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The Proposal
The FAA is proposing an amendment
to Title 14 Code of Federal Regulations
(14 CFR) part 71 by:
Amending the Class D airspace at
Jackson County Airport-Reynolds Field,
Jackson, MI, by updating the geographic
coordinates of the airport to coincide
with the FAA’s aeronautical database;
and replacing the outdated term
‘‘Airport/Facility Directory’’ with ‘‘Chart
Supplement’’;
Amending the Class E airspace
extending upward from 700 feet above
the surface within a 6.5-mile (decreased
from a 7-mile) radius of Jackson County
Airport-Reynolds Field (previously the
Jackson VOR/DME); updating the name
and geographic coordinates of the
airport to coincide with the FAA’s
aeronautical database; and removing the
Jackson VOR/DME from the airspace
legal description;
And amending the Class E airspace
extending upward from 700 feet above
the surface within a 6.3-mile radius
(decreased from a 7.6-mile radius) of
Lakeview Airport-Griffith Field,
Lakeview, MI; and updating the
geographic coordinates of the airport to
coincide with the FAA’s aeronautical
database.
This action is the result of airspace
reviews caused by the decommissioning
of the Jackson and Muskegon VORs,
which provided navigation information
for the instrument procedures these
airports, as part of the VOR MON
Program.
Class D and E airspace designations
are published in paragraph 5000 and
6005, respectively, of FAA Order
7400.11D, dated August 8, 2019, and
effective September 15, 2019, which is
incorporated by reference in 14 CFR
71.1. The Class D and E airspace
designations listed in this document
will be published subsequently in the
Order.
FAA Order 7400.11, Airspace
Designations and Reporting Points, is
published yearly and effective on
September 15.

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Regulatory Notices and Analyses
The FAA has determined that this
regulation only involves an established
body of technical regulations for which
frequent and routine amendments are
necessary to keep them operationally
current, is non-controversial and
unlikely to result in adverse or negative
comments. It, therefore: (1) Is not a
‘‘significant regulatory action’’ under
Executive Order 12866; (2) is not a
‘‘significant rule’’ under DOT
Regulatory Policies and Procedures (44
FR 11034; February 26, 1979); and (3)

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does not warrant preparation of a
regulatory evaluation as the anticipated
impact is so minimal. Since this is a
routine matter that will only affect air
traffic procedures and air navigation, it
is certified that this rule, when
promulgated, would not have a
significant economic impact on a
substantial number of small entities
under the criteria of the Regulatory
Flexibility Act.
Environmental Review
This proposal will be subject to an
environmental analysis in accordance
with FAA Order 1050.1F,
‘‘Environmental Impacts: Policies and
Procedures’’ prior to any FAA final
regulatory action.
List of Subjects in 14 CFR Part 71
Airspace, Incorporation by reference,
Navigation (air).

AGL MI E5 Jackson, MI [Amended]
Jackson County Airport-Reynolds Field,
Jackson, MI
(Lat. 42°15′38″ N, long. 84°27′44″ W)
That airspace extending upward from 700
feet above the surface within a 6.5-mile
radius of the Jackson County AirportReynolds Field.

*

*

*

*

*

AGL MI E5 Lakeview, MI [Amended]
Lakeview Airport-Griffith Field, MI
(Lat. 43°27′08″ N, long. 85°15′53″ W)
That airspace extending upward from 700
feet above the surface within a 6.3-mile
radius of the Lakeview Airport-Griffith Field.
Issued in Fort Worth, Texas, on May 6,
2020.
Steven T. Phillips,
Acting Manager, Operations Support Group,
ATO Central Service Center.
[FR Doc. 2020–10006 Filed 5–12–20; 8:45 am]
BILLING CODE 4910–13–P

The Proposed Amendment
Accordingly, pursuant to the
authority delegated to me, the Federal
Aviation Administration proposes to
amend 14 CFR part 71 as follows:
PART 71—DESIGNATION OF CLASS A,
B, C, D, AND E AIRSPACE AREAS; AIR
TRAFFIC SERVICE ROUTES; AND
REPORTING POINTS
1. The authority citation for 14 CFR
part 71 continues to read as follows:

■

Authority: 49 U.S.C. 106(f), 106(g); 40103,
40113, 40120; E.O. 10854, 24 FR 9565, 3 CFR,
1959–1963 Comp., p. 389.
§ 71.1

[Amended]

2. The incorporation by reference in
14 CFR 71.1 of FAA Order 7400.11D,
Airspace Designations and Reporting
Points, dated August 8, 2019, and
effective September 15, 2019, is
amended as follows:

■

Paragraph 5000

Class D Airspace.

*

*

*

AGL MI D

*

*

Jackson, MI [Amended]

Jackson County Airport-Reynolds Field, MI
(Lat. 42°15′38″ N, long. 84°27′44″ W)
That airspace extending upward from the
surface to and including 3,500 feet MSL
within a 4-mile radius of Jackson County
Airport-Reynolds Field. This Class D airspace
area is effective during the specific dates and
times established in advance by a Notice to
Airmen. The effective date and time will
thereafter be continuously published in the
Chart Supplement.
Paragraph 6005 Class E Airspace Areas
Extending Upward From 700 Feet or More
Above the Surface of the Earth.

*

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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–104591–18]
RIN 1545–BO67

Denial of Deduction for Certain Fines,
Penalties, and Other Amounts;
Information With Respect to Certain
Fines, Penalties, and Other Amounts
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:

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

SUMMARY:

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nongovernmental entities subject to the
related reporting requirement.
DATES: Written or electronic comments
and requests for a public hearing must
be received by July 13, 2020. Requests
for a public hearing must be submitted
as prescribed in the ‘‘Comments and
Requests for a Public Hearing’’ section.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically. Submit electronic
submissions via the Federal
eRulemaking Portal at
www.regulations.gov (indicate IRS and
REG–104591–18) by following the
online instructions for submitting
comments. Once submitted to the
Federal eRulemaking Portal, comments
cannot be edited or withdrawn. The IRS
expects to have limited personnel
available to process public comments
that are submitted on paper through
mail. Until further notice, any
comments submitted on paper will be
considered to the extent practicable.
The Department of the Treasury
(Treasury Department) and the IRS will
publish for public availability any
comment submitted electronically, and
to the extent practicable on paper, to its
public docket.
Send paper submissions to:
CC:PA:LPD:PR (REG–104591–18), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations on
amended section 162(f), Sharon Y. Horn
(202) 317–4426; concerning the
information reporting requirement,
Nancy L. Rose (202) 317–5147;
concerning submissions of comments
and/or requests for a public hearing,
Regina Johnson, (202) 317–5177 (not
toll-free numbers). The phone numbers
above may also be reached by
individuals who are deaf or hard of
hearing, or who have speech
disabilities, through the Federal Relay
Service toll-free at (800) 877–8339.
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
revisions to 26 CFR part 1 under section
162(f) and proposed additions to 26 CFR
part 1 under section 6050X. The
proposed revisions implement the
disallowance of deductions for amounts
paid or incurred to, or at the direction
of, a government, governmental entity,
or nongovernmental entity in relation to
the violation, or investigation or inquiry
into the potential violation, of a law
under section 162(f), as amended by
section 13306(a) of Public Law 115–97,
131 Stat. 2054 (2017), commonly

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referred to as the Tax Cuts and Jobs Act
(TCJA). The proposed additions
implement the reporting requirements,
under section 6050X, added to the Code
by section 13306(b) of the TCJA.
Prior law under section 162(f) was
enacted in 1969. Public Law 91–172, 83
Stat. 487 (1969). Unless certain
exceptions applied, prior law under
section 162(f) disallowed an ordinary
and necessary deduction, under section
162(a), for any fine or similar penalty
paid to a government for the violation
of a law. This provision codified
existing case law that denied an
ordinary and necessary business
expense deduction for fines or similar
penalties because ‘‘allowance of the
deduction would frustrate sharply
defined national or State policies
proscribing the particular types of
conduct evidenced by some
governmental declaration thereof.’’ See
S. Rep. No. 552–91 at 273—274 (1969).
On February 20, 1975, the Treasury
Department and the IRS issued final
regulations concerning prior law under
section 162(f) (TD 7345, 40 FR 7437)
(1975 regulations). See § 1.162–21.
Amendments were published on July
11, 1975 (T.D. 7366, 40 FR 29290).
Section 1.162–21(a) of the 1975
regulations describe the term ‘‘paid to’’
a government. Section 1.162–21(b)(1) of
the 1975 regulations describes certain
amounts that constitute fines or similar
penalties; § 1.162–21(b)(2) provides that
compensatory damages paid to a
government do not constitute a fine or
penalty. Section 1.162–21(c) provides
examples to illustrate the application of
the 1975 regulations.
As amended by section 13306(a)(1) of
the TCJA, the general rule of section
162(f)(1) provides that no deduction
otherwise allowable under chapter 1 of
the Code (chapter 1) shall be allowed for
any amount paid or incurred (whether
by suit, agreement, or otherwise) to, or
at the direction of, a government,
governmental entity, or
nongovernmental entity in relation to
the violation of a law or the
investigation or inquiry by such
government or governmental entity into
the potential violation of a law.
Section 162(f)(5) describes certain
self-regulating nongovernmental entities
treated as governmental entities.
Because section 162(f)(5) treats these
nongovernmental entities as
governmental entities, exclusively for
purposes of section 162(f) and the
related provisions of section 6050X, the
term ‘‘governmental entities’’ includes
those nongovernmental entities treated
as governmental entities.
Section 162(f)(2) provides an
exception to the general rule and allows

