
violation. Kokesh, 137 S. Ct. at 1642-44.
However, in Kokesh, the Supreme Court
recognized that disgorgement may serve
a compensatory purpose as well (“wrong
February 8, 2021
sought to be redressed is . . . a wrong to
the individual;” “[s]ome disgorged funds
are paid to victims”). Id.
To support excluding forfeiture from
the definition of restitution, remediation,
or amounts paid to come into compliance
with a law, the preamble to the proposed
regulations quotes Nacchio v. United
States, 824 F.3d 1370, 1379 (Fed. Cir.
2016) (“‘[w]hile restitution seeks to make
victims whole by reimbursing them for
their losses, forfeiture is meant to punish
the defendant by transferring his ill-gotten
gains to the United States Department of
Justice.’”) In Nacchio, the United States
Court of Appeals for the Federal Circuit
disallowed the taxpayer’s deduction for
the amount of mandatory forfeiture pursuant to a criminal conviction for insider
trading, even though the government, in
its discretion, subsequently used the forfeited funds to compensate victims.
Several commenters asked the Treasury Department and the IRS to reconsider the rule in the proposed regulations,
which excludes disgorgement and forfeiture from the definition of “restitution,
remediation, and coming into compliance.” One commenter explained the exclusion is contrary to the expressed intent
of Congress because the statute provides
an exception to the disallowance rule of
section 162(f)(1) for restitution and that,
in Kokesh, the Supreme Court stated,
“[g]enerally, disgorgement is a form of
‘[r]estitution measured by the defendant’s
wrongful gain.’” Kokesh, 137 S. Ct. at
1640. Commenters noted that, in Liu v. Securities and Exchange Commission, 140
S. Ct. 1936 (2020), which was decided after the publication of the proposed regulations, the Supreme Court recognized that,
amounts paid through disgorgement that
do not exceed the wrongdoer’s net profits and that are awarded to individual victims may constitute an equitable remedy.
Commenters also noted that, in Liu, the
Supreme Court expressly declined to answer whether under Kokesh disgorgement
necessarily constitutes a penalty. Liu, 140
S. Ct. at 1946.
In consideration of the comments submitted with respect to disgorgement and
the Supreme Court’s decision in Liu, the
final regulations will not treat disgorgement of net profits as, per se, nondeductible under section 162(f)(1). Instead, tax-
February 8, 2021
payer’s claim for a deduction for amounts
paid or incurred through disgorgement
will not be disallowed if the amount is
otherwise deductible under chapter 1; the
order or agreement identifies the payment,
not in excess of net profits, as restitution,
remediation, or an amount paid to come
into compliance with a law; the taxpayer establishes that the amount was paid
as restitution, remediation, or an amount
paid to come into compliance with a law;
and the origin of the taxpayer’s liability is
restitution, remediation, or an amount paid
to come into compliance with a law. However, amounts paid or incurred through
disgorgement will be disallowed if, pursuant to the order or agreement, the amounts
are disbursed to the general account of the
government or governmental entity for
general enforcement efforts or other discretionary purposes. The final regulations
provide an example to illustrate the application of section 162(f) to disgorgement.
Commenters also requested that the
Treasury Department and the IRS reconsider the rule in the proposed regulations
that excludes forfeiture from the definition of “restitution, remediation, and
coming into compliance,” but did not address forfeiture independently from their
discussion of disgorgement. Virtually all
states have some form of asset recovery
legislation and the United States Code
contains many forfeiture provisions. Because the final regulations cannot provide
specific rules about the application of section 162(f) to every asset recovery statute,
the final regulations will not treat forfeiture of net profits as, per se, nondeductible
under section 162(f)(1). Instead, taxpayer’s claim for a deduction for an amount
paid or incurred through forfeiture will
not be disallowed if the amount is otherwise deductible under chapter 1; the order
or agreement identifies the payment, not
in excess of net profits, as restitution, remediation, or an amount paid to come into
compliance with a law; the taxpayer establishes that the amount was paid as restitution, remediation, or an amount paid to
come into compliance with a law; and the
origin of the taxpayer’s liability is restitution, remediation, or an amount paid to
come into compliance with a law. However, amounts paid or incurred through
forfeiture will be disallowed if, pursuant
to the order or agreement, the amounts
730
are disbursed to the general account of the
government or governmental entity for
general enforcement efforts or other discretionary purposes. The final regulations
provide an example to illustrate the application of section 162(f) to forfeiture.
d. Payment to a fund
Under the proposed regulations, restitution, remediation, and amounts paid to
come into compliance with a law do not
include any amount paid or incurred to an
entity; to a fund, including a restitution,
remediation, or other fund; to a group;
or to a government or governmental entity, to the extent it was not harmed by
the taxpayer’s violation or potential violation of a law. Commenters asked that
the Treasury Department and the IRS reconsider this rule. In consideration of the
comments, the final regulations remove
the per se exclusion. However, the final
regulations provide that restitution and
remediation do not include amounts paid
or incurred pursuant to an order or agreement to the general account or treasury of
the government or governmental entity
for general enforcement efforts or other
discretionary purposes or amounts paid or
incurred that do not meet the requirements
of §1.162-21(e)(4)(i). In addition, the final
regulations provide that if amounts paid or
incurred pursuant to an order or agreement
to an entity, fund, group, or government or
governmental entity are subsequently returned to the taxpayer, the taxpayer will
be required to include those amounts in
income under the tax benefit rule.
Several commenters noted that restitution funds may not be exhausted if, for
example, there are unclaimed amounts or
when less than the entire fund is required
to be used to make harmed parties whole.
One commenter recommended that the
final regulations provide an example to
illustrate that when unclaimed amounts
revert to a government or governmental
entity’s general account the nature of those
amounts does not change as long as it was
reasonably expected, at the time the taxpayer made the payment to the fund, that
the amount would be used for restitution
payments to harmed parties. Although the
final regulations do not provide this example, the Treasury Department and the IRS
generally agree that, if the order or agree-
Bulletin No. 2021–6
ment identifies the payment to a fund,
described in §1.162-21(e)(4)(A) or (e)(4)
(B), as restitution or remediation, and the
taxpayer establishes that it made the payment to a fund for the purpose identified,
for example, by providing the canceled
check making the payment to the fund,
a deduction will not be disallowed if, after the taxpayer makes the payment, the
amount paid to the fund is not used for the
purpose identified as long as the amount
does not revert to the taxpayer or for the
benefit of the taxpayer.
2. Coming into compliance with a law
The proposed regulations provide that
an amount is paid or incurred to come into
compliance with a law by performing specific services, taking a specific corrective
action, providing specific property, or a
combination thereof. The final regulations
also list amounts that will not be treated as
paid or incurred to come into compliance
with a law. The final regulations clarify
that the services performed, actions taken, and the provision of property must be
done to come into compliance with the
law that has been violated, or potentially
violated.
One commenter requested that the final regulations treat amounts paid or incurred pursuant to an order or agreement
to upgrade equipment or property to a
higher standard than required by law as
coming into compliance with a law. The
final regulations modify an example in
the proposed regulations to clarify that if
an order or agreement requires a taxpayer to come into compliance with a law
and the taxpayer elects to upgrade equipment or property to a higher than required
standard, any amount paid or incurred in
excess of the amount paid or incurred to
come into compliance with a law will not
be disallowed by section 162(f)(1) or the
related final regulations because it is not
an amount paid or incurred to, or at the
direction of, a government or governmental entity in relation to the violation of any
law or the investigation or inquiry into the
potential violation of any law.
Another commenter requested that the
final regulations define the class of services and actions that qualify as having
been made to come into compliance with a
law under section 162(f)(2)(A)(i)(II). The
Bulletin No. 2021–6
final regulations do not adopt this recommendation because they are intended to
provide broad rules of general application
based on the underlying principles of section 162(f) rather than narrow rules with
limited application that risk excluding certain services or actions. The commenter
also suggested that the government or governmental entity not be required to verify
the accuracy of the amount expended by a
taxpayer to perform the activities to come
into compliance. The regulations do not
require the government or governmental
entity to verify the accuracy of the amount
expended by a taxpayer to perform the activities to come into compliance.
3. Identification requirement
Section 162(f)(2)(A)(ii) requires an
order or agreement to identify an amount
paid or incurred as restitution, remediation, or to come into compliance with a
law. Under the proposed regulations, an
order or agreement identifies a payment
by stating the nature of, or purpose for,
each payment each taxpayer is obligated
to pay and the amount of each payment
identified.
To satisfy the identification requirement, the proposed regulations require the
order or agreement to specifically state the
amount of the payment and that the payment constitutes restitution, remediation,
or an amount paid to come into compliance with a law. The proposed rule provides that the identification requirement
may be met if the order or agreement uses
a different form of the requisite words,
such as “remediate” or “comply with a
law.”
The Treasury Department and the IRS
received several recommendations and
requests for clarification regarding how
orders or agreements may meet the identification requirement when the payment
amount is not identified. One commenter
suggested that, if the total amount to be
paid is known at the time the agreement
is entered into or the order is issued, the
order or agreement must identify separately the amount to be paid as restitution,
remediation, or to come into compliance
with a law in order to meet the identification requirement. In contrast, several other commenters asked whether the
identification requirement may be met if
731
the order or agreement identifies the total
payment as restitution, remediation, or
paid to come into compliance with a law
without allocating the payment amount
among “restitution,” “remediation,” and
“coming into compliance.” Some commenters expressed the concern that it may
not be possible to satisfy the identification
requirement in an order or agreement that
imposes lump-sum judgments or settlements, involves multiple taxpayers, or
multiple damage awards, because the order or agreement may not segregate the
amounts to be paid as restitution, remediation, or to come into compliance with
a law from the disallowed amounts, or
allocate the payments among the multiple
taxpayers.
The final regulations do not adopt a
rule that a total payment amount must
be allocated in an order or agreement
among “restitution,” “remediation,” and/
or “coming into compliance” in order to
meet the identification requirement under
section 162(f)(2)(A)(ii) because it could
be burdensome on governments and
governmental entities and taxpayers and
would be difficult for the IRS to administer. Instead, the final regulations modify
the proposed rule for payment amounts
not identified so that it applies to orders
or agreements that impose lump-sum
payment judgments for “restitution, remediation, and coming into compliance,”
or that involve multiple taxpayers or
multiple damage awards. The payment
amount not identified rule provides that
the identification requirement may be
met even if the order or agreement does
not allocate the total lump-sum payment
amount or multiple damage award among
restitution, remediation, or to come into
compliance, or allocate the total payment
among multiple taxpayers. The final regulations also clarify that the identification requirement may be met even if the
order or agreement does not provide an
estimated payment amount.
Several commenters asked for clarification about how a taxpayer may meet
the identification requirement. Consistent with section 162(f)(2)(A)(ii), the final regulations provide that the order or
agreement, not the taxpayer, must meet
the identification requirement with language specifically stating, or describing,
that the amount will be paid or incurred
February 8, 2021
as restitution, remediation, or to come into
compliance with a law.
Under the proposed regulations, the
identification requirement is presumed
to be met if an order or agreement specifically states that the payment, and
the amount of the payment, constitutes
restitution, remediation, or an amount
paid to come into compliance with a
law. Commenters requested that the final regulations adopt a more permissive
rule pursuant to which the identification
requirement is presumed to be met if
the order or agreement uses words other
than “restitution,” “remediation” or “remediate,” and “come into compliance,”
or “comply.” In addition, a commenter
also asked for a more permissive rule if
an order or agreement is in a foreign language. The final regulations provide that
the identification requirement is met, not
presumed to be met, if the order or agreement specifically states that the payment
constitutes restitution, remediation, or
an amount paid to come into compliance
with a law. In response to the comments,
the final regulations also provide a similar result if the order or agreement uses
a different form of the required words,
such as, “remediate” or “comply with a
law.” An order or agreement in a foreign
language may meet the identification
requirement if the taxpayer provides a
complete and accurate certified English
translation of the order or agreement
that describes the nature and purpose of
the payment using the foreign language
equivalent of restitution, remediation, or
coming into compliance with the law.