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a taxpayer to deduct certain amounts
paid or incurred that are otherwise
allowable under chapter 1 for
restitution, remediation, or paid to come
into compliance with a law. Section
162(f)(3) provides an exception to the
general rule for amounts paid or
incurred with respect to private party
suits; section 162(f)(4) provides an
exception for certain taxes due.
Under section 162(f)(2)(A)(i) and (ii),
section 162(f)(1) shall not disallow a
deduction for amounts that (i) the
taxpayer establishes were paid or
incurred as restitution (including
remediation of property) or to come into
compliance with a law (establishment
requirement), and (ii) are identified in
the court order (order) or settlement
agreement (agreement) as restitution,
remediation, or amounts paid or
incurred to come into compliance with
a law (identification requirement).
Section 162(f)(2)(B) states that
restitution, remediation, and amounts
paid to come into compliance with a
law do not include any amount paid or
incurred as reimbursement to a
government or governmental entity for
the costs of any investigation or
litigation.
To the extent that the amount paid
would otherwise be deductible under
chapter 1, section 162(f)(2)(A)(iii), (f)(3),
and (f)(4) provide that section 162(f)(1)
shall not disallow a deduction for
amounts paid or incurred (1) as
restitution for failure to pay any tax
imposed under Title 26 had it been
timely paid; (2) pursuant to an order or
agreement with respect to a suit in
which no government or governmental
entity is a party; or (3) as taxes due.
Section 13306(b) of the TCJA added
new section 6050X. Section 6050X(a)(1)
and 6050X(a)(2)(A) requires the
appropriate official of any government
or any entity described in section
162(f)(5), involved in a suit, agreement,
or otherwise to which section 162(f)
applies, to file an information return if
the aggregate amount involved in all
orders or agreements with respect to the
violation, investigation, or inquiry is
$600 or more. Section 6050X(a)(2)(B)
authorizes the Secretary of the Treasury
or his delegate (Secretary) to adjust the
threshold amount for filing the
information return as necessary to
ensure the efficient administration of
the internal revenue laws. Pursuant to
section 6050X(a)(1), the information
return must set forth (1) the amount
required to be paid as a result of the
order or agreement; (2) any amount
required to be paid as a result of the
order or agreement that constitutes
restitution or remediation of property;
and (3) any amount required to be paid

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as a result of the order or agreement for
the purpose of coming into compliance
with a law that was violated or involved
in the investigation or inquiry.
Section 6050X(a)(3) provides that the
government or governmental entity shall
file the information return at the time
the agreement is entered into, as
determined by the Secretary. Section
6050X(b) requires the government or
governmental entity to furnish to each
person who is a party to the suit,
agreement, or otherwise a written
statement, at the time the information
return is filed with the IRS, that
includes (1) the name of the government
or entity and (2) the information
submitted to the IRS.
Under section 13306(a)(2) and (b)(3)
of the TCJA, the amendments to section
162(f) and new section 6050X apply to
amounts paid or incurred on or after the
date of the enactment of the TCJA
(December 22, 2017). However, they do
not apply to amounts paid or incurred
under any binding order or agreement
entered into before December 22, 2017
and, if such order or agreement requires
court approval, the required approval is
obtained before December 22, 2017.
On April 9, 2018, the IRS published
Notice 2018–23, 2018–15 I.R.B. 474, to
provide transitional guidance on the
identification requirement of section
162(f)(2)(A)(ii) and the information
reporting requirement under section
6050X. Notice 2018–23 provides that
information reporting is not required
until the date specified in proposed
regulations under section 6050X. Notice
2018–23 also provides that, until the
Treasury Department and the IRS issue
proposed regulations, the identification
requirement is treated as satisfied if the
order or agreement specifically states on
its face that an amount is paid or
incurred as restitution, remediation, or
to come into compliance with a law.
Under these proposed regulations, the
identification requirement applies to
taxable years beginning on or after the
date the proposed regulations are
adopted as final regulations. Until that
date, taxpayers, governments, and
governmental entities may rely on the
identification requirement as provided
in Notice 2018–23. Alternatively, if
taxpayers, governments, and
governmental entities, apply the rules in
their entirety and in a consistent
manner, taxpayers, governments, and
governmental entities may rely on the
proposed regulations.

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Explanation of Provisions
1. Denial of Deduction for Certain Fines,
Penalties, and Other Amounts
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 terms used
in section 162(f), and throughout these
proposed regulations, are defined in
proposed § 1.162–21(f) and discussed in
this section. In addition, this section
describes the exceptions to the general
rule of section 162(f)(1). Proposed
§ 1.162–21(g) provides examples for the
application of this section.
A. General Rule
Proposed § 1.162–21(a) provides
generally that a taxpayer may not take
a deduction under any provision of
chapter 1 (see section 161, and the
related regulations, concerning items
allowed as deductions) for amounts (1)
paid or incurred by suit, agreement, or
otherwise; (2) to, or at the direction of,
a government or governmental entity;
(3) in relation to the violation, or
investigation or inquiry into the
potential violation, of any civil or
criminal law. This general rule applies
regardless of whether the taxpayer
admits guilt or liability or pays the
amount imposed for any other reason,
including to avoid the expense or
uncertain outcome of an investigation or
litigation.
Proposed § 1.162–21(b) describes an
exception to the general rule, which
allows a deduction for certain amounts
identified in the order or agreement as
restitution, remediation, or paid or
incurred to come into compliance with
a law and the taxpayer establishes that
the amount was paid or incurred for the
purpose identified.
In general, section 6050X imposes a
reporting requirement on governments
and governmental entities with respect
to the payment amount identified
pursuant to certain suits, agreements, or
otherwise. Proposed § 1.6050X–1
provides rules for complying with the
reporting requirement.
Under sections 162(f) and 6050X and
proposed §§ 1.162–21 and 1.6050X–1,
suit, agreement, or otherwise includes,
but is not limited to, settlement
agreements; non-prosecution
agreements; deferred prosecution
agreements; judicial proceedings;
administrative adjudications; decisions
issued by officials, committees,
commissions, or boards of a government
or governmental entity; and any legal
actions or hearings in which a liability
for the taxpayer is determined or

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pursuant to which the taxpayer assumes
liability.
B. Definitions
Proposed § 1.162–21(f) provides
definitions relating to section 162(f).
Government, Governmental Entity, or
Nongovernmental Entity Treated as a
Governmental Entity
The definition of ‘‘government or
governmental entity’’ under proposed
§ 1.162–21(f)(1) reflects the term ‘‘paid
to’’ a government as described in the
1975 regulations but uses the term
‘‘territory’’ instead of ‘‘possession’’ and
‘‘Commonwealth’’ and includes
additional territories. The definition of
government or governmental entity
under proposed § 1.162–21(f)(1) also
includes (1) the government of a
federally recognized Indian tribal
government or a subdivision of an
Indian tribal government; (2) a political
subdivision of, or corporation or other
entity serving as an agency or
instrumentality of, any government; or
(3) a nongovernmental entity treated as
a governmental entity. Under proposed
§ 1.162–21(f)(2)(i), certain
nongovernmental entities are treated as
governmental entities.
Proposed § 1.162–21(f)(2)(ii) adopts
the definition of a nongovernmental
entity in section 162(f)(5) in its entirety.
Proposed § 1.162–21(f)(2)(ii) provides
that a nongovernmental entity is treated
as a governmental entity if it (1)
exercises self-regulatory powers
(including imposing sanctions) in
connection with a qualified board or
exchange (as defined in section
1256(g)(7)); or (2) exercises selfregulatory powers, including adopting,
administering, or enforcing laws and
imposing sanctions, as part of
performing an essential governmental
function. Although nongovernmental
entities are not governmental entities,
for purposes of proposed §§ 1.162–21
and 1.6050X–1 only, the term
‘‘governmental entities’’ includes the
nongovernmental entities treated as
governmental entities.
Restitution and Remediation
Under proposed § 1.162–21(f)(3)(i), an
amount is paid or incurred for
restitution or remediation if it restores,
in whole or in part, the person, as
defined in section 7701(a)(1); the
government; the governmental entity; or
property harmed by the violation or
potential violation of a law. In response
to Notice 2018–23, commenters
disagreed about whether restitution, for
purposes of section 162(f), includes
forfeiture and disgorgement.

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

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paid as restitution or remediation, or
that the amount was paid to come into
compliance with a law.
Proposed § 1.162–21(b)(3)(i) provides
that the taxpayer may satisfy the
establishment requirement by providing
documentary evidence (1) That the
taxpayer was legally obligated to pay the
amount the order or agreement
identified as restitution, remediation, or
to come into compliance with a law; (2)
of the amount paid or incurred; and (3)
of the date on which the amount was
paid or incurred.
Commenters requested that the
regulations address the documents, or
other evidence, that a taxpayer may
present to meet the establishment
requirement. In addition, commenters
expressed concern that it may be
difficult for taxpayers to meet the
requirement when the government has
control of the information that
establishes the amount identified in the
order or agreement. Proposed § 1.162–
21(b)(3)(ii) provides a non-exhaustive
list of documents that taxpayers may
use to satisfy the establishment
requirement. Reporting of the amount
by a government or governmental entity
under section 6050X and proposed
§ 1.6050X–1(a) alone does not satisfy the
establishment requirement. The
Treasury Department and the IRS
request comments about other evidence
and supporting documentation
taxpayers may use to meet the
establishment requirement.
F. Identification Requirement
Section 162(f)(2)(A)(ii) requires an
order or agreement to identify an
amount paid or incurred as restitution,
remediation, or to come into compliance
with a law. Under proposed § 1.162–
21(b)(2)(i), an order or agreement
identifies a payment by stating the
nature of, or purpose for, each payment
each taxpayer is obligated to pay and
the amount of each payment identified.
To satisfy the identification
requirement, proposed § 1.162–
21(b)(2)(ii) requires the order or
agreement to specifically state that the
payment, and the amount of the
payment, constitutes restitution,
remediation, or an amount paid to come
into compliance with a law. The
proposed rule provides that the
identification requirement may be met if
the order or agreement uses a different
form of the requisite words, such as
‘‘remediate’’ or ‘‘comply with a law.’’
Commenters expressed the concern
that it may not be possible to satisfy the
identification requirement in an order or
agreement that imposes lump-sum
judgments or settlements, multiple
damage awards, or involves multiple