An order or agreement will also meet
the identification requirement, despite not
using the words “restitution,” “remediation,” “remediate,” “come into compliance,” or “comply,” if the nature and purpose of the payment, as described in the
order or agreement, are clearly and unambiguously to restore the injured party or
property or to correct the non-compliance.
The final regulations provide that an order
or agreement will also meet the identification requirement if the order or agreement
describes the damage done, harm suffered,
or manner of noncompliance with a law,
and describes the action required of the
taxpayer to (1) restore, in whole or in part,
the party, property, environment, wildlife,
or natural resources harmed, injured, or
February 8, 2021
damaged by the violation or potential violation of that law or (2) to perform services, take action, provide property, or
do any combination thereof to come into
compliance with that law.
The proposed regulations provide
that the IRS may challenge an order or
agreement’s identification of the payment
amount as restitution, remediation, or
made to come into compliance with a law
for the purposes of meeting the identification requirement. One commenter recommended that a substantive challenge to
the characterization of a payment would
more appropriately fit under the establishment requirement, rather than under the
identification requirement. To address this
comment, the identification requirement
in the final regulations does not include a
rebuttable presumption.
4. Establishment requirement
Section 162(f)(2)(A)(i) requires that
a taxpayer establish that an amount was
paid as restitution or remediation, or that
the amount was paid to come into compliance with a law. The proposed regulations
provide that the taxpayer may satisfy the
establishment requirement by providing
documentary evidence (1) that the taxpayer was legally obligated to pay the
amount the order or agreement identified
as restitution, remediation, or to come into
compliance with a law; (2) of the amount
paid or incurred; and (3) of the date on
which the amount was paid or incurred.
A commenter recommended that the final
regulations clarify what the taxpayer must
prove to meet the establishment requirement. The commenter also advised that it
would be more appropriate for the IRS to
challenge the characterization of the payment amount as restitution, remediation,
or made to come into compliance with a
law under the establishment requirement
rather than under the identification requirement. The final regulations clarify
that the establishment requirement is met
if the documentary evidence submitted
by the taxpayer proves that the taxpayer
was legally obligated to pay the amount
identified in the order or agreement as restitution, remediation, or to come into compliance with a law and that it was paid or
incurred for the nature and purpose identified.
732
If the order or agreement identifies a
lump-sum payment or a multiple damage
award that includes some combination
of restitution, remediation, and coming
into compliance with a law, the taxpayer
must establish the exact amount paid or
incurred for each purpose. Likewise, if an
order or agreement involves multiple taxpayers, each taxpayer must establish the
amount that taxpayer paid or incurred as
restitution, remediation, or to come into
compliance.
The proposed regulations provided
a non-exhaustive list of documents that
taxpayers may use to satisfy the establishment requirement. Commenters requested
that the final regulations include additional examples of such documents. The final
regulations expand the list of documentary evidence that may be used to meet the
establishment requirement. The taxpayer
may be able to use documentary evidence
in a foreign language to satisfy the establishment requirement if the taxpayer provides a complete and accurate certified
English translation of the documentary
evidence.
5. Information return may not satisfy
the identification requirement or the
establishment requirement
The proposed regulations provide
that reporting of the amount by a government or governmental entity under section 6050X does not satisfy the
identification requirement or the establishment requirement. A commenter
requested that the final regulations provide that a government or governmental
entity’s submission of an information
return under section 6050X can satisfy the identification requirement under section 162(f)(2)(A)(ii) and/or the
establishment requirement under section 162(f)(2)(A)(i). The final regulations do not adopt this recommendation.
The reporting requirement imposed by
section 6050X is for tax administration
purposes and does not serve as documentation that the taxpayer has met the
identification requirement or the establishment requirement. Therefore, the
taxpayer may not use the information
reported on the Form 1098-F to satisfy
the identification requirement or the establishment requirement.
Bulletin No. 2021–6
6. Private party suit
Under section 162(f)(3), the general rule
that disallows a deduction does not apply
to any amount paid or incurred pursuant to
an order in a suit in which no government
or governmental entity is a party. Like the
proposed regulations, the final regulations
clarify that section 162(f)(1) does not apply
to any amount paid or incurred by reason of
any order or agreement in a suit in which
no government or governmental entity is a
party. A commenter asked for clarification
in the final regulations that section 162(f)
(1) does not apply to any amount paid or incurred by reason of any order or agreement
in a suit in which a government or governmental entity enforces rights as a private
party. For example, payments pursuant to
contract disputes that are not due to fraud
or other potentially illegal activity wherein
the government or governmental entity enforces its rights as a private party contracting for goods and/or services, and not in its
enforcement, regulatory, or administrative
capacity, generally are not payments made
at the direction of a government or governmental entity. The final regulations generally adopt this recommendation. An example
has been provided in the final regulations to
illustrate the application of this rule.
A commenter asked for clarification
about the application of section 162(f) to
qui tam cases brought by private citizens
on behalf of a government or governmental
entity. The final regulations do not adopt
a single rule concerning qui tam cases,
but certain principles apply to determine
whether a deduction for the amounts paid
or incurred will be allowed. In general, a
government or governmental entity is the
real party in interest in the suit and receives
any funds paid pursuant to the order or
agreement, including any share ultimately
paid by the government or governmental
entity to the relator, whether or not the government or governmental entity intervenes
in the suit. Accordingly, any amount paid
or incurred to a government or governmental entity as a result of the suit will likely be
disallowed unless an exception to section
162(f)(1) applies.
7. Pre and postjudgment interest
A commenter asked whether section 162(f)(1) disallows a deduction for
Bulletin No. 2021–6
prejudgment and postjudgment interest.
Section 162(f)(1) applies to prejudgment
interest paid or incurred to, or at the direction of, a government or governmental entity for the violation of any law
or for the investigation or inquiry into
a violation or potential violation of any
law. However, a deduction for prejudgment interest will not be disallowed if
the prejudgment interest is identified as a
component of the total amount identified
in the order or agreement as restitution
and the taxpayer establishes that it was
paid for this purpose. In general, section 162(f)(1) applies to postjudgment
interest on amounts to be paid or incurred
to, or at the direction of, a government or
governmental entity for the violation of
any law or investigation or inquiry into
a potential violation of any law. However, if postjudgment interest is paid on an
amount to which an exception under section 162(f)(2) applies, the exception also
applies to that postjudgment interest.
8. Failure to pay tax and related interest
and penalties
The proposed regulations provide
that section 162(f)(1) does not apply to
amounts paid or incurred as otherwise
deductible taxes or related interest. In
accordance with section 162(f)(2)(A)
(iii), the final regulations provide that, in
the case of any amount paid or incurred
as restitution for failure to pay any tax
imposed under Title 26, section 162(f)
(1) does not disallow a deduction for an
amount equal to or less than the amount
otherwise allowed under chapter 1 if the
tax had been timely paid. For example,
section 162(f)(1) does not disallow a deduction of an amount paid or incurred
as restitution for failure to pay a tax imposed under Title 26 of the Code, such
as certain excise or employment taxes
otherwise deductible under chapter 1.
However, a deduction for amounts paid
or incurred as restitution for failure to
pay a Federal income tax is disallowed
because Federal income taxes are not
otherwise deductible under chapter 1. See
section 275(a)(1).
The Treasury Department and the IRS
received several comments about the application of section 162(f) to federal, state,
and local taxes, and any related interest
733
and penalties. Under the proposed regulations, if penalties are imposed with respect
to otherwise deductible taxes, a taxpayer may not deduct the interest paid with
respect to such penalties. A commenter
requested clarification that the taxpayer
also may not deduct the penalties. The
Treasury Department and the IRS agree
and the final regulations are revised accordingly to provide that if penalties are
imposed with respect to otherwise deductible taxes, a taxpayer may not deduct the
penalties or the interest paid with respect
to such penalties.
9. Material change
The proposed regulations contained a
material change rule under which some
orders issued, or agreements entered,
before December 22, 2017, were subject
to section 162(f)(1) as amended by the
TCJA. Several commenters considered
the definition of “material change” in the
proposed regulations as “overly broad,”
and suggested it could cause unnecessary
administrative disputes and discourage
taxpayers from negotiating with governments or governmental entities to clarify the terms of an order or agreement,
resulting in increased litigation and
burdening taxpayers, governments and
governmental entities, and courts. One
commenter argued that section 13306(a)
(2) of the TCJA (the transition rule for
section 162(f)) precludes adopting a material change rule for any binding orders
issued or agreements entered into before
December 22, 2017. The commenter
recommended that the final regulations
provide that the amendment to section 162(f) applies only to orders issued
or agreements entered into after December 22, 2017.
In response to this comment, the Treasury Department and the IRS have determined that section 162(f), as amended by
TCJA, does not apply to any pre-December 22, 2017 binding order or agreement
even if modified on or after December
22, 2017. In addition, material changes to
an order or agreement will generally result in a new order or agreement subject
to section 162(f). For these reasons, the
final regulations do not include the material change rule included in the proposed
regulations.
February 8, 2021
II. Reporting Information for Certain
Fines, Penalties, and Other Amounts
A. General rule
The purpose of the regulations under
section 6050X is to provide appropriate
officials of governments or governmental entities the operational, administrative, and definitional rules for complying
with the statutory information reporting
requirements for suits or agreements to
which section 6050X(a)(1) applies.
In general, under the final regulations, if the aggregate amount a payor is
required to pay pursuant to an order or
agreement for a violation, investigation,
or inquiry to which section 6050X(a)(1)
and (a)(2) applies equals or exceeds the
threshold amount, the appropriate official
of a government or governmental entity
that is a party to the order or agreement
must file an information return with the
IRS regarding certain amounts paid or incurred pursuant to the order or agreement,
the payor’s taxpayer identification number (TIN), and other information required
by the information return and the related
instructions. The appropriate official of a
government or governmental entity that is
a party to the order or agreement must also
furnish a written statement with the same
information to the payor.
1. Government, governmental entity,
or nongovernmental entity treated as a
governmental entity
The proposed regulations provided a
definition of “government or governmental entity.” No comments were received on
the definition of “government or governmental entity” in the proposed regulations.
The definition in the final regulations has
been reorganized to provide a definition
of a government in §1.6050X-(f)(2) and
to provide a definition of a “governmental
entity” in §1.162-21(f)(3). The definitions
are based on the definition in the proposed
regulations but clarify that a political subdivision of a government includes a local
government unit. The final regulations
also clarify that a governmental entity includes a nongovernmental entity treated
as a governmental entity.
The proposed regulations under section 6050X incorporate the definition of a
February 8, 2021
“nongovernmental entity” in the proposed
regulations under section 162(f). The final regulations clarify that, for purposes
of the information reporting requirements
in section 6050X, a nongovernmental entity treated as a governmental entity does
not include a nongovernmental entity of
a territory of the United States, including
American Samoa, Guam, the Northern
Mariana Islands, Puerto Rico, or the U.S.
Virgin Islands, a foreign country, or an Indian tribe.
The proposed regulations provided that
the information reporting is required for a
“suit, agreement, or otherwise” pursuant
to section 162(f)(1). A commenter noted
that this rule is inconsistent with the statutory language of section 6050X, which
only concerns a “suit or agreement.” The
final regulations clarify that a government
or governmental entity involved in a suit
or agreement to which section 6050X(a)
(2) applies must file an information return
for payment amounts described in section 6050X(a)(1).