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taxpayers because it is unlikely that the
order or agreement will distinguish the
amount to be paid as restitution,
remediation, or to come into compliance
with a law from the disallowed
amounts, or allocate the payments
among the multiple taxpayers.
Therefore, the commenters
recommended that the regulations
exclude these orders and agreements
from the identification requirement of
section 162(f)(2)(A)(ii) altogether. The
proposed regulations do not adopt the
commenters’ recommendation because
such an exception would be
inconsistent with the statute. The
Treasury Department and the IRS
request comments on how taxpayers
may meet the identification requirement
with respect to lump-sum payments,
multiple damage awards, and multiple
taxpayers.
One commenter expressed the
concern that it is beyond the expertise
of a government or governmental entity
to place a value on restitution or
remediation costs, or costs to come into
compliance with a law. Another stated
that, in general, the compliance or
restitution provisions of an order or
agreement may not include quantified
amounts because neither the up-front,
nor ultimate, costs can be determined.
The Treasury Department and the IRS
request comments about orders or
agreements meeting the identification
requirement, including when an order
or agreement identifies a payment
amount which is less than the amount
the taxpayer establishes was paid as
restitution, remediation, or to come into
compliance with a law.
Other commenters explained that an
order or agreement may require the
taxpayer to provide services, provide
property, or undertake specific action,
to satisfy the legal obligation. These
commenters requested that the
regulations provide a rule that an order
or agreement may meet the
identification requirement if it identifies
the in-kind settlement or the specified
performance as restitution, remediation,
or amount paid to come into compliance
with a law, even if an actual payment
amount is not identified.
To treat taxpayers that, pursuant to
the order or agreement, in whole or in
part, discharge their liability in-kind in
the same manner as taxpayers who
make a monetary payment, and to
administer the statute in a manner
consistent with congressional intent,
proposed § 1.162–21(b)(2)(iii) addresses
how an order or agreement may meet
the identification requirement with
respect to any amount paid or incurred
that is not identified. The proposed rule
provides, if the order or agreement

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identifies a payment as restitution,
remediation, or to come into compliance
with a law but does not identify some
or all of the aggregate amount the
taxpayer must pay, the order or
agreement must describe the damage
done, harm suffered, or manner of
noncompliance with a law, and describe
the action required by the taxpayer
(such as incurring costs to provide
services or to provide property) with
respect to the damage, harm, or
noncompliance.
Under proposed § 1.162–21(b)(2)(iv),
the IRS may challenge the
characterization of an amount identified
under proposed § 1.162–21(b)(2). No
deduction is allowable unless the
identification requirement is met. H.R.
Rep. No. 115–466, at 430 (2017).
Reporting of the amount by a
government or governmental entity
under section 6050X and proposed
§ 1.6050X–1(a) alone does not satisfy the
identification requirement.
G. Suits Between Private Parties
If the amount is otherwise deductible
under chapter 1, section 162(f)(3) allows
a deduction for an amount paid or
incurred pursuant to an order or
agreement in which no government or
governmental entity is a party to a suit.
Therefore, section 162(f)(1) disallows a
deduction for amounts paid or incurred
to, or at the direction of, a government
or governmental entity only when a
government or governmental entity is a
complainant or investigator with respect
to the violation or potential violation of
a law. A court-directed payment or the
entry of a judgment in a lawsuit
between private parties is not a payment
made at the direction of a government.
H.R. Rep. No. 115–466, at 430 (2017).
Proposed section 1.162–21(c)(1)
provides that section 162(f)(1) does not
apply to any amount paid or incurred by
reasons of any order or agreement in a
suit in which no government or
governmental entity is a party.
H. Taxes and Related Interest
Section 162(f)(4) provides that section
162(f)(1) does not apply to any amount
paid or incurred as ‘‘taxes due.’’ ‘‘Taxes
due’’ includes interest on taxes but not
interest, if any, with respect to any
related penalties imposed. See Joint
Committee on Taxation, General
Explanation of Public Law 115–97, at
194 (December 2018). Proposed § 1.162–
21(c)(2) provides that proposed § 1.162–
21(a) does not apply to amounts paid or
incurred as otherwise deductible taxes
or related interest. However, if penalties
are imposed with respect to those
otherwise deductible taxes, proposed
§ 1.162–21(a) disallows a deduction for

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the interest paid with respect to such
penalties.
I. Failure To Pay Title 26 Tax
In accordance with section
162(f)(2)(A)(iii), proposed § 1.162–
21(c)(3) provides that, in the case of any
amount paid or incurred as restitution
for failure to pay tax imposed under
Title 26, section 162(f)(1) does not
disallow a deduction otherwise allowed
under chapter 1. For example, section
162(f)(1) and proposed § 1.162–21(a) do
not disallow a deduction of an amount
paid or incurred as restitution for failure
to pay certain excise or employment
taxes otherwise deductible under
chapter 1. However, a deduction for
amounts paid or incurred as restitution
for failure to pay a Federal income tax
is disallowed because section 275(a)(1)
provides that no deduction is allowed
for Federal income taxes.
J. Taxable Year of Deduction
Under proposed § 1.162–21(d)(1),
deductions allowed under proposed
§§ 1.162–21(b) or (c), are taken into
account under the rules of section 461
and the related regulations, or the rules
specifically applicable to the allowed
deduction, such as the rules of
§ 1.468B–3(c).
K. Tax Benefit Income
If the deduction allowed under
proposed § 1.162–21(b) or (c) results in
a tax benefit to the taxpayer, proposed
§ 1.162–21(d)(2) requires the taxpayer to
include in income, under sections 61
and 111, the recovery of any amount
deducted in a prior taxable year to the
extent the prior year’s deduction
reduced the taxpayer’s tax liability.
2. Reporting Information With Respect
to Certain Fines, Penalties, and Other
Amounts
The purpose of the proposed
regulations under section 6050X is to
provide appropriate officials of
governments or governmental entities
the operational, administrative, and
definitional rules for complying with
the statutory information reporting
requirements with respect to certain
suits or agreements to which section
162(f) and proposed § 1.162–21(f)(4)
apply.
In general, under proposed
§ 1.6050X–1(a), if the aggregate amount
a payor is required to pay pursuant to
an order or agreement with respect to a
violation, investigation, or inquiry to
which section 162(f) and proposed
§ 1.162–21 apply equals or exceeds the
threshold amount under proposed
§ 1.6050X–1(g)(5), the appropriate
official of a government or governmental

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Government, Governmental Entity, or
Nongovernmental Entity Treated as a
Governmental Entity

6050X and proposed § 1.6050X–1 on
Indian tribal governments, as defined in
section 7701(a)(40), subdivisions of
Indian tribal governments, as
determined in accordance with section
7871(d), or a corporation or other entity
serving as an agency or instrumentality
of any Indian tribal government would
not contribute to the efficient
administration of the internal revenue
laws. Additionally, consistent with
general principles of comity, the
proposed definition of ‘‘government or
governmental entity’’ in § 1.6050X–
1(g)(2) excludes foreign governments,
governments of U.S. territories, or any
political subdivision, or corporation or
other entity serving as an agency or
instrumentality, thereof.
Although a particular entity is
excluded from the information reporting
requirements of section 6050X and
proposed § 1.6050X–1, amounts paid or
incurred to all categories of entities
described in proposed § 1.162–21(f)(1)
are subject to the limitations on
deductibility set forth in proposed
§ 1.162–21.

To lessen the administrative burden
on certain entities, the proposed
definition of ‘‘government or
governmental entity’’ in § 1.6050X–
1(g)(2) is narrower than the definition
provided in proposed § 1.162–21(f)(1)
because it requires reporting only from
certain of the governments and
governmental entities described in
proposed § 1.162–21(f)(1). Specifically,
the government of the United States, a
State, or the District of Columbia, under
proposed § 1.162–21(f)(1)(i), or a
political subdivision, or a corporation or
other entity serving as an agency or
instrumentality, thereof, are each treated
under the proposed regulations as a
government or governmental entity that
must comply with the information
reporting requirements of section 6050X
and proposed § 1.6050X–1. In addition,
a nongovernmental entity, under
proposed § 1.162–21(f)(2), that exercises
self-regulatory powers (including
imposing sanctions) in connection with
a qualified board or exchange (as
defined in section 1256(g)(7)) or
exercises self-regulatory powers,
including adopting, administering, or
enforcing laws and imposing sanctions,
as part of performing an essential
governmental function, also must
comply with the information reporting
requirements of section 6050X and
proposed § 1.6050X–1.
In contrast, as a result of governmentto-government consultation with tribal
leaders, the Treasury Department and
the IRS have determined that imposing
the reporting requirements of section

Appropriate Official
Section 6050X(c) defines ‘‘appropriate
official’’ of a government or
governmental entity as the officer or
employee having control of the suit,
investigation, or inquiry, or an
appropriately designated person.
Proposed § 1.6050X–1(g)(1) adopts this
statutory definition and further provides
that the appropriate official may instead
be the officer or employee of the
government or governmental entity
assigned to comply with the information
reporting requirements of section
6050X.
One commenter observed that more
than one government or governmental
entity may be involved in the same
order or agreement and suggested that
the appropriate official be an official
from only one government or
governmental entity. The Treasury
Department and the IRS agree with this
comment generally. To minimize the
burden on governments or governmental
entities from having to report the same
amount more than once, and to ensure
the efficient administration of the
internal revenue laws, proposed
§ 1.6050X–1(g)(1)(ii)(A) provides a
general rule that, if more than one
government or governmental entity is a
party to an order or agreement, only the
appropriate official of the government or
governmental entity listed first, for
example as the first signatory, on the
most recently executed order or
agreement is responsible for complying
with all section 6050X information
reporting and furnishing requirements.

entity that is a party to the order or
agreement must file an information
return with the IRS with respect to the
amounts or incurred paid and any
additional information required by the
information return and the related
instructions, including the payor’s
taxpayer identification number. The
appropriate official of a government or
governmental entity that is a party to the
order or agreement must also furnish a
written statement with the same
information to the payor.
Reporting of the amount by a
government or governmental entity
under section 6050X and proposed
§ 1.6050X–1(a) alone does not satisfy the
identification requirement under section
162(f)(2)(A)(ii) and proposed § 1.162–
21(b)(2)(ii) or the establishment
requirement under section
162(f)(2)(A)(i) and proposed § 1.162–
21(b)(3).