Another commenter recommended that
the final regulations clarify that a suit or
agreement is treated as binding under applicable law even if all appeals have not
been exhausted. The final regulations generally adopt this recommendation.
tion reporting requirement should apply
only for civil, not criminal, cases. A third
commenter recommended that the final
regulations provide that the information
reporting requirement applies only to payors involved in a trade or business and not
to individual payors.
The final regulations do not adopt these
recommendations because they are inconsistent with section 6050X. Section 6050X
does not carve out an exception for criminal cases; individuals, including those not
in a trade or business; and tax-exempt organizations.
The final regulations require the appropriate official to include the TIN of
the payor on the information return filed
regarding the payor. Commenters asked
how the appropriate official of a government or governmental entity may secure
a payor’s TIN. If the appropriate official
does not already have the payor’s TIN, the
appropriate official must request the TIN.
The TIN may be requested in any manner.
The appropriate official must notify the
payor that the law requires the payor to
furnish a TIN for inclusion on the information return and that failure to furnish
the TIN may subject the payor to a penalty under section 6723. The payor may
provide the TIN in any manner including
orally, in writing, or electronically. If the
payor furnishes the TIN in writing, no particular form is required.
3. Payor
4. Threshold amount
The final regulations define “payor” as
the person, as defined in section 7701(a)
(1), which, pursuant to an order or agreement, has paid or incurred, or is liable to
pay or incur, an amount to, or at the direction of, the government or governmental
entity in relation to the violation or potential violation of any law. In general,
the payor will be the person to which section 162(f) and §1.162-21 apply.
One commenter recommended that the
final regulations provide that governments
and governmental entities do not have a
reporting requirement, and do not need to
furnish a written statement, pursuant to
section 6050X for the amounts described
in section 6050X(a)(1) that tax-exempt,
non-profit payors are required to pay. Another commenter recommended that the
final regulations provide that the informa-
Section 6050X(a)(2)(B) provides the
Secretary with the authority to adjust the
statutory reporting threshold of $600 as
necessary to ensure the efficient administration of the internal revenue laws.
Based on comments received prior to the
publication of the proposed regulations
from governments and governmental
entities concerned about the burden of
information reporting and to ensure the
efficient administration of the internal
revenue laws, the Treasury Department
and the IRS determined that a threshold
higher than $600 was appropriate to address these concerns. The proposed regulations provided that reporting is required
if the aggregate amount of all orders and
agreements for the violation, investigation, or inquiry equals or exceeds $50,000
(threshold amount). Anticipating possible
2. Suit or agreement
734
Bulletin No. 2021–6
compliance burdens on filers, the Treasury
Department and the IRS requested comments about the proposed $50,000 threshold. In particular, the Treasury Department and the IRS requested data on the
annual number of relevant orders issued,
or agreements entered, by governments or
governmental entities and the financial,
time, and administrative burdens associated with different threshold amounts. After
publication of the proposed regulations,
the Treasury Department and the IRS received several requests from governments
and governmental entities to raise the proposed $50,000 threshold amount, but none
of the comments provided data to support
those requests. As a result, the final regulations maintain the proposed threshold
amount and provide that reporting is required for payment amounts equal to or in
excess of $50,000.
Commenters described several situations in which the government or governmental entity may be uncertain about
its reporting obligation because it is not
clear that the suit or agreement requires
the payor to make payments described in
section 6050X(a)(1) that equal or exceed
the threshold amount. In one situation,
the order or agreement described in section 6050X(a)(1) requires the payor to
make several payments for a violation,
investigation, or inquiry, each described
in section 6050X(a)(2) and each for less
than the threshold amount, but the aggregate amount of all payments pursuant to
the order or agreement equals or exceeds
the threshold amount. In another situation,
an order or agreement involving more
than one violation, investigation, or inquiry, each described in section 6050X(a)(2),
requires the payor to make several payments, each described in section 6050X(a)
(1), and each for less than the threshold
amount, but the aggregate amount of all
payments pursuant to the order or agreement equals or exceeds the threshold
amount.
The commenter recommended that,
in these two situations, the final regulations should treat each payment amount
separately to determine if the aggregate
amount involved in the order or agreement equals or exceeds the threshold
amount. The final regulations do not
provide rules for every circumstance to
which section 6050X(a)(2)(A)(ii) could
Bulletin No. 2021–6
apply. Form 1098-F and its instructions
will contain additional guidance regarding the threshold amount.
Another commenter described a situation in which, pursuant to separate orders
or agreements, the payor is required to pay
separate amounts, all less than the threshold amount, for multiple acts or omissions
in violation of the same law but the aggregate amount of the payments to be made
pursuant to all orders and agreements
equals or exceeds the threshold amount.
The commenter requested that, in this situation, the final regulations treat each order
and agreement separately. This situation is
addressed by section 6050X(a)(2)(A)(ii),
which provides that the government or
governmental entity must file an information return for a suit or agreement if “the
aggregate amount involved in all court
orders and agreements with respect to the
violation, investigation, or inquiry” equals
or exceeds the threshold amount. Therefore, the final regulations do not adopt the
rule proposed by the commenter. The final
regulations also provide that in this situation, the appropriate official must file only
one information return for all amounts the
payor is required to pay pursuant to these
orders or agreements.
5. Requirement to file return
The appropriate official of a government or governmental entity must
comply with the information reporting
requirements of section 6050X and the
related regulations by filing Form 1098F, Fines, Penalties, and Other Amounts,
or any successor form, as provided by
the instructions, with Form 1096, Annual
Summary and Transmittal of U.S. Information Returns, on or before the annual
due date as provided in the final regulations. Under the final regulations, the information return filed by the government
or governmental entity with the IRS must
provide the amount a payor is required to
pay, pursuant to section 6050X(a)(1)(A)
and §1.6050X-1(b)(1)(i), as a result of the
order or agreement, the separate amounts
required to be paid as restitution, remediation, or to come into compliance with a
law, pursuant to section 6050X(a)(1)(B)
and (a)(1)(C) and §1.6050X-1(b)(1)(ii), as
a result of the order or agreement, the payor’s TIN, and any additional information
735
required by the information return and the
related instructions.
The Treasury Department and the IRS
received comments requesting that the
final rules require information reporting
only for amounts paid directly to a government or governmental entity. A commenter also requested final rules pursuant
to which the government or governmental
entity could provide the reporting information to the payor and require the payor to file the information return. None
of these suggestions were adopted in the
final regulations because they are inconsistent with the explicit language of section 6050X.
A commenter inquired whether the
government or governmental entity reports the payment amount identified in the
order or agreement, or only the amount
the payor ultimately pays. Another commenter recommended that the reporting requirement apply only to payment
amounts described in sections 162(f)(1)
and 6050X(a)(1)(A) that are actually collected by governments and governmental
entities. Section 6050X(a)(1) mandates
reporting for “the amount required to be
paid as a result of the suit or agreement”
for a violation of any law, or an investigation or inquiry into the potential violation
of any law, as well as for restitution, remediation, and to come into compliance with
a law. Therefore, the final regulations do
not adopt the commenter’s recommendation. Instead, the final regulations clarify
that governments and governmental entities have a reporting obligation for the
amounts, described in section 6050X(a)
(1) and §1.6050X-1(b)(1)(i) and (ii), required to be paid pursuant to the order or
agreement.
A commenter inquired whether the
IRS would consider using website reporting instead of requiring reporting on
a form. Section 6050X prescribes reporting that is more suitable on a form. Furthermore, section 6050X(b) also requires
governments and governmental entities
to furnish written statements to payors.
Thus, even if the final regulations permitted governments and governmental
entities to report information to the IRS
via a website, they would still need to provide a written statement to payors, which
could not be accomplished by a website.
To minimize the burden on governments
February 8, 2021
or governmental entities, the final regulations permit the appropriate official to
comply with the requirements to furnish
written statements to payors via the Form
1098-F or another document that contains
the required information if the document
conforms to applicable guidance relating
to substitute statements.
A commenter expressed concerns
about the information reporting requirements resulting from an order or agreement, pursuant to which payments are
made over the course of several years.
To minimize the burden on governments
and governmental entities and to ensure
the efficient administration of the internal revenue laws, the final regulations do
not require an appropriate official to file
information returns for each taxable year
in which a payor makes a payment pursuant to a single order or agreement. Instead,
the appropriate official must file only one
information return to report the amounts
required by section 6050X(a)(1).
Some commenters inquired about the
application of the reporting obligation to
governments and governmental entities
for specific types of administrative and
certain other categories of proceedings.
The final regulations do not address the
application of the reporting obligation to
specific statutes or types of proceedings
because the final regulations are intended
to provide broad rules of general application based on the underlying principles of
sections 162(f) and 6050X rather than narrow rules with limited application that risk
excluding a certain “violation of any law
or the investigation or inquiry . . . into the
potential violation of any law.”
One commenter observed that the payors and the governments and governmental entities may have incentives to enter
into an agreement concerning the filing of
information returns such that payors may
improperly attempt to claim deductions to
which they are not entitled and governments and governmental entities do not
have to incur the burden of filing information returns and furnishing written statements. The commenter recommended that
the final regulations treat any agreements
between payors and governments or governmental entities not to file information
returns as invalid and unenforceable. The
final regulations do not adopt this recommendation because section 162(f) applies
February 8, 2021
to the taxpayer regardless of whether the
appropriate official files an information
return with the IRS.
6. Due dates
Section 6050X(a)(3) provides that the
information return shall be filed at the
time the agreement is entered into, as
determined by the Secretary, not at the
time of payment, as recommended by a
commenter. Further, section 6050X(b)
requires the written statement to be furnished to the payor at the same time the
information return is filed with the IRS.
Under the proposed regulations, the information return was required to be filed
on or before January 31 of the year following the calendar year in which the order or agreement becomes binding under
applicable law.
A commenter requested that appropriate officials of governments and governmental entities be given more time to
comply with the requirement. As requested, the final regulations provide, pursuant to section 6071(a), that information
returns filed with the IRS on paper are
due on or before February 28 of the year
following the calendar year in which the
order or agreement becomes binding under applicable law. In accordance with
section 6071(b), information returns filed
electronically are due on or before March
31 of such year. However, to increase the
likelihood that payors have the information necessary to timely prepare their income tax returns and to avoid burdening
governments and governmental entities
with having to determine the tax year of
each payor, the final regulations require
the appropriate official to furnish the written statement on or before January 31 of
such year.
7. Rules for multiple payors
The final regulations describe the application of the information reporting
requirements if, pursuant to the order or
agreement, the aggregate amount multiple payors are required to pay, or the costs
to provide the property or the service,
equals or exceeds the threshold amount.
If, pursuant to the order or agreement,
more than one payor is individually liable
for some or all of the payment amount,
736
the final regulations require the appropriate official to file an information return
for the separate amount that each individually liable payor is required to pay,
even if a payor’s payment liability is less
than the threshold amount, and to furnish
a written statement containing this information to each payor. If more than one
person, as defined in section 7701(a)(1),
is a party to an order or agreement, there
is no information reporting requirement,
or requirement to furnish a written statement, with respect to any person who
does not have a payment obligation or
obligation for costs to provide services or
to provide property.
The final regulations provide that, if
an order or agreement identifies multiple
jointly and severally liable payors, the appropriate official must file an information
return for each payor to report the information required by §1.6050X-1(b)(1)(i)
and (ii) on the amount to be paid by all
jointly and severally liable payors. The
appropriate official must furnish a written
statement containing this information to
each of those payors, regardless of which
payor makes the payment.
A commenter wrote that the rules requiring reporting would be challenging to
implement when multiple payors are required to make payments. However, under
section 6050X(a)(1)(3), the appropriate
official has an obligation to file an information return when an order or agreement
becomes binding, not when the payments
are made, so there is no need for governments or governmental entities to track
the receipt of payments in order to comply with section 6050X or the related final
regulations.