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A. Definitions

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To provide governments or
governmental entities with greater
flexibility, proposed § 1.6050X–
1(g)(1)(ii)(B) permits the governments or
governmental entities to appoint one or
more other appropriate officials to be
responsible for complying with the
information reporting and furnishing
requirements. The Treasury Department
and the IRS request comments about
assigning an appropriate official to
comply with the information reporting
and furnishing requirements if more
than one government or governmental
entity are parties to the order or
agreement.
Payor
Proposed § 1.6050X–1(g)(4) defines
‘‘payor’’ as the person, as defined in
section 7701(a)(1), which, pursuant to
an order or agreement, has paid or
incurred, or is liable to pay or incur, an
amount to, or at the direction of, the
government or governmental entity in
relation to the violation or potential
violation of a law. In general, the payor
will be the person to which section
162(f) and proposed § 1.162–21 apply.
Threshold Amount
Section 6050X(a)(2)(B) provides the
Secretary with the authority to adjust
the statutory reporting threshold of $600
as necessary to ensure the efficient
administration of the internal revenue
laws.
Based on comments received from
governments and governmental entities
concerned about the burden of
information reporting and to ensure the
efficient administration of the internal
revenue laws, the Treasury Department
and the IRS have determined that a
threshold higher than $600 is
appropriate to address these concerns.
Proposed § 1.6050X–1(g)(5) provides
that reporting is required for payment
amounts equal to or in excess of $50,000
(threshold amount).
The Treasury Department and the IRS
request comments concerning the
proposed threshold amount in
consideration of the anticipated
compliance burden on filers. In
particular, the Treasury Department and
the IRS request data on the annual
number of relevant orders issued, or
agreements entered into, by
governments or governmental entities as
well as the financial, time, and
administrative burdens associated with
different threshold amounts.
B. Requirement To File Return
Under proposed § 1.6050X–1(b)(1),
the information return filed by the
government or governmental entity
must provide the aggregate amount a

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payor is required to pay as a result of
the order or agreement, the separate
amounts required to be paid as
restitution, remediation, or to come into
compliance with a law as a result of the
order or agreement, and any additional
information required by the information
return and the related instructions.
Section 6050X(a)(3) requires the
information return to be filed at the time
the agreement is entered into, as
determined by the Secretary.
Commenters observed that it would be
burdensome and inefficient to file
information returns each time an
agreement is entered into or an order is
issued. In order to reduce the reporting
burden, several commenters suggested
that the regulations require annual filing
of information returns to be made by a
specific date in the year following the
date the agreement is entered into or the
order is issued. The Treasury
Department and the IRS agree with this
comment and have adopted it in the
proposed regulations. Accordingly, the
appropriate official of a government or
governmental entity must comply with
the information reporting requirement
of proposed § 1.6050X–1(a) and (b) by
filing Form 1098–F, Fines, Penalties,
and Other Amounts (or any successor
form), with Form 1096, Annual
Summary and Transmittal of U.S.
Information Returns, on or before the
annual due date as provided in
proposed § 1.6050X–1(b)(2).
Several commenters expressed
concerns about the information
reporting requirements with respect to
an order or agreement pursuant to
which payments are made over the
course of several years. To minimize the
burden on governments or governmental
entities and to ensure the efficient
administration of the internal revenue
laws, proposed § 1.6050X–1 does not
require an appropriate official to file
information returns for each taxable
year in which a payor makes a payment
pursuant to a single order or agreement.
Instead, the appropriate official must
file only one information return for the
aggregate amount identified in the order
or agreement.
C. Requirement To Furnish Written
Statement
Proposed § 1.6050X–1(c) requires the
appropriate official of a government or
governmental entity who fulfills the
requirement under section 6050X(a) and
proposed § 1.6050X–1(a)(1) to furnish a
written statement to each payor with
respect to which it is required to file an
information return under paragraphs
(a)(1) and (b) of § 1.6050X–1. For
purposes of tax administration, the
requirement to ‘‘furnish’’ written

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statements requires that those with a
reporting obligation must provide
statements to certain recipients
containing the information reported to
the IRS and, in some cases, additional
information. Under section 6050X, the
payor is the recipient. The written
statement must include the information
that was reported on the information
return and a legend that identifies the
statement as important tax information
that is being furnished to the IRS. To
minimize the burden on governments or
governmental entities, the proposed
regulations permit the appropriate
official to comply with the requirements
under section 6050X(b) and proposed
§ 1.6050X–1(a)(2) by furnishing a copy
of Form 1098–F to the payor. Regardless
of when the appropriate official
furnishes the statement to the payor, the
timing of any deduction allowed under
proposed § 1.162–21 is governed by the
general principles of Federal income tax
law, as set forth in proposed § 1.162–
21(d).
D. Due Dates
Section 6050X(a)(3) provides that the
information return shall be filed at a
time the agreement is entered into, as
determined by the Secretary. Further,
section 6050X(b) requires the written
statement to be furnished to the payor
at the same time the information return
is filed with the IRS. Under proposed
§ 1.6050X–1(b)(2), the information
return must be filed on or before January
31 of the year following the calendar
year in which the order or agreement
becomes binding under applicable law,
even if all appeals have not been
exhausted with respect to the suit,
agreement, or otherwise.
The return is due on or before January
31 whether it is filed on paper or
electronically. Although the due date for
filing electronic Forms 1098–F under
proposed § 1.6050X–1(b)(2) differs from
the general March 31 due date provided
in section 6071(b), which applies with
respect to electronically filed
information returns under sections 6041
through 6050Y, the specific provisions
of section 6050X take precedence over
the general March 31 due date. To
ensure that the payor has the
information necessary to prepare the
payor’s income tax return, and as
directed by section 6050X(b), proposed
§ 1.6050X–1(c)(3) requires the
appropriate official to furnish the
written statement, under proposed
§ 1.6050X–1(c)(1), on or before the date
that the appropriate official files the
Form 1098–F with the IRS (January 31).

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E. Rules for Multiple Payors
Proposed § 1.6050X–1(d) describes
the application of paragraphs (a), (b),
and (c) of § 1.6050X–1 if, pursuant to
the order or agreement, the aggregate
amount multiple payors are required to
pay, or the costs to provide the property
or the service, equals or exceeds the
threshold amount. If, pursuant to the
order or agreement, more than one
payor is individually liable for some or
all of the payment amount, proposed
§ 1.6050X–1(d)(1) requires the
appropriate official to file an
information return for the separate
amount that each individually liable
payor is required to pay, even if a
payor’s payment liability is less than the
threshold amount, and to furnish a
written statement containing this
information to each payor. If more than
one person (as defined in section
7701(a)(1)) is a party to an order or
agreement, there is no information
reporting requirement, or requirement to
furnish a written statement, with respect
to any person who does not have a
payment obligation or obligation for
costs to provide services or to provide
property.
Proposed § 1.6050X–1(d)(2) provides
that, if an order or agreement identifies
multiple jointly and severally liable
payors, the appropriate official must file
an information return for each payor
reporting the aggregate amount to be
paid by all jointly and severally liable
payors. The appropriate official must
furnish a written statement containing
this information to each of those payors,
regardless of which payor makes the
payment.
F. Payment Amount Not Identified
Some orders or agreements may
identify a payment, or an obligation to
provide property or to provide services,
as restitution, remediation, or an
amount paid to come into compliance
with a law, without identifying some or
all of the aggregate amount the payor
must pay, or some or all of the aggregate
cost to provide property or services.
Proposed § 1.6050X–1(e) provides that,
if the government or governmental
entity expects, under the facts and
circumstances, that the amount the
payor must pay, plus any other costs the
payor will incur, pursuant to the order
or agreement will equal or exceed the
threshold amount, the appropriate
official of such government or
governmental entity must file an
information return on Form 1098–F (or
any successor form), as provided in the
instructions to the Form 1098–F, and
furnish a written statement to the payor
with the information supplied to the IRS

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on Form 1098–F. For example, if the
United States Environmental Protection
Agency (EPA) issues an order requiring
a payor to come into compliance with
the underlying legal requirements of the
Clean Water Act, 33 U.S.C. 1251 et seq.,
by undertaking work, and the EPA
expects, under the facts and
circumstances, that the payor will incur
$50,000 or more of costs to come into
compliance with the law, the EPA must
file Form 1098–F and furnish a written
statement including this information, as
directed by the form and form
instructions, to the payor.
The Treasury Department and the IRS
request comments about reporting of
payment amounts that are not identified
and the factors governments and
governmental entities may consider to
determine if the amounts are expected
to equal or exceed the threshold
amount.

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G. Material Change
If there is a material change to the
terms of an order or agreement, as
defined in proposed § 1.162–21(e)(2) for
which the appropriate official has filed
an information return, proposed
§ 1.6050X–1(f) requires the appropriate
official to update the IRS by filing a
corrected information return, and to
furnish an amended written statement
to the payor, with respect to the entire
order or agreement, and not just the
terms modified. The proposed rules
require the appropriate official to file
the corrected Form 1098–F, on paper or
electronically, as provided by the
General Instructions for Certain
Information Returns, on or before
January 31 of the year following the
calendar year in which the parties make
a material change to the terms of the
order or agreement. The proposed rules
also require the appropriate official to
furnish an amended written statement
to the payor on or before the date that
the corrected Form 1098–F is filed with
the IRS.
Proposed Applicability Dates
The rules of proposed § 1.162–21 are
proposed to apply to taxable years
beginning on or after the date of
publication of the Treasury decision
adopting the rules of proposed § 1.162–
21 as final regulations in the Federal
Register, except that such rules do not
apply to amounts paid or incurred
under any order or agreement which
became binding under applicable law
before such date. Until that date,
taxpayers may rely on the rules of
proposed § 1.162–21, for any order or
agreement, but only if the taxpayers
apply the rules in their entirety and in
a consistent manner. See section