Another commenter recommended that
the payment obligation of each payor be
examined separately to determine whether
the amount each payor is required to pay,
or the costs to provide the property or the
service, equals or exceeds the threshold
amount. However, in the case of joint and
several liability, each payor is responsible
for the entire amount, which requires reporting of, and furnishing a statement to,
each payor. In the case where a payor is
individually liable for an amount below
the threshold amount, the payor may still
attempt to deduct some or all of the payment amount all of the payors are required
to pay, so filing an information return for
Bulletin No. 2021–6
each of the payor’s liabilities is useful for
tax administration.
One commenter asked for clarification
that the government or governmental entity is not obligated to file an information
return with the IRS if, after an order or
agreement has become binding under applicable law, the payor pursues another
party for contribution. Because any payment the payor receives from another party in a subsequent proceeding will not be
subject to section 162(f), the government
or governmental entity will not have an
obligation to file an information return for
any payment made by the other party.
8. Payment amount not identified
Commenters expressed concern that it
is difficult for governments and governmental entities to estimate the payment
amount pursuant to the order or agreement, and whether the aggregate amount
equals or exceeds the information reporting threshold, when the order or agreement
does not specify an amount. The Treasury
Department and the IRS agree, which is
why the regulations do not require governments or governmental entities to estimate
payment amounts. Accordingly, if some or
all of the payment amount is not identified
in the order or agreement, the regulations
direct governments and governmental entities to the instructions to Form 1098-F,
or any successor form.
Some orders or agreements may
identify a payment described in section 6050X(a)(1)(A) and identify a payment or an obligation to provide property or to provide services, as restitution,
remediation, or an amount paid to come
into compliance with a law, as described
in section 6050X(a)(1)(B), but not identify some or all of the payment amounts the
payor must pay, or some or all of the cost
to provide property or services. The final
regulations provide that, if the government
or governmental entity reasonably expects
that the aggregate amount the payor must
pay, and the costs the payor will pay or
incur to provide services or to provide
property, pursuant to the order or agreement, will equal or exceed the threshold
amount, the appropriate official of such
government or governmental entity must
file an information return on Form 1098F, or any successor form, as provided in
Bulletin No. 2021–6
the instructions to the Form 1098-F, and
furnish a written statement to the payor
with the information supplied to the IRS
on Form 1098-F.
Similarly, a commenter noted that
some orders or agreements may require
a payor to make payments described in
section 6050X(a)(1) for which reporting is required and other payments for
which reporting is not required under section 6050X. The commenter recommended that if it is not clear for which payment
amount the government or governmental
entity has a reporting requirement, the
rule under the proposed regulations for
a payment amount not identified should
apply. The Treasury Department and the
IRS generally agree with this recommendation. Therefore, if, under the circumstances described by the commenter, the
government or governmental entity reasonably expects that the aggregate amount
the payor must pay, and the costs the
payor must pay to provide services or to
provide property, will equal or exceed the
threshold amount, the appropriate official
of such government or governmental entity must file an information return.
9. Material change
Under the proposed regulations, if
there was a material change to the terms
of an order or agreement for which an
appropriate official of a government or
governmental entity filed an information
return, the appropriate official had to file a
corrected information return with the IRS
and furnish an amended written statement
to the payor. The Treasury Department
and the IRS have concluded that material
changes to an order or agreement will generally result in a new order or agreement
subject to the rules under section 6050X
and §1.6050X-1. For this reason, and because the final regulations under §1.16221 do not include a material change rule,
the final regulations have removed the
material change rule from §1.6050X-1.
Applicability Dates
The rules of §1.162-21 apply to taxable years beginning on or after the date
of publication of this Treasury decision
in the Federal Register, except that such
rules do not apply to amounts paid or in-
737
curred under any order or agreement, pursuant to a suit, agreement, or otherwise,
that became binding under applicable law
before such date, determined without regard to whether all appeals have been exhausted or the time for filing an appeal has
expired. The rules of §1.6050X-1 apply
only to orders and agreements, pursuant to
suits and agreements, that become binding under applicable law on or after January 1, 2022, determined without regard to
whether all appeals have been exhausted
or the time for filing an appeal has expired.
Special Analyses
I. Regulatory Planning and Review –
Economic Analysis
Executive Orders 12866 and 13563
direct agencies to assess costs and benefits of available regulatory alternatives
and, if regulation is necessary, to select
regulatory approaches that maximize net
benefits (including potential economic,
environmental, public health and safety
effects, distributive impacts, and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting flexibility.
The regulations have been designated
by the Office of Information and Regulatory Affairs (OIRA) as subject to review
under Executive Order 12866 pursuant to
the Memorandum of Agreement (April
11, 2018) between the Treasury Department and by the Office of Management
and Budget (OMB) regarding review of
tax regulations.
A. Background
Prior to the Tax Cuts and Jobs Act
(TCJA), section 162(f) of the Code disallowed a deduction for any fine or similar penalty paid to a government for
the violation of any law. This provision,
enacted in 1969, codified existing case
law that denied business deductions for
fines or similar penalties. The general
rule of section 162(f)(1), as amended
by section 13306(a) of the TCJA, disallows any deduction for amounts paid or
incurred (whether by suit, agreement,
or otherwise) to, or at the direction of,
a government or governmental entity or
February 8, 2021
certain nongovernmental entities treated
as governmental entities, in relation to
the violation of any law or the investigation or inquiry by such government
or entity into the potential violation of
any law. Section 13306(a) also provides
certain exceptions to this disallowance.
Section 162(f)(2)(A)(i) and (ii) does not
disallow a deduction for amounts that (1)
the taxpayer establishes were paid or incurred as restitution (including remediation of property) or to come into compliance with a law, and (2) are identified in
the court order or settlement agreement
as restitution, remediation, or to come
into compliance with a law.
In addition, under prior law, the Treasury Department and the IRS did not
receive information returns from governments or governmental entities that
received fines or penalties. Section 6050X
of the Code, enacted by section 13306(b)
of the TCJA, requires appropriate officials to file an information return if the
aggregate amount involved in all orders
or agreements relating to the violation,
investigation, or inquiry is $600 or more.
The information return must include (1)
the amount required to be paid as a result
of the order or agreement; (2) any amount
that constitutes restitution or remediation
of property; and (3) any amount required
to be paid for the purpose of coming into
compliance with a law that was violated
or involved in the investigation or inquiry. Section 6050X provides the Secretary
with the authority to adjust the $600 reporting threshold in order to ensure efficient tax administration.
Proposed regulations regarding these
provisions were previously issued on May
13, 2020 (REG-104591-18) (proposed
regulations).
B. Need for the Regulations
Following the passage of the TCJA,
the Treasury Department and the IRS received several questions and comments
from Federal, state, local, and tribal governments, as well as the public, regarding
the meaning of various provisions in each
section and issues not explicitly addressed
in the statute. The Treasury Department
and the IRS have determined that such
comments warrant the issuance of further
guidance.
February 8, 2021
In addition, the Treasury Department
and the IRS have determined that increasing the reporting threshold to reduce the
reporting burden and to enhance the efficiency of tax administration is appropriate.
C. Overview of the Regulations
The regulations provide guidance regarding sections 162(f) and 6050X. The
following analysis provides further detail
regarding the anticipated impacts of the
regulations. Part I.D specifies the baseline for the economic analysis. Part I.E.1.
summarizes the economic effects of the
rulemaking, relative to this baseline. Part
I.E.2. describes the economic effects of
specific provisions covering (1) the reporting threshold, (2) the timing of information reporting, and (3) information
reporting requirements when payment
amounts are not identified.
D. Baseline
In this analysis, the Treasury Department and the IRS assess the benefits and
costs of the final regulations relative to a
no-action baseline reflecting anticipated
Federal income tax-related behavior in the
absence of these regulations.
The regulations under section 6050X
provide certainty and consistency for affected governments and governmental
entities by defining and clarifying the
statute’s terms and rules. Further, the regulations use the authority provided by the
statute to the Secretary to set information
reporting requirements to minimize the
burden on governments and governmental entities and to ensure the efficient administration of the internal revenue laws.
Most importantly, the regulations increase
the reporting threshold from $600 to
$50,000, thereby eliminating information
reporting requirements for approximately
1 to 5 million orders or agreements. Using
the midpoint of this range (3 million), the
estimated burden reduction from this exercise of regulatory discretion is $74 million (2018 dollars) per year relative to the
no-action baseline.
This reduction in compliance burden
is the only meaningful economic effect
of the regulations. The regulations do not
have meaningful effects on the tax liability
of taxpayers, the deductibility of amounts
paid to, or at the directions of, governments and governmental entities, or the
incentive for individuals or businesses to
engage in violations of the law.
E. Economic Analysis of the Regulation
II. Economic Analysis of Specific
Provisions
I. Summary of Economic Effects
A. Reporting Threshold
The regulations under section 162(f)
provide definitions for restitution, remediation, and amounts paid to come into
compliance with the law. These definitions clarify for taxpayers which amounts
paid or incurred may be deductible under
the statute. The regulations also clarify
(1) how the taxpayer meets the establishment requirement; and (2) how the order
or agreement meets the identification requirement.
The Treasury Department and the IRS
have determined that the burden reduction
associated with the regulations for section 162(f) is modest. In addition, while
the regulations reduce uncertainty for
taxpayers, they are unlikely to affect economic decision-making because most of
the amounts to be paid or incurred which
are subject to section 162(f) are non-discretionary.
Section 6050X requires governments
and governmental entities which enter orders or agreements to which section 162(f) applies to file an information
return if the aggregate amount paid or incurred in all orders or agreements relating
to the violation, investigation, or inquiry
is equal to or exceeds a threshold of $600.
Section 6050X also provides the Secretary
with the authority to adjust the statutory
reporting threshold as necessary to ensure
efficient tax administration. In response to
multiple comments received prior to the
issuance of the proposed regulations from
governments and governmental entities
concerned about the burden of information
reporting for smaller payments amounts
pursuant to orders or agreements, the regulations raise the reporting threshold to
$50,000. In the proposed regulations, the
Treasury Department and the IRS solic-
738
Bulletin No. 2021–6
ited data on the annual number of orders
or agreements by governments or governmental entities that could inform the determination of the appropriate threshold
amount. The Treasury Department and the
IRS did not receive any such data.
The Treasury Department and the IRS
considered a range of alternative thresholds including the statutory threshold of
$600, along with much higher thresholds
suggested by some commenters. Upon
consideration of both the enforcement
needs of the IRS and the reporting burden
on governments and governmental entities, the Treasury Department and the IRS
exercised the authority provided to the
Secretary by the statute to set the reporting
threshold amount at $50,000.
The Treasury Department and the IRS
do not know of any data on the number of
orders or agreements requiring taxpayers
to pay amounts to, or at the direction of,
governments or governmental entities, or
the distribution of these amounts, such as
the number that are above or below $600.
Based on communications with stakeholders, the Treasury Department and the
IRS estimate that the increase in reporting
threshold from $600 to $50,000 will reduce the number of required information
returns by approximately 1 to 5 million.
The Treasury Department and the IRS further estimate that the average time to complete the information return is between
0.387 and 0.687 hours. Using the midpoint
of each of these ranges (3 million information returns and .537 hours) and a labor
cost of $46 per hour,1 the Treasury Department and the IRS estimate that increasing
the reporting threshold will reduce annual
compliance burdens by $74 million dollars (2018 dollars) per year. It should be
noted that many of the lower level fines
and penalties are likely to be assessed on
non-businesses that are not able to deduct
business expenses so they would be unaffected by the extent to which governments
or governmental entities are subject to reporting requirements.
Increasing the reporting threshold from
$600 to $50,000 is unlikely to have a significant effect on revenues because fines
over $50,000 likely account for the vast
majority of fines and penalties in terms of
dollar values. Based on financial reporting
1
values disclosed on tax returns of C corporations, S corporations and partnerships,
firms with over $50,000 in total fines and
penalties account for 99 percent of all fines
and penalties. However, these data should
be interpreted with caution. Financial reporting of fines and penalties includes
both international and domestic fines, and
all fines and penalties are aggregated into
yearly totals. Furthermore, firms with less
than $10 million in assets are not required
to provide financial reporting values with
their tax returns.
B. Time of Reporting
Section 6050X provides that the government or governmental entity shall file
the information return at the time the order is issued or the agreement is entered
into, as determined by the Secretary. The
Treasury Department and the IRS received comments from governments and
governmental entities prior to the issuance
of the proposed regulations observing that
it would be burdensome and inefficient
for them to file information returns each
time an order or agreement becomes binding under applicable law. Several commenters suggested that annual filing of
information returns would meaningfully
reduce this reporting burden. The Treasury Department and the IRS agree with
this comment and have adopted it in the
regulations. The Treasury Department and
the IRS have not estimated the difference
in compliance burden between these two
alternatives because they do not have suitable data or models to do so.
Several commenters also expressed uncertainty and concern about the information reporting requirements for an order
or agreement pursuant to which payments
are made over the course of several years.
To reduce uncertainty, and to minimize
the burden on governments and governmental entities, the regulations clarify that
information reporting is required only for
the year in which the order or agreement
becomes binding under applicable law,
and not required for each taxable year in
which a payor makes a payment.
The Treasury Department and the IRS
considered requiring information reporting at the time the order is issued or the
agreement is entered. The Treasury Department and the IRS also considered requiring information reporting in each year
in which an amount is paid or incurred
pursuant to the order or agreement. However, both alternative approaches were
determined to impose unnecessary burden
for governments and governmental entities without creating accompanying benefits for tax administration or for taxpayers.
Under the proposed regulations, the information return was required to be filed
with the IRS, and a written statement furnished to the payor, on or before January
31 of the year following the calendar year
in which the order or agreement becomes
binding under applicable law, even if all
appeals have not been exhausted for the
suit or agreement. In response to the proposed regulations, a commenter requested
that governments and governmental entities be given more time to comply with the
requirements. As requested, the final regulations are revised to provide that information returns filed with the IRS on paper
are due on or before February 28 of the
year following the calendar year in which
the order or agreement becomes binding
under applicable law and information
returns filed electronically are due on or
before March 31 of such year. However, to increase the likelihood that payors
have the information necessary to timely
prepare their income tax returns, the final
regulations still require governments and
governmental entities to furnish the written statements to payors on or before January 31 of such year.
C. Payment Amount Not Identified
When the expected amount paid or incurred pursuant to an order or agreement
equals or exceeds the threshold amount,
section 6050X requires governments or
governmental entities to file an information return including: (1) the amount
required to be paid as a result of the order or agreement; (2) any amount that
constitutes restitution or remediation of
property; and (3) any amount required to
be paid for the purpose of coming into
compliance with a law that was violated
or involved in the investigation or inquiry. However, some orders or agreements
This data point is derived by the IRS as part of the burden analysis described in the Paperwork Reduction Act section below.
Bulletin No. 2021–6
739
February 8, 2021
may involve uncertain payments or costs
to provide property or services without
identifying some or all of the aggregate
amount the payor must pay, or some or
all of the aggregate cost to provide property or services. The Treasury Department and the IRS received comments
expressing concern that amounts paid or
incurred are often difficult to assess, and
strict valuation requirements would impose undue burden on governments and
governmental entities. For situations in
which the amount is not identified, the
regulations direct governments and governmental entities to the instructions to
Form 1098-F. To address commenters’
concerns, these instructions will permit
governments and governmental entities
to report the threshold amount of $50,000
when the amount is unknown but expected to equal or exceed $50,000. This rule
Form
1098-F
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
on governments and governmental entities.
The Treasury Department and the IRS did
not estimate the difference in compliance
burden between the final regulation and
this alternative approach because they do
not have suitable data or models to do so.
Paperwork Reduction Act
Collection of Information – Form 1098-F
In general, the collection of information in the regulations is required under
section 6050X of the Code. The collection of information in these regulations is
set forth in §1.6050X-1. The IRS intends
that the collection of information pursuant to section 6050X will be conducted
by way of Form 1098-F, Fines, Penalties,
and Other Amounts. Form 1098-F will be
used by all governments, governmental
entities, and nongovernmental entities
treated as governmental entities with a
reporting requirement. The Treasury Department and the IRS request comments
on all aspects of information collection
burdens related to the regulations. In
addition, when available, drafts of IRS
forms are posted for comment at www.
irs.gov/draftforms.
The current status of the PRA submissions related to section 6050X are provided in the following table.
Type of Filer
OMB Number Status
Governments, Governmental Entities, And Certain 1545-2284
Form 1098-F is approved through 1/31/2023.
Nongovernmental Entities
Related New or Revised Tax Forms
New
Form 1098-F
Revision of Existing Form
Yes
A reasonable burden estimate for the
average time to complete Form 1098-F is
between 0.387 and 0.687 hours (approximately 23 to 41 minutes). This estimate is
based on survey data collected from similar information return filers. In addition,
the increase in the reporting threshold under section 6050X will lead to a decrease
in the number of information returns filed
by approximately 1 million to 5 million returns. Using the midpoint of these ranges,
or 3 million and 0.537 hours, the estimated
burden reduction is $74 million per year.
Estimated average time per form: .537
hours.
Estimated number of respondents:
90,100.
Estimated total annual burden hours:
48,383.70.
Estimated change in number of information returns resulting from increased
reporting threshold: (3,000,000).
February 8, 2021
Number of Respondents (2018, estimated)
90,100 (85,500 small governmental jurisdictions, 4,500 large
governmental jurisdictions and 100 nongovernmental entities).
Estimated change in burden (hours):
(1,611,150).
Estimated change in burden (Dollars):
($74,161,235).
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it displays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and tax
return information are confidential, as required by 26 U.S.C. 6103.
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
(5 U.S.C. chapter 6) requires agencies to
“prepare and make available for public
740
comment an initial regulatory flexibility
analysis,” which will “describe the impact
of the rule on small entities.” 5 U.S.C.
603(a). Section 605(b) of the RFA allows
an agency to certify a rule if the rulemaking is not expected to have a significant
economic impact on a substantial number
of small entities.
Pursuant to the RFA, the Secretary of
the Treasury hereby certifies that these
regulations will not have a significant economic impact on a substantial number of
small entities within the meaning of section 601(6) of the RFA.
The RFA generally applies to regulations that affect small businesses, small
organizations, and small governmental
jurisdictions. For purposes of the RFA,
small governmental jurisdictions are governments of cities, counties, towns, townships, villages, school districts, or special
districts with a population of less than
Bulletin No. 2021–6
50,000. This rule would affect States, as
well as local governments, some of which
may meet the definition of small governmental jurisdiction. Approximately 90,100
governments, governmental entities, and
nongovernmental entities treated as governmental entities may be subject to the
reporting requirements of section 6050X.
Of those governments and governmental
entities, approximately 85,500 (or 95%)
are small governmental jurisdictions.
Although the regulations may affect a
substantial number of small governmental jurisdictions, the economic impact of
the regulations is not expected to be significant. The regulations set a reporting
threshold that is higher than the minimum
required by statute and also provide for
governments and governmental entities
to file annual returns. Both of these provisions reduce the potential burden on small
governmental jurisdictions. In particular,
the increase in the reporting threshold will
lead to a decrease in the number of information returns filed by approximately
1 million to 5 million returns. Using the
midpoint of this range, or 3 million, the
estimated burden reduction is $74 million
per year (2018 dollars). It is estimated that
after reading and learning about the requirements of the regulations, the burden
associated with filing the annual form is
approximately 23 to 41 minutes and the
average cost per information return is approximately $24.72, which would not result in a significant economic impact on
small entities.
Pursuant to section 7805(f) of the
Code, the proposed rule preceding this
rulemaking was submitted to the Chief
Counsel for the Office of Advocacy of the
Small Business Administration for comment on its impact on small entities and
no comments were received.
Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) 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
2
by the private sector, of $100 million in
1995 dollars, updated annually for inflation. This rule does not include any Federal mandate that may result in expenditures by state, local, or tribal governments,
or by the private sector in excess of that
threshold.
Executive Order 13132: Federalism
Executive Order 13132 (entitled Federalism) prohibits an agency from publishing any rule that has Federalism
implications if the rule either imposes
substantial direct compliance costs on
state and local governments, and is not
required by statute, or preempts state law,
unless the agency meets the consultation
and funding requirements of section 6 of
the Executive Order. These rules do not
have Federalism implications, and do not
impose substantial direct compliance costs
on state and local governments or preempt
state law, within the meaning of the Executive Order. The compliance costs, if
any, are imposed on state and local governments by section 6050X, as enacted by
the TCJA. Notwithstanding, the Treasury
Department and the IRS consulted with
the National League of Cities and the
National Governors Association prior to
the issuance of the proposed regulations.
Pursuant to the requirements set forth in
section 8(a) of Executive Order 13132, the
Treasury Department and the IRS certify
that they have complied with the requirements of Executive Order 13132.
Congressional Review Act
The Administrator of the Office of Information and Regulatory Affairs of the
Office of Management and Budget has
determined that this is a major rule for
purposes of the Congressional Review
Act (5 U.S.C. 801 et seq.) (CRA)). Under
5 U.S.C. 801(3), a major rule takes effect
60 days after the rule is published in the
Federal Register.
Notwithstanding this requirement, 5
U.S.C. 808(2) allows agencies to dispense
with the requirements of 5 U.S.C. 801
when the agency for good cause finds that
such procedure would be impracticable,
unnecessary, or contrary to the public in-
terest and the rule shall take effect at such
time as the agency promulgating the rule
determines. Pursuant to 5 U.S.C. 808(2),
the Treasury Department and the IRS find,
for good cause, that a 60-day delay in the
effective date is unnecessary and contrary
to the public interest.
Following the amendments to section 162(f) and enactment of section 6050X by the TCJA, the Treasury
Department and the IRS published IRS
published Notice 2018–23, 2018–15 I.R.B.
474, to provide transitional guidance on
the identification requirement of section 162(f) and the information reporting
requirement under section 6050X and to
solicit comments from the public and affected governments and governmental entities on issues related to the implementation of section 162(f) and section 6050X.
Subsequently, on May 13, 2020, the Treasury Department and the IRS published
a notice of proposed rulemaking (REG104591-18) in the Federal Register (85
FR 28524) providing additional guidance for taxpayers and governments and
governmental entities on the deduction
disallowance rules in section 162(f) and
the associated reporting requirements in
section 6050X. However, as demonstrated
by the wide variety of public comments
in response to the proposed regulations
received, taxpayers and governments and
governmental entities continue to express
uncertainty regarding the proper application of the relevant statutory rules under
section 162(f) and section 6050X. These
final regulations provide crucial guidance
for taxpayers and governments and governmental entities on how to apply the
relevant statutory rules. In certain cases,
failure to comprehend the proper application of the requirements of section 162(f)
can prevent taxpayers from claiming appropriate deductions, resulting in them
paying potentially higher taxes than required during a time of economic difficulty.2 In addition, governments and
governmental entities will require several
months to update or develop data collection and reporting systems to comply with
the rules under section 6050X. However,
governments and governmental entities
will need to know that the final regulations are effective before incurring neces-
See Executive Order 13924 (May 19, 2020) 85 FR 31,353-54.