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7805(b)(7). Additionally, the rules of
proposed § 1.6050X–1 are proposed to
apply only to orders and agreements
that become binding under applicable
law on or after January 1, 2022.
Special Analyses
I. Regulatory Planning and Review—
Economic Analysis
Executive Orders 12866 and 13563
direct agencies to assess costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). Executive Order 13563
emphasizes the importance of
quantifying both costs and benefits, of
reducing costs, of harmonizing rules,
and of promoting flexibility. The
preliminary E.O. 13771 designation is
regulatory.
The proposed regulations have been
designated as subject to review under
Executive Order 12866 pursuant to the
Memorandum of Agreement (April 11,
2018) between the Treasury Department
and by the Office of Management and
Budget (OMB) regarding review of tax
regulations. The Office of Information
and Regulatory Affairs (OIRA) has
designated the proposed rulemaking as
significant under section 1(c) of the
Memorandum of Agreement.
Accordingly, the proposed regulations
have been reviewed by OMB.
A. Background
Prior to the TCJA, section 162(f) of the
Code disallowed a deduction for any
fine or similar penalty paid to a
government for the violation of a law.
This provision, enacted in 1969,
codified existing case law that denied
business deductions for fines or similar
penalties. The general rule of section
162(f)(1), as amended by section
13306(a) of the TCJA, disallows any
deduction for amounts paid or incurred
(whether by suit, agreement, or
otherwise) to, or at the direction of, a
government or governmental entity or
certain nongovernmental entities treated
as governmental entities, in relation to
the violation of a law or the
investigation or inquiry by such
government or entity into the potential
violation of a law. Section 13306(a) also
provides certain exceptions to this
disallowance. Section 162(f)(2) does not
disallow deduction for amounts that (1)
the taxpayer establishes were paid or
incurred as restitution (including
remediation of property) or to come into
compliance with a law, and (2) are

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identified in the court order or
settlement agreement as restitution,
remediation, or to come into compliance
with a law.
In addition, under prior law, the
Treasury Department and the IRS did
not receive information returns from
governments or governmental entities
that received fines or penalties. Section
6050X of the Code, enacted by section
13306(b) of the TCJA, requires
appropriate officials to file an
information return if the aggregate
amount involved in all orders or
agreements with respect to the violation,
investigation, or inquiry is $600 or
more. The information return must
include (1) The amount required to be
paid as a result of the order or
agreement; (2) any amount that
constitutes restitution or remediation of
property; and (3) any amount required
to be paid for the purpose of coming
into compliance with a law that was
violated or involved in the investigation
or inquiry. Section 6050X provides the
Secretary with the authority to adjust
the $600 reporting threshold in order to
ensure efficient tax administration.
B. Need for the Proposed Regulations
The Treasury Department and the IRS
have received several questions and
comments from Federal, state, local, and
tribal governments, as well as the
public, regarding the meaning of various
provisions in each section and issues
not explicitly addressed in the statute.
The Treasury Department and the IRS
have determined that such comments
warrant the issuance of further
guidance.
In addition, the Treasury Department
and the IRS have determined that
increasing the reporting threshold to
reduce the reporting burden and to
enhance the efficiency of tax
administration is appropriate.
C. Overview of the Proposed
Regulations
The proposed regulations provide
guidance regarding sections 162(f) and
6050X. The following analysis provides
further detail regarding the anticipated
impacts of the proposed regulations.
Part I.D specifies the baseline for the
economic analysis. Part I.E.1.
summarizes the economic effects of the
rulemaking, relative to this baseline.
Part I.E.2. describes the economic effects
of specific provisions covering (1) the
reporting threshold, (2) the timing of
information reporting, and (3)
information reporting requirements
when payment amounts are not
identified.

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Federal Register / Vol. 85, No. 93 / Wednesday, May 13, 2020 / Proposed Rules

D. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of
the proposed regulations relative to a
no-action baseline reflecting anticipated
Federal income tax-related behavior in
the absence of these proposed
regulations.
E. Economic Analysis of the Proposed
Regulation

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I. Summary of Economic Effects
The proposed section 162(f)
regulations provide definitions for
restitution, remediation, and amounts
paid to come into compliance with the
law. These definitions clarify for
taxpayers which amounts paid or
incurred may be deductible under the
statute. The proposed regulations also
clarify (1) how the taxpayer meets the
establishment requirement; and (2) how
the order or agreement meets the
identification requirement. The
Treasury Department and the IRS have
determined that the burden reduction
associated with the proposed
regulations for section 162(f) is modest.
In addition, while the proposed
regulations reduce uncertainty for
taxpayers, they are unlikely to affect
firms’ economic decision-making
because most of the amounts to be paid
or incurred which are subject to section
162(f) are non-discretionary.
The proposed regulations under
section 6050X provide certainty and
consistency for affected governments
and governmental entities by defining
and clarifying the statute’s terms and
rules. Further, the proposed regulations
use the authority provided by the statute
to the Secretary to set information
reporting requirements to minimize the
burden on governments and
governmental entities and to ensure the
efficient administration of the internal
revenue laws. Most importantly, the
proposed regulations increase the
reporting threshold from $600 to
$50,000, thereby eliminating
information reporting requirements for
an estimated 1 to 5 million orders or
agreements. Using the midpoint of this
range (3 million), the estimated burden
reduction from this exercise of
regulatory discretion is $74 million
(2018 dollars) per year. The Treasury
Department and the IRS acknowledge
that limited quantitative data makes
estimates of the number of affected
orders and agreements uncertain, and
request comments or data that can help
improve these estimates.

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II. Economic Analysis of Specific
Provisions
The effects of the information
reporting requirements are discussed in
more detail in sections II.A, B, and C.
The Treasury Department and the IRS
solicit comments on the economics of
each of the items discussed
subsequently and of any other items of
the proposed regulations not discussed
in this section. The Treasury
Department and the IRS particularly
solicit comments that provide data,
other evidence, or models that could
enhance the rigor of the process by
which provisions might be developed
for the final regulations.
A. Reporting Threshold
Section 6050X requires governments
and governmental entities which enter
orders or agreements to which section
162(f) applies to file an information
return if the aggregate amount paid or
incurred in all orders or agreements
with respect to the violation,
investigation, or inquiry is equal to or
exceeds a threshold of $600. Section
6050X also provides the Secretary with
the authority to adjust the statutory
reporting threshold as necessary to
ensure efficient tax administration. In
response to multiple comments received
from governments and governmental
entities concerned about the burden of
information reporting for smaller
payment amounts pursuant to orders or
agreements, the proposed regulations
raise the reporting threshold to $50,000.
The Treasury Department and the IRS
request comments on this proposed
threshold amount. In particular, data on
the annual number of orders or
agreements by governments or
governmental entities would be helpful.
The Treasury Department and the IRS
considered a range of alternative
thresholds including the statutory
threshold of $600, along with much
higher thresholds suggested by some
commenters. Upon consideration of
both the enforcement needs of the IRS
and the reporting burden on
governments and governmental entities,
the Treasury Department and the IRS
exercised the authority provided to the
Secretary by the statute to set the
reporting threshold amount at $50,000.
The Treasury Department and the IRS
do not know of any data on the number
of orders or agreements requiring
taxpayers to pay amounts to, or at the
direction of, governments or
governmental entities, or the
distribution of these amounts, such as
the number that are above or below
$600. Based on communications with
stakeholders, the Treasury Department

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and the IRS estimate that the increase in
reporting threshold from $600 to
$50,000 will reduce the number of
required information returns by 1 to 5
million. The Treasury Department and
the IRS further estimate that the average
time to complete the information return
is between 0.387 and 0.687 hours. Using
the midpoint of each of these ranges (3
million information returns and .537
hours) and labor cost of $46 per hour,1
the Treasury Department and the IRS
estimate that increasing the reporting
threshold will reduce annual
compliance burdens by $74 million
dollars (2018 dollars) per year. It should
be noted that many of the lower level
fines and penalties are likely to be
assessed to non-businesses that are not
able to deduct business expenses so
they would be unaffected by any
reporting requirement.
Increasing the reporting threshold
from $600 to $50,000 is unlikely to have
a significant effect on revenues as fines
over $50,000 likely account for the vast
majority of fines and penalties in terms
of dollar values. Based on financial
reporting values disclosed on tax
returns of C corporations, S corporations
and Partnerships, firms with over
$50,000 in total fines and penalties
account for 99% of all fines and
penalties. However, this data should be
interpreted with caution. Financial
reporting of fines and penalties includes
both international and domestic fines,
and all fines and penalties are
aggregated into yearly totals.
Furthermore, firms with less than $10
million in assets are not required to
provide financial reporting values with
their tax returns.
The Treasury Department and the IRS
solicit comments on this threshold and
cost estimates and particularly solicit
comments that provide data that would
enhance the rigor by which the
threshold is decided for the final
regulations.
B. Time of Reporting
Section 6050X provides that the
government or governmental entity shall
file the information return at the time
the order or agreement is entered into,
as determined by the Secretary. The
Treasury Department and the IRS
received comments from governments
and governmental entities observing
that it would be burdensome and
inefficient to file information returns
each time an order or agreement
becomes binding under applicable law.
Several commenters suggested that
1 This data point is derived by the IRS as part of
the burden analysis described in the Paperwork
Reduction Act section below.

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Federal Register / Vol. 85, No. 93 / Wednesday, May 13, 2020 / Proposed Rules
annual filing of information returns
would meaningfully reduce this
reporting burden. The Treasury
Department and the IRS agree with this
comment and have adopted it in the
proposed regulations.
Several commenters also expressed
uncertainty and concern about the
information reporting requirements for
an order or agreement pursuant to
which payments are made over the
course of several years. To reduce
uncertainty, and to minimize the burden
on governments and governmental
entities, the proposed regulations clarify
that information reporting is required
only for the year in which the order or
agreement becomes binding under
applicable law, and not required for
each taxable year in which a payor
makes a payment.
The Treasury Department and the IRS
considered requiring information
reporting at the time the order is issued
or the agreement is entered. The
Treasury Department and the IRS also
considered requiring information
reporting in each year in which an
amount is paid or incurred pursuant to
the order or agreement. However, both
alternative approaches were determined
to impose unnecessary burden for
governments and governmental entities
without creating accompanying benefits
for tax administration or for taxpayers.
The Treasury Department and the IRS
solicit comments on the timing of
reporting and particularly solicit
comments that provide data regarding
how timing of reporting affects
compliance burdens.
C. Payment Amount Not Identified
When the expected amount paid or
incurred pursuant to an order or
agreement equals or exceeds the
threshold amount, section 6050X
requires governments or governmental

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

Form

Type of filer

1098–F ...............