Bulletin No. 2021–6
741
February 8, 2021
sary costs to timely comply with the final
regulations. Accordingly, the Treasury
Department and the IRS have determined
that the rules in this Treasury decision
will take effect on the date of filing for
public inspection in the Federal Register.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, Notices and other guidance cited
in this document are published in the Internal Revenue Bulletin and are available
from the Superintendent of Documents,
U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the
IRS website at http://www.irs.gov.
Drafting Information
The principal author of these regulations is Sharon Y. Horn of Associate Chief
Counsel (Income Tax and Accounting),
IRS. However, other personnel from the
Treasury Department and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes; Reporting and recordkeeping requirements
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
*****
Section 1.6050X-1 also issued under
26 U.S.C. 6050X(a), (b).
*****
Par. 2. Section 1.162-21 is revised to
read as follows:
§1.162-21 Denial of deduction for
certain fines, penalties, and other
amounts.
(a) Deduction Disallowed. Except as
otherwise provided in this section, no de-
February 8, 2021
duction is allowed under chapter 1 of the
Internal Revenue Code (Code) for any
amount that is paid or incurred—
(1) By suit, settlement agreement
(agreement), or otherwise, as defined in
paragraph (e)(5) of this section;
(2) To, or at the direction of, a government, as defined in paragraph (e)(1) of
this section, or a governmental entity, as
defined in paragraph (e)(2) of this section;
and
(3) In relation to the violation, or investigation or inquiry by such government
or governmental entity into the potential
violation, of any civil or criminal law.
(i) An amount that is paid or incurred
in relation to the violation of any civil or
criminal law includes a fine or penalty.
(ii) An investigation or inquiry into
the potential violation of any law does
not include routine investigations or inquiries, such as audits or inspections, of
regulated businesses that are not related to
any evidence of wrongdoing or suspected
wrongdoing, but are conducted to ensure
compliance with the rules and regulations
applicable to those businesses.
(b) Exception for restitution, remediation, and amounts paid to come into
compliance with a law—(1) In general.
Paragraph (a) of this section does not apply to amounts paid or incurred for restitution (including remediation) or to come
into compliance with a law, as defined in
paragraphs (e)(4) of this section, provided
that both the identification and the establishment requirements of paragraphs (b)
(2) and (b)(3) of this section are met.
(2) Identification requirement—(i) In
general. A court order (order) or an agreement, as defined in paragraph (e)(5) of this
section, identifies a payment by stating the
nature of, or purpose for, each payment
each taxpayer is obligated to pay and the
amount of each payment identified.
(ii) Meeting the identification requirement. The identification requirement is
met if an order or agreement specifically states the amount of the payment
described in paragraph (b)(2)(i) of this
section and that the payment constitutes
restitution, remediation, or an amount
paid to come into compliance with a law.
If the order or agreement uses a different
form of the required words (such as “remediate” or “comply with a law”) and describes the purpose for which restitution
742
or remediation will be paid or the law with
which the taxpayer must comply, the order
or agreement will be treated as stating that
the payment constitutes restitution, remediation, or an amount paid to come into
compliance with a law. Similarly, if an order or agreement specifically describes the
damage done, harm suffered, or manner of
noncompliance with a law and describes
the action required of the taxpayer to provide restitution, remediation, or to come
into compliance with any law, as defined
in paragraph (e)(4) of this section, the order or agreement will be treated as stating
that the payment constitutes restitution,
remediation, or an amount paid to come
into compliance with any law. Meeting the
establishment requirement of paragraph
(b)(3) of this section alone is not sufficient
to meet the identification requirement of
paragraph (b)(2) of this section.
(iii) Payment amount not identified.
(A) If the order or agreement identifies a
payment as restitution, remediation, or to
come into compliance with a law but does
not identify some or all of the amount the
taxpayer must pay or incur, the identification requirement may be met for any
payment amount not identified if the order
or agreement describes the damage done,
harm suffered, or manner of noncompliance with a law, and describes the action
required of the taxpayer, such as paying
or incurring costs to provide services or to
provide property.
(B) If the order or agreement identifies
a lump-sum payment or multiple damages award as restitution, remediation, or to
come into compliance with a law but does
not allocate some or all of the amount the
taxpayer must pay or incur among restitution, remediation, or to come into compliance with a law, or does not allocate
the total payment amount among multiple
taxpayers, the identification requirement
may be met for any payment amount
not specifically allocated if the order or
agreement describes the damage done,
harm suffered, or manner of noncompliance with a law, and describes the action
required of the taxpayer, such as paying
or incurring costs to provide services or to
provide property.
(3) Establishment requirement—(i)
Meeting the establishment requirement.
The establishment requirement is met if
the taxpayer, using documentary evidence,
Bulletin No. 2021–6
proves the taxpayer’s legal obligation,
pursuant to the order or agreement, to
pay the amount identified as restitution,
remediation, or to come into compliance
with a law; the amount paid or incurred;
the date the amount was paid or incurred;
and that, based on the origin of the liability
and the nature and purpose of the amount
paid or incurred, the amount the taxpayer
paid or incurred was for restitution or remediation, as defined in paragraph (e)(4)
(i) of this section or to come into compliance with any law, as defined in paragraph
(e)(4)(ii) of this section. If the amount is
paid or incurred to a segregated fund or
account, as described in paragraphs (e)(4)
(i)(A)(2) and (3), (e)(4)(i)(B), or (e)(4)(i)
(C) of this section, the taxpayer may meet
the establishment requirement even if each
ultimate recipient, or each ultimate use,
of the payment is not designated or is unknown. A taxpayer will not meet the establishment requirement if the taxpayer fails
to prove that the taxpayer paid or incurred
the amount identified as restitution, remediation, or to come into compliance with a
law; the amount paid; the date the amount
was paid or incurred; or that the amount
the taxpayer paid or incurred was for the
nature and purpose identified in the order
or agreement as required by paragraph (b)
(2)(i) of this section, or was made for the
damage done, harm suffered, noncompliance, or to provide property or services
as described in (b)(2)(iii) of this section.
Meeting the identification requirement of
paragraph (b)(2) of this section is not sufficient to meet the establishment requirement of paragraph (b)(3) of this section.
(ii) Substantiating the establishment
requirement. The documentary evidence
described in paragraph (b)(3)(i) of this
section includes, but is not limited to, receipts; the legal or regulatory provision related to the violation or potential violation
of any law; documents issued by the government or governmental entity relating
to the investigation or inquiry, including
court pleadings filed by the government
or governmental entity requesting restitution, remediation, or demanding that
defendant take action to come into compliance with the law; judgment; decree;
documents describing how the amount to
be paid was determined; and correspondence exchanged between the taxpayer
and the government or governmental en-
Bulletin No. 2021–6
tity before the order or agreement became
binding under applicable law, determined
without regard to whether all appeals have
been exhausted or the time for filing an
appeal has expired.
(c) Other exceptions—(1) Suits between private parties. Paragraph (a) of
this section does not apply to any amount
paid or incurred by reason of any order or
agreement in a suit in which no government or governmental entity is a party or
any order or agreement in a suit pursuant
to which a government or governmental
entity enforces its rights as a private party.
(2) Taxes and related interest. Paragraph (a) of this section does not apply
to amounts paid or incurred as otherwise
deductible taxes or related interest. However, if penalties are imposed relating to
such taxes, paragraph (a) of this section
applies to disallow a deduction for such
penalties and interest payments related to
such penalties.
(3) Failure to pay title 26 tax. In the
case of any amount paid or incurred as
restitution for failure to pay tax imposed
under title 26 of the United States Code,
paragraph (a) of this section does not disallow a deduction for title 26 taxes, such
as excise and employment taxes, which
are equal to or less than the deduction
otherwise allowed under chapter 1 of the
Code if the tax had been timely paid.
(d) Application of general principles of
Federal income tax law—(1) Taxable year
of deduction. If, under paragraph (b) or (c)
of this section, the taxpayer is allowed a
deduction for the amount paid or incurred
pursuant to an order or agreement, the
deduction is taken into account under the
rules of section 461 and the related regulations, or under a provision specifically
applicable to the allowed deduction, such
as §1.468B-3(c).
(2) Tax benefit rule applies. If the deduction allowed under paragraphs (b) or
(c) of this section results in a tax benefit to
the taxpayer, the taxpayer must include in
income, under sections 61 and 111, the recovery of any amount deducted in a prior
taxable year to the extent the prior year’s
deduction reduced the taxpayer’s tax liability.
(i) A tax benefit to the taxpayer includes
a reduction in the taxpayer’s tax liability
for a prior taxable year or the creation of a
net operating loss carryback or carryover.
743
(ii) A taxpayer’s recovery of any
amount deducted in a prior taxable year
includes, but is not limited to—
(A) Receiving a refund, recoupment,
rebate, reimbursement, or otherwise recovering some or all of the amount the
taxpayer paid or incurred, or
(B) Being relieved of some or all of the
payment liability under the order or agreement.
(e) Definitions. For section 162(f) and
§1.162-21, the following definitions apply:
(1) Government. A government
means—
(i) The government of the United
States, a State, or the District of Columbia;
(ii) The government of a territory of
the United States, including American
Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands;
(iii) The government of a foreign country;
(iv) An Indian tribal government, as
defined in section 7701(a)(40), or a subdivision of an Indian tribal government,
as determined in accordance with section 7871(d); or
(v) A political subdivision (such as a
local government unit) of a government
described in paragraph (e)(1)(i), (ii), or
(iii) of this section.
(2) Governmental entity. A governmental entity means—
(i) A corporation or other entity serving
as an agency or instrumentality of a government (as defined in paragraph (e)(1) of
this section), or
(ii) A nongovernmental entity treated
as a governmental entity as described in
paragraph (e)(3) of this section.
(3) Nongovernmental entity treated as
a governmental entity. A nongovernmental entity treated as a governmental entity
is an entity that—
(i) Exercises self-regulatory powers
(including imposing sanctions) in connection with a qualified board or exchange, as
defined in section 1256(g)(7); or
(ii) Exercises self-regulatory powers,
including adopting, administering, or enforcing rules and imposing sanctions, as
part of performing an essential governmental function.
February 8, 2021
(4) Restitution, remediation of property,
and amounts paid to come into compliance
with a law—(i) Amounts for restitution or
remediation. An amount is paid or incurred
for restitution or remediation pursuant to
paragraph (b)(1) of this section if it is paid
or incurred to restore, in whole or in part,
the person, as defined in section 7701(a)
(1); government; governmental entity;
property; environment; wildlife; or natural
resources harmed, injured, or damaged by
the violation or potential violation of any
law described in paragraph (a)(3) of this
section to the same or substantially similar position or condition as existed prior to
such harm, injury, or damage.
(A) Environment, wildlife, or natural
resources. Restitution or remediation of
the environment, wildlife, or natural resources includes amounts paid or incurred
for the purpose of conserving soil, air, or
water resources, protecting or restoring
the environment or an ecosystem, improving forests, or providing a habitat for fish,
wildlife, or plants. The amounts must be
paid or incurred—
(1) To, or at the direction of, a government or governmental entity to be used
exclusively for the restitution or remediation of a harm to the environment, wildlife, or natural resources;
(2) To a segregated fund or account
established by a government or governmental entity and, pursuant to the order or
agreement, the amounts are not disbursed
to the general account of the government
or governmental entity for general enforcement efforts or other discretionary
purposes; or
(3) To a segregated fund or account established at the direction of a government
or governmental entity.
(4) Paragraph (e)(4)(i)(A) of this section
applies only if there is a strong nexus or
connection between the purpose of the payment and the harm to the environment, natural resources, or wildlife that the taxpayer
has caused or is alleged to have caused.