Governments, Governmental Entities, And Certain Nongovernmental Entities.

reduction, with the exception of the
increase in the threshold amount, which
is estimated to reduce burden by $74
million (2018 dollars) per year. The
Treasury Department and the IRS
projected that the proposed regulations,
taken together, would have a nonrevenue economic effect of less than
$100 million (2018 dollars) per year.
The Treasury Department and the IRS
request comments on the economic
effects of these proposed regulations.
Paperwork Reduction Act
Collection of Information—Form 1098–F
In general, the collection of
information in the proposed regulations
is required under section 6050X of the
Internal Revenue Code (the Code). The
collection of information in these
proposed regulations is set forth in
proposed § 1.6050X–1. The IRS intends
that the collection of information
pursuant to section 6050X will be
conducted by way of Form 1098–F,
Fines, Penalties, and Other Amounts.
For purposes of the PRA, the reporting
burden associated with the collection of
information with respect to section
6050X will be reflected in the IRS Forms
14029 Paperwork Reduction Act
Submission associated with Form 1098–
F. Form 1098–F will be used by all
governments, governmental entities, and
nongovernmental entities treated as
governmental entities with a reporting
requirement. The Treasury Department
and the IRS request comments on all
aspects of information collection
burdens related to the proposed
regulations. In addition, when available,
drafts of IRS forms are posted for
comment at www.irs.gov/draftforms.
The current status of the PRA
submissions related to section 6050X
are provided in the following table.

OMB No.
1545–2284

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Status
Form 1098–F is approved through 1/31/2023.

Related New or Revised Tax Forms

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Form 1098–F .........................................

New

Revision of
existing form

No. of respondents
(2018, estimated)

Yes ...................

........................

90,100 (85,500 small governmental jurisdictions, 4,500 large governmental jurisdictions and 100 nongovernmental entities).

A reasonable burden estimate for the
average time to complete Form 1098–F
is between 0.387 and 0.687 hours
(approximately 23 to 41 minutes). This
estimate is based on survey data

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collected from similar information
return issuers. In addition, the increase
in the reporting threshold under section
6050X will lead to a decrease in the
number of information returns filed by

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between 1 million to 5 million returns.
Using the midpoint of these ranges, or
3 million and 0.537 hours, the estimated
burden reduction is $74 million per
year.

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Federal Register / Vol. 85, No. 93 / Wednesday, May 13, 2020 / Proposed Rules

Estimated average time per form: .537
Hours.
Estimated number of respondents:
90,100.
Estimated total annual burden hours:
48,383.70.
Estimated change in number of
information returns resulting from
increased reporting threshold:
(3,000,000).
Estimated change in burden (hours):
(1,611,150).
Estimated change in burden (Dollars):
($74,161,235).
The Treasury Department and the IRS
request comments on all aspects of these
estimates.
Comments on the collection of
information in proposed § 1.6050X–1(a)
should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the
Treasury at oira_submission@
omb.eop.gov or Office of Information
and Regulatory Affairs, Washington, DC
20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer, SE:CAR:MP:T:T:SP,
Washington, DC 20224. Comments on
the collection of information should be
received by June 12, 2020.
Comments are specifically requested
concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the duties of the IRS,
including whether the information will
have practical utility (including
underlying assumptions and
methodology);
The accuracy of the estimated burden
associated with the proposed collection
of information;
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the proposed collection of information
may be minimized, including through
the application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance,
and purchase of services to provide
information.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the Office of
Management and Budget.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information

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are confidential, as required by 26
U.S.C. 6103.
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
(5 U.S.C. chapter 6) requires agencies to
‘‘prepare and make available for public
comment an initial regulatory flexibility
analysis,’’ which will ‘‘describe the
impact of the proposed rule on small
entities.’’ 5 U.S.C. 603(a). Section 605(b)
of the RFA allows an agency to certify
a rule if the proposed rulemaking is not
expected to have a significant economic
impact on a substantial number of small
entities.
Pursuant to the RFA, it is hereby
certified that these proposed regulations
will not have a significant economic
impact on a substantial number of small
entities within the meaning of section
601(6) of the RFA.
The RFA generally applies to
regulations that affect small businesses,
small organizations, and small
governmental jurisdictions. For
purposes of the RFA, small
governmental jurisdictions are
governments of cities, counties, towns,
townships, villages, school districts, or
special districts with a population of
less than 50,000. This proposed rule
would affect States, as well as local
governments, some of which may meet
the definition of small governmental
jurisdiction. Approximately 90,100
governments, governmental entities, and
nongovernmental entities treated as
governmental entities may be subject to
the reporting requirements of section
6050X. Of those governments and
governmental entities, approximately
85,500 (or 95%) are small governmental
jurisdictions.
Although the regulations may affect a
substantial number of small
governmental jurisdictions, the
economic impact of the proposed
regulations is not likely to be
significant. The proposed regulations set
a reporting threshold that is higher than
the minimum required by statute and
also provide for governments and
governmental entities to file annual
returns. Both of these provisions reduce
the potential burden on small
governmental jurisdictions. In
particular, the increase in the reporting
threshold will lead to a decrease in the
number of information returns filed by
between 1 million to 5 million returns.
Using the midpoint of this range, or 3
million, the estimated burden reduction
is $74 million per year (2018 dollars). It
is estimated that after reading and
learning about the requirements of the
regulations, the burden associated with
filing the annual form is approximately
23 to 41 minutes and the average cost

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per information return is approximately
$24.72, which would not result in a
significant economic impact on small
entities. The Treasury Department and
the IRS request comments on the burden
associated with filing the annual form.
Notwithstanding this certification, the
Treasury Department and the IRS invite
comments on any impact this rule
would have on small entities. Pursuant
to section 7805(f) of the Code, this
notice of proposed rulemaking will be
submitted to the Chief Counsel for the
Office of Advocacy of the Small
Business Administration for comment
on its impact on small entities.
Unfunded Mandates Reform Act
Section 202 of the Unfunded
Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated
costs and benefits and take certain other
actions before issuing a final rule that
includes any Federal mandate that may
result in expenditures in any one year
by a state, local, or tribal government, in
the aggregate, or by the private sector, of
$100 million in 1995 dollars, updated
annually for inflation. This rule does
not include any Federal mandate that
may result in expenditures by state,
local, or tribal governments, or by the
private sector in excess of that
threshold.
Executive Order 13132: Federalism
Executive Order 13132 (entitled
Federalism) prohibits an agency from
publishing any rule that has Federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state
law, unless the agency meets the
consultation and funding requirements
of section 6 of the Executive Order.
These proposed rules do not have
Federalism implications, and do not
impose substantial direct compliance
costs on state and local governments or
preempt state law, within the meaning
of the Executive Order. The compliance
costs, if any, are imposed on state and
local governments by section 6050X, as
enacted by the TCJA. Notwithstanding,
the Treasury Department and the IRS
have engaged in efforts to consult and
work cooperatively with affected State
and local officials in the process of
developing the proposed rules by
participating in a teleconference with
the National League of Cities on
September 27, 2019, and the National
Governors Association on October 2,
2019. Pursuant to the requirements set
forth in section 8(a) of Executive Order
13132, the Treasury Department and the
IRS certify that they have complied with

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Federal Register / Vol. 85, No. 93 / Wednesday, May 13, 2020 / Proposed Rules
the requirements of Executive Order
13132.
Executive Order 13175: Consultation
and Coordination With Indian Tribal
Governments
Executive Order 13175 (entitled
Consultation and Coordination with
Indian Tribal Governments) requires
consultation and collaboration with
tribal officials in the development of
Federal policies that may have tribal
implications. In order to obtain tribal
input in accordance with Executive
Order 13175 and consistent with
Treasury’s Tribal Consultation Policy
(80 FR 57434, September 23, 2015), the
Treasury Department and the IRS held
a Tribal Consultation with tribal
officials on September 12, 2019. The
Treasury Department and the IRS will
obtain additional input on the tribal
implications of the proposed rules
before publishing them as final rules.
Comments and Requests for a Public
Hearing

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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.

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List of Subjects in 26 CFR Part 1
Income taxes; Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
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).

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

VerDate Sep<11>2014

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.

*

*
*
*
*
Par. 2. Section 1.162–21 is revised to
read as follows:

■

§ 1.162–21 Denial of deduction for certain
fines, penalties, and other amounts.

(a) Deduction Disallowed. Except as
otherwise provided in this section, no
deduction is allowed under chapter 1 of
the Internal Revenue Code (Code) for
any amount that is paid or incurred—
(1) By suit, settlement agreement
(agreement), or otherwise;
(2) To or at the direction of a
government or governmental entity, as
defined in paragraph (f)(1) of this
section, or a nongovernmental entity, as
defined in paragraph (f)(2) of this
section; and
(3) In relation to the violation, or
investigation or inquiry into the
potential violation, of any civil or
criminal law.
(b) Exception for restitution,
remediation, and amounts paid to come
into compliance with a law—(1) In
general. Paragraph (a) of this section
does not apply to amounts paid or
incurred for restitution, remediation, or
to come into compliance with a law, as
defined in paragraph (f)(3) of this
section, provided that both the
identification and the establishment
requirements of paragraphs (b)(2) and
(b)(3) of this section are met.
(2) Identification requirement—(i) In
general. A court order (order) or an
agreement identifies a payment by
stating the nature of, or purpose for,
each payment each taxpayer is obligated
to pay and the amount of each payment
identified.