(B) Disgorgement or forfeiture. Provided the identification and establishment
requirements of paragraphs (b)(2) and (b)
(3) of this section are met, restitution may
include amounts paid or incurred as disgorgement or forfeiture, if paid or incurred
at the direction of a government or governmental entity directly to the person, as
defined in section 7701(a)(1), harmed by
February 8, 2021
the violation or potential violation of any
law or to, or at the direction of, the government or governmental entity, to establish a
segregated fund or account for the benefit
of such harmed person. This paragraph
(e)(4)(i)(B) does not apply if the order or
agreement identifies the payment amount
as in excess of the taxpayer’s net profits
or, pursuant to the order or agreement, the
amounts are disbursed to the general account of the government or governmental
entity for general enforcement efforts or
other discretionary purposes.
(C) Segregated funds or accounts. Provided the identification and establishment
requirements of paragraphs (b)(2) and (b)
(3) of this section are met, restitution or
remediation may include amounts paid or
incurred, pursuant to an order or agreement, to a segregated fund or account to
restore, in whole or in part, the person,
as defined in section 7701(a)(1); government; governmental entity; property; environment; wildlife; or natural resources
harmed, injured, or damaged by the violation or potential violation of any law described in paragraph (a)(3) of this section.
This paragraph (e)(4)(i)(C) does not apply
if, pursuant to the order or agreement, the
amounts are disbursed to the general account of the government or governmental
entity for general enforcement efforts or
other discretionary purposes.
(ii) Amounts to come into compliance
with a law. An amount is paid or incurred
to come into compliance with a law that
the taxpayer has violated, or is alleged
to have violated, by performing services;
taking action, such as modifying equipment; providing property; or doing any
combination thereof to come into compliance with that law.
(iii) Amounts not included. Regardless
of whether the order or agreement identifies them as such, restitution, remediation,
and amounts paid to come into compliance with a law do not include any amount
paid or incurred—
(A) As reimbursement to a government
or governmental entity for investigation
costs or litigation costs incurred in such
government or governmental entity’s investigation into, or litigation concerning,
the violation or potential violation of any
law; or
(B) At the taxpayer’s election, in lieu of
a fine or penalty.
744
(5) Suit, agreement, or otherwise. A
suit, agreement, or otherwise includes, but
is not limited to, suits; settlement agreements; orders; non-prosecution agreements; deferred prosecution agreements;
judicial proceedings; administrative adjudications; decisions issued by officials,
committees, commissions, or boards of a
government or governmental entity; and
any legal actions or hearings which impose a liability on the taxpayer or pursuant
to which the taxpayer assumes liability.
(f) Examples. The application of this
section is illustrated by the following examples.
(1) Example 1. (i) Facts. Corp. A enters into an
agreement with State Y’s environmental enforcement
agency (Agency) for violating state environmental
laws. Pursuant to the agreement, Corp. A pays $40X
to the Agency in civil penalties, $80X in restitution
for the environmental harm that the taxpayer has
caused, $50X for remediation of contaminated sites,
and $60X to conduct comprehensive upgrades to
Corp. A’s operations to come into compliance with
the state environmental laws.
(ii) Analysis. The identification requirement is
satisfied for those amounts the agreement identifies as
restitution, remediation, or to come into compliance
with a law. If Corp. A meets the establishment requirement, as provided in paragraph (b)(3), paragraph (a)
of this section will not disallow Corp. A’s deduction
for $80X in restitution and $50X for remediation. Under paragraph (a) of this section, Corp. A may not deduct the $40X in civil penalties. Paragraph (a) of this
section will not disallow Corp. A’s deduction for the
$60X paid to come into compliance with the state environmental laws. See section 161, concerning items
allowed as deductions, and section 261, concerning
items for which no deduction is allowed, and the regulations related to sections 161 and 261.
(2) Example 2. (i) Facts. Corp. A enters into an
agreement with State T’s securities agency (Agency)
for violating a securities law by inducing B to make
a $100X investment in Corp. C stock, which B lost
when the Corp. C stock became worthless. As part
of the agreement, Corp. A agrees to pay $100X to
B as restitution for B’s investment loss, incurred as
a result of Corp. A’s actions. The agreement specifically states that the $100X payment by Corp. A to B
is restitution. The agreement also requires Corp. A to
pay a $40X penalty for violating Agency law. Corp.
A pays the $140X.
(ii) Analysis. Corp. A’s $100X payment to B is
identified in the agreement as restitution. If Corp. A
establishes, as provided in paragraph (b)(3) of this
section, that the amount paid was for that purpose,
paragraph (a) of this section will not disallow Corp.
A’s deduction for the $100X payment. Under paragraph (a) of this section, Corp. A may not deduct its
$40X payment to the Agency because it was paid for
Corp. A’s violation of Agency law.
(3) Example 3. (i) Facts. Corp. B is under investigation by State X’s environmental enforcement
agency for a potential violation of State X’s law
governing emissions standards. Corp. B enters into
Bulletin No. 2021–6
an agreement with State X under which it agrees to
upgrade the engines in a fleet of vehicles that Corp.
B operates to come into compliance with State X’s
law. Although the agreement does not provide the
specific amount Corp. B will incur to upgrade the engines to come into compliance with State X’s law, it
identifies that Corp. B must upgrade existing engines
to lower certain emissions. Under the agreement,
Corp. B also agrees to construct a nature center in a
local park for the benefit of the community. Instead
of paying $12X, to come into compliance with State
X’s law, Corp. B pays $15X to upgrade the engines
to a standard higher than that which the law requires.
Corp. B presents evidence to establish that it would
cost $12X to upgrade the engines to come into compliance with State X’s law.
(ii) Analysis. Because the agreement describes
the specific action Corp. B must take to come into
compliance with State X’s law, and Corp. B provides
evidence, as described in paragraph (b)(3)(ii) of this
section, to establish that the agreement obligates it to
incur costs to come into compliance with a law, paragraph (a) of this section will not disallow Corp. B’s
deduction for the $12X Corp. B incurs to come into
compliance. Corp. B may also deduct the $3X if it
is otherwise deductible under chapter 1 of the Code.
However, Corp. B may not deduct the amounts paid
to construct the nature center because no facts exist to
establish that the amount was paid either to come into
compliance with a law or as restitution or remediation.
(4) Example 4. (i) Facts. Corp. D enters into an
agreement with governmental entity, Trade Agency,
for engaging in unfair trade practices in violation of
Trade Agency laws. The agreement requires Corp.
D to pay $80X to a Trade Agency fund, through
disgorgement of net profits, to be used exclusively to pay restitution to the consumers harmed by
Corp. D’s violation of Trade Agency law. Corp. D
pays $80X to Trade Agency fund and Trade Agency
disburses all amounts in the restitution fund to the
harmed consumers.
(ii) Analysis. The agreement identifies the $80X
payment to the fund as restitution. Trade Agency
uses the funds exclusively to provide restitution to
the harmed consumers and does not use it for discretionary or general enforcement purposes. If Corp. D
establishes, as provided in paragraph (b)(3) of this
section, that the $80X constitutes restitution under
paragraph (e)(4)(i)(B) of this section, paragraph (a)
of this section does not apply.
(5) Example 5. (i) Facts. B, a regulated banking institution, is subject to the supervision of, and
annual examinations by, governmental entity, R. In
the ordinary course of its business, B is required to
pay annual assessment fees to R, which fees are used
to support R in supervising and examining banking
institutions to ensure a safe and sound banking system. Following an annual examination conducted in
the ordinary course of B’s business, R issues a letter
to B identifying concerns with B’s internal compliance functions. B takes corrective action to address
R’s concerns by investing in its internal compliance
functions. R does not conduct an investigation or inquiry into B’s potential violation of any law.
(ii) Analysis. The payment of annual assessment
fees by B to R in the ordinary course of business is not
related to the violation of any law or the investigation
or inquiry into the potential violation of any law. In
Bulletin No. 2021–6
addition, B’s costs of taking the corrective action are
not related to the violation of any law or the investigation or inquiry into the potential violation of any law
as described in section 162(f)(1). Paragraph (a) of this
section will not disallow the deduction of the annual
assessment fees and the cost of the corrective actions.
(6) Example 6. (i) Facts. B, a regulated banking
institution, is subject to the supervision of, and annual examinations by, governmental entity, R. Following an annual examination conducted in the ordinary
course of B’s business, R pursues an enforcement action against B for violation of banking laws. B and
R enter a settlement agreement, pursuant to which B
agrees to undertake certain improvements to come
into compliance with banking laws and to pay R $20X
for violation of banking laws. B pays the $20X.
(ii) Analysis. If the agreement meets the identification requirement of paragraph (b)(2) of this section and B meets the establishment requirement of
paragraph (b)(3) of this section, paragraph (a) of this
section will not disallow the deduction of the costs
of the corrective actions to come into compliance
with banking laws. However, B may not deduct the
$20X paid to R because the amount was not paid to
come into compliance with a law or as restitution or
remediation.
(7) Example 7. (i) Facts. Corp. C contracts with
governmental entity, Q, to design and build a rail
project within five years. Corp. C does not complete
the project. Q sues Corp. C for breach of contract and
damages of $10X. A jury finds Corp. C breached the
contract and Corp. C pays $10X to Q.
(ii) Analysis. The suit arose out of a proprietary
contract, wherein Q enforced its rights as a private
party. Paragraph (a) of this section will not disallow
Corp. C’s deduction of the payment of $10X pursuant to this suit.
(8) Example 8. (i) Facts. Corp. C contracts with
governmental entity, Q, to design and build a rail
project within five years. Site conditions cause construction delays and Corp. C asks Q to pay $50X
in excess of the contracted amount to complete the
project. After Q pays for the work, it learns that, at
the time it entered the contract with Corp. C, Corp. C
knew that certain conditions at the project site would
make it challenging to complete the project within
five years. Q sues Corp. C for withholding critical
information during contract negotiations in violation
of the False Claims Act (FCA). The court enters a
judgment in favor of Q pursuant to which Corp. C
will pay Q $50X in restitution and $150X in treble
damages. Corp. C pays the $200X.
(ii) Analysis. The suit pertains to Corp. C’s violation of the FCA. The order identifies the $50X Corp.
C is required to pay as restitution, as described in
paragraph (b)(2) of this section. If Corp. C establishes, as provided in paragraph (b)(3) of this section,
that the amount paid was for restitution, paragraph
(a) of this section will not disallow Corp. C’s deduction for the $50X payment. Under paragraph (a) of
this section, Corp. C may not deduct the $150X paid
for the treble damages imposed for violation of the
FCA because the order did not identify all or part of
the payment as restitution.
(9) Example 9. (i) Facts. Corp. T operates a truck
fleet company incorporated in State A. State A requires that all vehicles registered in State A have a
vehicle emissions test every two years. Corp. T’s 40
745
trucks take the emissions test on March 1 for which
it pays the $15 per vehicle. Under State A law, if a
vehicle fails the emissions test, the vehicle owner has
30 days to certify to State A that the vehicle has been
repaired and has passed the emissions test. State A
imposes a $1X penalty per vehicle for failure to comply with this 30-day rule. Twenty trucks pass; twenty
trucks fail. Corp. T does not submit the required certification to State A for the twenty trucks that failed
the emissions test. State A imposes a $40X penalty
against Corp. T. Corp. T pays the $40X.
(ii) Analysis. Emissions tests are conducted in
the ordinary course of operating a truck fleet company and, therefore, paragraph (a) of this section does
not apply to the $600 Corp. T pays for the emissions
tests. However, Corp. T may not deduct the $40X
penalty for failure to comply with State A requirements because the amount is required to be paid to
a government in relation to the violation of a law.
(10) Example 10. (i) Facts. Corp. G operates a
chain of 20 grocery stores in County X. Under County X’s health and food safety code and regulations,
Corp. G is subject to annual inspections for which
Corp. G is required to pay an inspection fee of $40
per store. Pursuant to the annual inspection, the
County X health inspector finds violations of County
X’s health and food safety code and regulations in
three of Corp. G’s 20 stores. County X bills Corp. G
$800 for the annual inspection fees for the 20 stores
and a $1,000 fine for each of the three stores, for a
total fine of $3,000, for violations of the health and
food safety code. Corp. G pays the fees and fines.