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28535

(ii) Meeting the identification
requirement. The identification
requirement is presumed to be met if an
order or agreement specifically states
that the payment, and the amount of the
payment, described in paragraph
(b)(2)(i) of this section, constitutes
restitution, remediation, or an amount
paid to come into compliance with a
law or if the order or agreement uses a
different form of the required words,
such as, ‘‘remediate’’ or ‘‘comply with a
law.’’ Meeting the establishment
requirement of paragraph (b)(3) of this
section alone is not sufficient to meet
the identification requirement of
paragraph (b)(2) of this section.
(iii) Payment amount not identified. If
the order or agreement identifies a
payment as restitution, remediation, or
to come into compliance with a law but
does not identify some or all of the
aggregate amount the taxpayer must
pay, the identification requirement may
be met, with respect to any payment
amount not identified, if the order or
agreement describes the damage done,
harm suffered, or manner of
noncompliance with a law, and
describes the action required of the
taxpayer, such as paying or incurring
costs to provide services or to provide
property.
(iv) Challenge by the IRS. The IRS
may challenge the characterization of an
amount identified under paragraph
(b)(2) of this section. To rebut the
presumption described in paragraph
(b)(2)(ii) of this section, the IRS must
develop sufficient contrary evidence
that the amount paid or incurred was
not for the purpose identified in the
order or agreement.
(3) Establishment requirement—(i)
Meeting the establishment requirement.
The establishment requirement is met if
the taxpayer substantiates, with
documentary evidence, the taxpayer’s
legal obligation, pursuant to the order or
agreement, to pay the amount identified
as restitution, remediation, or to come
into compliance with a law, the amount
paid, and the date the amount was paid
or incurred. Meeting the identification
requirement of paragraph (b)(2) of this
section alone is not sufficient to meet
the establishment requirement of
paragraph (b)(3) of this section.
(ii) Substantiating the establishment
requirement. The documentary evidence
described in paragraph (b)(3)(i) of this
section includes, but is not limited to,
receipts; the legal or regulatory
provision related to the violation or
potential violation of a law; documents
issued by the government or
governmental entity relating to the
investigation or inquiry; documents
describing how the amount to be paid

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Federal Register / Vol. 85, No. 93 / Wednesday, May 13, 2020 / Proposed Rules

was determined; and correspondence
exchanged between the taxpayer and the
government or governmental entity
before the order or agreement became
binding under applicable law.
(c) Other Exceptions—(1) Suits
between private parties. Paragraph (a) of
this section does not apply to any
amount paid or incurred by reason of
any order or agreement in a suit in
which no government or governmental
entity is a party.
(2) Taxes and related interest.
Paragraph (a) of this section does not
apply to amounts paid or incurred as
otherwise deductible taxes or related
interest. However, if penalties are
imposed with respect to these taxes,
paragraph (a) of this section applies to
disallow a deduction for any interest
payments related to the penalties
imposed.
(3) Failure to pay Title 26 tax. In the
case of any amount paid or incurred as
restitution for failure to pay tax imposed
under Title 26 of the United States
Code, paragraph (a) of this section does
not disallow a deduction for Title 26
taxes which is otherwise allowed under
chapter 1 of the Code.
(d) Application of general principles
of Federal income tax law—(1) Taxable
year of deduction. If, under paragraph
(b) or (c) of this section, the taxpayer is
allowed a deduction for the amount
paid or incurred pursuant to an order or
agreement, the deduction is taken into
account under the rules of section 461
and the related regulations, or under a
provision specifically applicable to the
allowed deduction, such as § 1.468B–
3(c).
(2) Tax benefit rule applies. If the
deduction allowed under paragraphs (b)
or (c) of this section results in a tax
benefit to the taxpayer, the taxpayer
must include in income, under sections
61 and 111, the recovery of any amount
deducted in a prior taxable year to the
extent the prior year’s deduction
reduced the taxpayer’s tax liability.
(i) A tax benefit to the taxpayer
includes a reduction in the taxpayer’s
tax liability for that year or the creation
of a net operating loss carryback or
carryover.
(ii) A taxpayer’s recovery of any
amount deducted in a prior taxable year
includes, but is not limited to—
(A) Receiving a refund, recoupment,
rebate, reimbursement, or otherwise
recovering some or all of the amount the
taxpayer paid or incurred, or
(B) Being relieved of some or all of the
payment liability under the order or
agreement.
(e) Material change to order or
agreement—(1) In general. If the parties
to an order or agreement, entered before

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December 22, 2017, make a material
change to the terms of that order or
agreement on or after the applicability
date in paragraph (h) of this section,
paragraph (a) of this section applies to
any amounts paid or incurred, or any
obligation to provide property or
services, after the date of the material
change.
(2) Material change. A material
change to the terms of an order or
agreement under paragraph (e)(1) of this
section may include: Changing the
nature or purpose of a payment
obligation; or changing, adding to, or
removing a payment obligation, an
obligation to provide services, or an
obligation to provide property. A
material change does not include
changing a payment date or changing
the address of a party to the order or
agreement.
(f) Definitions. For purposes of section
162(f) and § 1.162–21, the following
definitions apply:
(1) Government or governmental
entity. A government or governmental
entity means—
(i) The government of the United
States, a State, or the District of
Columbia;
(ii) The government of a territory of
the United States, including American
Samoa, Guam, the Northern Mariana
Islands, Puerto Rico, or the U.S. Virgin
Islands;
(iii) The government of a foreign
country;
(iv) An Indian tribal government, as
defined in section 7701(a)(40), or a
subdivision of an Indian tribal
government, as determined in
accordance with section 7871(d); or
(v) A political subdivision of (i), (ii),
or (iii), or a corporation or other entity
serving as an agency or instrumentality
of any of paragraph (f)(1)(i)–(f)(iv) of this
section.
(2) Nongovernmental entity treated as
a governmental entity. (i) A
nongovernmental entity described in
paragraph (f)(2)(ii) of this section is
treated as a governmental entity.
(ii) A nongovernmental entity treated
as governmental entity is an entity
that—
(A) Exercises self-regulatory powers
(including imposing sanctions) in
connection with a qualified board or
exchange (as defined in section
1256(g)(7)); or
(B) Exercises self-regulatory powers,
including adopting; administering; or
enforcing laws and imposing sanctions,
as part of performing an essential
governmental function.
(3) Restitution, remediation of
property, and amounts paid to come
into compliance with a law. (i) An

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amount is paid or incurred for
restitution or remediation pursuant to
paragraph (b)(1) of this section if it
restores, in whole or in part, the person,
as defined in section 7701(a)(1); the
government; the governmental entity; or
property harmed by the violation or
potential violation of a law described in
paragraph (a)(3) of this section.
(ii) An amount is paid or incurred to
come into compliance with a law that
the taxpayer has violated, or is alleged
to have violated, by performing services;
taking action, such as modifying
equipment; providing property; or doing
any combination thereof.
(iii) Regardless of whether the order
or agreement identifies them as such,
restitution, remediation, and amounts
paid to come into compliance with a
law do not include any amount paid or
incurred—
(A) To reimburse the government or
governmental entity for investigation
costs or litigation costs;
(B) At the payor’s election, in lieu of
a fine or penalty;
(C) As forfeiture or disgorgement; or
(D) To the extent the payment or
contribution does not meet the
requirements of paragraph (f)(3)(i) or (ii)
of this section, to an entity; fund,
including a restitution, remediation, or
other fund; group; government or
governmental entity.
(4) Suit, agreement, or otherwise. A
suit, agreement, or otherwise includes,
but is not limited to, settlement
agreements, non-prosecution
agreements, deferred prosecution
agreements, judicial proceedings,
administrative adjudications, decisions
issued by officials, committees,
commissions, boards of a government or
governmental entity, and any legal
actions or hearings which impose a
liability on the taxpayer or pursuant to
which the taxpayer assumes liability.
(g) Examples. The application of this
section may be illustrated by the
following examples.
(1) Example 1. Identification and
establishment requirements—(i) Facts.
Corp. A enters into an agreement with
State Y’s environmental enforcement
agency (Agency) for violating state
environmental laws. Under the terms of
the agreement, Corp. A must pay
$40,000 to the Agency in civil penalties,
$80,000 in restitution for environmental
harm, $50,000 for remediation of
contaminated sites, and $60,000 to
conduct comprehensive upgrades to
Corp. A’s operations to come into
compliance with the state
environmental laws.
(ii) Analysis. The identification
requirement is satisfied for those
amounts the agreement identifies as

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restitution, remediation, or to come into
compliance with a law. If Corp. A
establishes, as provided in paragraph
(b)(3) of this section, that the amounts
it paid or incurred are for restitution,
remediation, and to come into
compliance with state environmental
laws, paragraph (a) of this section does
not preclude Corp. A from deducting
$190,000. Under paragraph (a) of this
section, Corp. A may not deduct the
$40,000 in civil penalties. Section 162(f)
and § 1.162–21(a) will not disallow
Corp. A’s deduction for the $60,000
paid to come into compliance with the
state environmental laws. However,
Corp. A may deduct the $60,000 paid
only if, under the facts and
circumstances, the payment would be
otherwise deductible under chapter 1 of
the Code. See section 161, concerning
items allowed as deductions, and
section 261, concerning items for which
no deduction is allowed, and the
regulations related to sections 161 and
261.
(2) Example 2. Restitution—(i) Facts.
Corp. A enters into an agreement with
State T’s securities agency (Agency) for
violating a securities law by inducing B
to make a $100,000 investment in Corp.
C stock, which B lost when the Corp. C
stock became worthless. As part of the
agreement, Corp. A agrees to pay
$100,000 to B as restitution for B’s
investment loss, incurred as a result of
Corp. A’s actions. The agreement
specifically states that the $100,000
payment by Corp. A to B is restitution.
The agreement also requires Corp. A to
pay a $40,000 fine to the Agency as a
result of Corp. A’s misconduct.
(ii) Analysis. Corp. A’s $100,000
payment to B is identified in the
agreement as restitution. If Corp. A
establishes, as provided in paragraph
(b)(3) of this section, that the amount
paid was for that purpose, Corp. A may
deduct the $100,000 payment.
Paragraph (a) of this section precludes
Corp. A from deducting its payment of
$40,000 to the Agency because the
payment of a fine is not treated as
restitution, remediation, or as paid to
come into compliance with a law.
(3) Example 3. Amount paid to come
into compliance with a law—(i) Facts.
Corp. B, an accrual method taxpayer, is
under investigation by State X’s
environmental enforcement agency for a
potential violation of State X’s law
governing emissions standards. Corp. B
enters into an agreement with State X
under which it agrees to upgrade the
engines in a fleet of vehicles that Corp.
B operates to come into compliance
with State X’s law. Although the
agreement does not provide the specific
amount Corp. B will incur to upgrade