(ii) Analysis. Paragraph (a) of this section will not
disallow Corp. G’s deduction for the $800 inspection
fees paid in the ordinary course of a regulated business. Under paragraph (a) of this section, Corp. G
may not deduct the $3,000 fine for violation of the
County X’s health code and food safety ordinances
because it was paid to a government in relation to the
violation of a law.
(11) Example 11. (i) Facts. Corp. G operates a
chain of grocery stores in County X. Under County X’s health and food safety code and regulations,
Corp. G is subject to annual inspections. Pursuant to
an annual inspection, the County X health inspector
finds that the refrigeration system in one of Corp. G’s
stores does not keep food at the temperature required
by the health and food safety code and regulations.
The County X health inspector issues a warning letter instructing Corp. G to correct the violation and
bring the refrigeration system into compliance with
the law before a reinspection in 60 days or face the
imposition of fines if it fails to comply. Corp. G pays
$10,000 to bring its refrigeration system into compliance with the law.
(ii) Analysis. Provided the identification and establishment requirements of paragraphs (b)(2) and
(b)(3), respectively, of this section are met, paragraph (a) of this section will not disallow Corp. G’s
deduction for the $10,000 it pays to bring its refrigeration system into compliance with the law.
(12) Example 12. (i) Facts. Corp. G operates a
chain of grocery stores in County X. Under County X’s health and food safety code and regulations,
Corp. G is subject to annual inspections. Pursuant to
an annual inspection, the County X health inspector
finds that the refrigeration system in one of Corp. G’s
stores does not keep food at the temperature required
February 8, 2021
by the health and food safety code and regulations.
The County X health inspector issues a warning letter instructing Corp. G to correct the violation and
bring the refrigeration system into compliance with
the law before a reinspection in 60 days or face the
imposition of fines if it fails to comply. The County X health inspector later reinspects the refrigeration system. Corp. G pays a reinspection fee of $80.
During the reinspection, the health inspector finds
that Corp. G did not bring its refrigeration system
into compliance with the law. The health inspector
issues a citation imposing a $250 fine on Corp. G.
Corp. G pays the $250 fine.
(ii) Analysis. Paragraph (a) of this section will
disallow Corp. G’s deduction for the $80 inspection
fee because it is paid in relation to the investigation
or inquiry by County X into the potential violation
of the law. Paragraph (a) of this section will also disallow Corp. G’s deduction for the $250 fine paid for
violation of the law.
(13) Example 13. (i) Facts. Accounting Firm was
convicted of embezzling $500X from Bank in violation of State X law. The court issued an order requiring Accounting Firm to pay $100X in restitution
to Bank. The court also issued an order of forfeiture
and restitution for $400X, which was seized by the
State X officials. Accounting Firm paid $100X to
Bank. The $400X seized was deposited with Fund
within the State X treasury and, at the discretion of
the State X Attorney General, was used to support
law enforcement programs.
(ii) Analysis. Although the order identified the
amount forfeited as restitution, paragraph (a) of this
section will disallow Accounting Firm’s deduction for
the $400X forfeited because, under paragraph (e)(4)
(i)(B) of this section, it does not constitute restitution.
If Accounting Firm establishes, as provided in paragraph (b)(3) of this section, that the $100X constitutes
restitution under paragraph (e)(4)(i), paragraph (a) of
this section will not disallow Accounting Firm’s deduction for the $100X paid, provided the $100X is
otherwise deductible under chapter 1.
(g) Applicability date. The rules of this
section apply to taxable years beginning
on or after January 19, 2021, except that
such rules do not apply to amounts paid
or incurred under any order or agreement
pursuant to a suit, agreement, or otherwise
which became binding under applicable
law before such date, determined without
regard to whether all appeals have been
exhausted or the time for filing appeals
has expired.
Par. 3. Add §1.6050X-1 to read as follows:
§1.6050X-1 Information reporting for
fines, penalties, and other amounts by
governments, governmental entities,
and nongovernmental entities treated
as governmental entities.
(a) Information reporting requirement.
The appropriate official, as defined in
February 8, 2021
paragraph (f)(1) of this section, of a government, as defined in paragraph (f)(2) of
this section, a governmental entity, as defined in paragraph (f)(3) of this section, or
nongovernmental entity treated as a governmental entity, as defined in paragraph
(f)(4) of this section, that is a party to a suit
or agreement to which section 6050X(a)
(1) and (a)(2) applies, must—
(1) File an information return, as described in paragraph (b) of this section,
if the aggregate amount the payor, as defined in paragraph (f)(5) of this section, is
required to pay pursuant to all court orders (orders) and settlement agreements
(agreements), relating to the violation of
any law, or the investigation or inquiry
into the potential violation of any law,
equals or exceeds the threshold amount
provided in paragraph (f)(6) of this section;
(2) Furnish a written statement as described in paragraph (c) of this section to
each payor; and
(3) Request the payor’s taxpayer identification number (TIN) if it is not already
known, and notify the payor that the law
requires the payor to furnish a TIN for
inclusion on the information return and
that the payor may be subject to a penalty for failure to furnish the TIN. See sections 6723, 6724(d)(3), and §301.6723-1
of this chapter. The TIN may be requested
in any manner, and the payor may provide
the TIN in any manner, including orally,
in writing, or electronically. If the TIN is
furnished in writing, no particular form is
required. Form W-9, Request for Taxpayer Identification Number and Certification, may be used, or the request may be
incorporated into documents related to the
order or agreement.
(b) Requirement to file return—(1)
Content of information return. The information return must provide the following:
(i) The amount required to be paid
to, or at the direction of, a government
or governmental entity, pursuant to section 6050X(a)(1)(A), as a result of the orders and/or agreements;
(ii) The separate amounts required to
be paid as restitution, remediation, or to
come into compliance with a law, as described in section 6050X(a)(1)(B) and
(C), as a result of the orders and/or agreements;
(iii) The payor’s TIN; and
746
(iv) Any additional information required by the information return and the
related instructions.
(2) Form and manner of reporting. The
appropriate official required to file an information return, under paragraph (a)(1)
of this section, must file Form 1098-F,
Fines, Penalties, and Other Amounts, or
any successor form, as provided by the instructions, with Form 1096, Annual Summary and Transmittal of U.S. Information
Returns.
(3) Multiple orders and/or agreements.
The appropriate official must file only one
Form 1098-F for amounts required to be
paid as a result of multiple orders and/or
agreements with respect to the violation
of a law, investigation or inquiry into the
potential violation of a law.
(4) Time of reporting. Returns required to
be made under paragraph (a) of this section
must be filed with the Internal Revenue Service (IRS) on or before February 28 (March
31 if filed electronically) of the year following the calendar year in which the orders
and/or agreements become binding under
applicable law, determined without regard
to whether all appeals have been exhausted
or the time for filing an appeal has expired.
(c) Requirement to furnish written
statement—(1) In general. The appropriate official must furnish a written statement to each payor for which it is required
to file an information return under paragraphs (a)(1) and (b) of this section. The
written statement must include:
(i) The information that was reported to
the IRS relating to such payor; and
(ii) A legend that identifies the statement as important tax information that is
being furnished to the IRS.
(2) Copy of the Form 1098-F. The appropriate official may satisfy the requirement of this paragraph (c) by furnishing
a copy of the Form 1098-F, or any successor form, filed regarding the payor,
or another document that contains the
information required by paragraph (c)(1)
of this section if the document conforms
to applicable revenue procedures or other
guidance relating to substitute statements.
See §601.601 of this chapter.
(3) Time for furnishing written statement. The appropriate official must furnish a written statement to the payor on
or before January 31 of the year following
the calendar year in which the order or
Bulletin No. 2021–6
agreement becomes binding under applicable law, determined without regard to
whether all appeals have been exhausted
or the time for filing an appeal has expired.
(d) Rules for multiple payors—(1)
Multiple payors — individual liability.
If, pursuant to an order or agreement the
aggregate amount multiple individually liable payors are liable to pay, for the
violation of any law, or the investigation
or inquiry into the potential violation of
any law, equals, or exceeds, the threshold amount under paragraph (f)(6) of this
section, the appropriate official must file
an information return under paragraphs
(a)(1) and (b) of this section to report the
amount required to be paid by each payor, even if a payor’s payment liability is
less than the threshold amount. The appropriate official must furnish a written
statement, under paragraph (c) of this
section, to each payor. If more than one
person, as defined in section 7701(a)(1),
is a party to an order or agreement, there
is no information reporting requirement,
or requirement to furnish a written statement, with respect to any person who
does not have a payment obligation or
obligation for costs to provide services or
to provide property.
(2) Multiple payors — joint and several liability. If, pursuant to an order or
agreement, multiple payors are jointly
and severally liable to pay for the violation of any law, or the investigation
or inquiry into the potential violation of
any law, an amount that, in the aggregate,
equals or exceeds the threshold amount
under paragraph (f)(6) of this section, the
appropriate official must file an information return, under paragraphs (a)(1) and
(b) of this section for each of the jointly
and severally liable payors. Each information return must report all amounts
required to be paid by all of the payors
pursuant to the order or agreement. The
appropriate official must furnish a written statement, under paragraph (c) of this
section, to each of the jointly and severally liable payors.
(e) Payment amount not identified. If
some or all of the payment amount is not
identified, as described in §1.162-21(b)
(2)(iii), for paragraphs (a), (b), and (c) of
this section, the appropriate official must
file an information return, and furnish the
Bulletin No. 2021–6
written statement to the payor, as provided by the instructions to Form 1098-F, or
any successor form, including instructions
as to the amounts (if any) to include on
Form 1098-F, only if the government or
governmental entity reasonably expects
that the aggregate amount required to be
paid or incurred pursuant to the order or
agreement, relating to the violation of any
law, or the investigation or inquiry into the
potential violation of any law, will equal
or exceed the threshold amount under
paragraph (f)(6) of this section.
(f) Definitions. The following definitions apply under this section:
(1) Appropriate official—(i) One government or governmental entity. If the
government or governmental entity has
not assigned one of its officers or employees to comply with the reporting requirements of paragraph (a), (b), and (c) of
this section, the term appropriate official
means the officer or employee of a government or governmental entity having
control of the suit, investigation, or inquiry. If the government or governmental
entity has assigned one of its officers or
employees to comply with the reporting
requirements of paragraph (a), (b), and (c)
of this section, such officer or employee is
the appropriate official.
(ii) More than one government or governmental entity—(A) In general. If more
than one government or governmental
entity is a party to an order or agreement,
only the appropriate official of the government or governmental entity listed first on
the most recently executed order or agreement is responsible for complying with all
reporting requirements under paragraphs
(a), (b), and (c) of this section, unless another appropriate official is appointed by
agreement under paragraph (f)(1)(ii)(B) of
this section.
(B) By agreement. The governments or
governmental entities that are parties to an
order or agreement may agree to appoint
one or more other appropriate officials to
be responsible for complying with the information reporting requirements of paragraphs (a), (b), and (c) of this section.
(2) Government. For purposes of this
section, government means the government of the United States, a State, the
District of Columbia, or a political subdivision (such as a local government unit) of
any of the foregoing.
747
(3) Governmental entity. For purposes of this section, governmental entity
means—
(i) A corporation or other entity serving
as an agency or instrumentality of a government (as defined in paragraph (f)(2) of
this section), or
(ii) A nongovernmental entity treated
as a governmental entity as described in
paragraph (f)(4) of this section.
(4) Nongovernmental entity treated as
governmental entity. For purposes of this
section, the definition of nongovernmental entity treated as a gover
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.