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the engines to come into compliance
with State X’s law, it identifies that
Corp. B must upgrade existing engines
to lower certain emissions. Under the
agreement, Corp. B also agrees to bring
certain machinery, already in
compliance with State X law, up to a
standard higher than that which the law
requires, and to construct a nature
center in a local park for the benefit of
the community. Corp. B presents
evidence, as described in paragraph
(b)(3)(ii) of this section, to substantiate
that the expenses Corp. B will incur to
upgrade the engines will be amounts
paid to come into compliance with State
X’s law.
(ii) Analysis. Because the agreement
describes the specific action Corp. B
must take to come into compliance with
State X’s law, and Corp. B presents
invoices to establish that the agreement
obligates it to incur costs to come into
compliance with a law, paragraph (a) of
this section would not preclude a
deduction for the amounts Corp. B
incurs to come into compliance.
However, Corp. B may not deduct the
amounts paid to bring its machinery up
to a higher standard than required by
State X’s law or to construct the nature
center because no facts exist to establish
that either amount was paid to come
into compliance with a law or as
restitution or remediation.
(4) Example 4. At the direction of a
government—(i) Facts. Corp. D enters
into an agreement with governmental
entity, Consumer Board, for violating
consumer protection laws by failing to
provide debt-relief services it promised
its customers. The agreement requires
Corp. D to pay $60,000 as restitution to
the customers harmed by Corp. D’s
violation of the law.
(ii) Analysis. At the direction of
Consumer Board, Corp. D must pay
$60,000 to its customers as a result of
its violation of the law. The agreement
identifies the $60,000 as restitution.
Provided Corp. D establishes, under
paragraph (b)(3) of this section, that the
$60,000 constitutes restitution,
paragraph (a) does not apply.
(h) Applicability date. The rules of
this section are proposed to apply to
taxable years beginning on or after the
date of publication of the Treasury
decision adopting these rules as final
regulations is published in the Federal
Register, except that such rules do not
apply to amounts paid or incurred
under any order or agreement that
became binding under applicable law
before such date. Until that date,
taxpayers may rely on these proposed
rules for any order or agreement, but
only if the taxpayers apply the rules in

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28537

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

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(c) Requirement to furnish written
statement—(1) In general. The
appropriate official must furnish a
written statement to each payor with
respect to which it is required to file an
information return under paragraphs
(a)(1) and (b) of this section. The written
statement must include:
(i) The information that was reported
to the IRS with respect to such payor;
and
(ii) A legend that identifies the
statement as important tax information
that is being furnished to the IRS.
(2) Copy of the Form 1098–F. The
appropriate official may satisfy the
requirement of this paragraph (c) by
furnishing a copy of the Form 1098–F
(or any successor form) filed with
respect to the payor, or another
document that contains the information
required by paragraph (c)(1) of this
section if the document conforms to
applicable revenue procedures (see
§ 601.601) or other guidance relating to
substitute statements.
(3) Time for furnishing written
statement. The appropriate official must
furnish the written statement to the
payor on or before the date that the
appropriate official files the Form 1098–
F with the IRS, as provided in paragraph
(b)(2) of this section.
(d) Rules for multiple payors—(1)
Multiple payors—individual liability. If,
pursuant to an order or agreement, the
sum of the aggregate amount that
multiple individually liable payors must
pay with respect to a violation,
investigation, or inquiry equals, or
exceeds, the threshold amount under
paragraph (g)(5) of this section, the
appropriate official must file an
information return under paragraphs
(a)(1) and (b) of this section to report the
amount required to be paid by each
payor, even if a payor’s payment
liability is less than the threshold
amount. The appropriate official must
furnish a written statement, under
paragraph (c) of this section, to each
payor. If more than one person (as
defined in section 7701(a)(1)) is a party
to an order or agreement, there is no
information reporting requirement, or
requirement to furnish a written
statement, with respect to any person
who does not have a payment obligation
or obligation for costs to provide
services or to provide property.
(2) Multiple payors—joint and several
liability. If, pursuant to an order or
agreement, multiple payors are jointly
and severally liable to pay an amount
that, in the aggregate, equals or exceeds
the threshold amount under paragraph
(g)(5) of this section, the appropriate
official must file an information return,
under paragraphs (a)(1) and (b) of this

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section for each of the jointly and
severally liable payors. Each
information return must report the
aggregate amount required to be paid by
all of the payors. The appropriate
official must furnish a written
statement, under paragraph (c) of this
section, to each of the jointly and
severally liable payors.
(e) Payment amount not identified. If,
as provided by § 1.162–21(b)(2)(iii), the
order or agreement identifies a payment
(or the cost to provide property or to
provide services) as restitution,
remediation, or an amount paid to come
into compliance with a law (as defined
in § 1.162–21(f)(3)), but does not
identify some or all of the aggregate
amount the payor must pay (or some or
all of the aggregate cost to provide
property or to provide services) and,
under the facts and circumstances, the
government or governmental entity
expects the amount to equal or exceed
the threshold amount under paragraph
(g)(5) of this section, for purposes of
paragraphs (a), (b), and (c) of this
section, the appropriate official must
file an information return, and furnish
the written statement to the payor, as
provided by the instructions to Form
1098–F (or any successor form),
including instructions as to the amounts
(if any) to include on Form 1098–F.
(f) Material change. If the parties
make a material change, as described in
§ 1.162–21(e)(2), to the terms of an order
or agreement for which an appropriate
official has filed Form 1098–F (or any
successor form), the appropriate official
must update the IRS by filing a
corrected Form 1098–F (or any
successor form), as provided by the form
instructions, with respect to the entire
amended order or agreement, not just
the terms modified. The appropriate
official must file the corrected Form
1098–F with the IRS on or before
January 31 of the year following the
calendar year in which the parties make
a material change to the terms of the
order or agreement. The appropriate
official must furnish an amended
written statement to the payor on or
before the date that the appropriate
official files the corrected Form 1098–F
with the IRS.
(g) Definitions. For purposes of this
section, the following definitions
apply—
(1) Appropriate official—(i) One
government or governmental entity. If
the government or governmental entity
has not assigned one of its officers or
employees to comply with the reporting
requirements of paragraphs (a), (b), and
(c) of this section, the term ‘‘appropriate
official’’ means the officer or employee
of a government or governmental entity

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having control of the suit, investigation,
or inquiry. If the government or
governmental entity has assigned one of
its officers or employees to comply with
the reporting requirements of
paragraphs (a), (b), and (c) of this
section, such officer or employee is the
appropriate official.
(ii) More than one government or
governmental entity—(A) In general. If
more than one government or
governmental entity is a party to an
order or agreement, only the appropriate
official of the government or
governmental entity listed first on the
most recently executed order or
agreement is responsible for complying
with all reporting requirements under
paragraphs (a), (b), and (c) of this
section, unless another appropriate
official is appointed by agreement under
paragraph (g)(1)(ii)(B) of this section.
(B) By agreement. The governments or
governmental entities that are parties to
an order or agreement may agree to
appoint one or more other appropriate
officials to be responsible for complying
with the information reporting
requirements of paragraphs (a), (b), and
(c) of this section.
(2) Government or governmental
entity. For purposes of this section,
government or governmental entity
means—
(i) The government of the United
States, a State, or the District of
Columbia; or
(ii) A political subdivision of, or a
corporation or other entity serving as an
agency or instrumentality of any of
paragraph (g)(2)(i) of this section.
(3) Nongovernmental entity treated as
governmental entity. For purposes of
this section, the definition of
nongovernmental entity set forth in
§ 1.162–21(f)(2) applies.
(4) Payor. The payor is the person (as
defined in section 7701(a)(1)) who,
pursuant to an order or agreement has
paid or incurred, or is liable to pay or
incur, an amount to, or at the direction
of, a government or governmental entity
in relation to the violation or potential
violation of a law. In general, the payor
will be the person to which section
162(f) and § 1.162–21 of the regulations
apply.
(5) Threshold amount. The threshold
amount is $50,000.
(h) Applicability date. The rules of
this section are proposed to apply only
to orders and agreements that become

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Federal Register / Vol. 85, No. 93 / Wednesday, May 13, 2020 / Proposed Rules
binding under applicable law on or after
January 1, 2022.
Sunita Lough,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2020–08649 Filed 5–12–20; 8:45 am]
BILLING CODE P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–100956–19]
RIN 1545–BP16

Source of Income From Certain Sales
of Personal Property; Hearing
Internal Revenue Service (IRS),
Treasury.
ACTION: Proposed rule; notice of hearing.
AGENCY:

This document provides a
notice of public hearing on proposed
regulations modifying the rules for
determining the source of income from
sales of inventory produced within the
United States and sold without the
United States or vice versa.
DATES: The public hearing is being held
on Wednesday, June 3, 2020, at 10:00
a.m. The IRS must receive speakers’
outlines of the topics to be discussed at
the public hearing by Wednesday, May
20, 2020. If no outlines are received by
May 20, 2020, the public hearing will be
cancelled.
ADDRESSES: The public hearing is being
held by teleconference. Individuals who
want to testify (by telephone) at the
public hearing must send an email to
[email protected] to receive the
telephone number and access code for
the hearing. The subject line of the
email must contain the regulation
number [REG–100956–19] and the word
TESTIFY. For example, the subject line
may say: Request to TESTIFY at Hearing
for REG–100956–19. The email should
also include a copy of the speaker’s
public comments and outline of topics.
The email must be received by May 20,
2020.
Individuals who want to attend (by
telephone) the public hearing must also
send an email to [email protected]
to receive the telephone number and
access code for the hearing. The subject
line of the email must contain the
regulation number [REG–100956–19]
and the word ATTEND. For example,
the subject line may say: Request to
ATTEND Hearing for REG–100956–19.
The email requesting to attend the
public hearing must be received by 5:00

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p.m. two (2) business days before the
date that the hearing is scheduled.
The telephonic hearing will be made
accessible to people with disabilities. To
request special assistance during the
telephonic hearing please contact the
Publications and Regulations Branch of
the Office of Associate Chief Counsel
(Procedure and Administration) by
sending an email to publichearings@
irs.gov (preferred) or by telephone at
(202) 317–5177 (not a toll-free number)
at least three (3) days prior to the date
that the telephonic hearing is
scheduled.
Any questions regarding speaking at
or attending a public hearing may also
be emailed to [email protected].
Send outline submissions
electronically via the Federal
eRulemaking Portal at
www.regulations.gov (IRS REG–100956–
19).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Brad McCormack, (202) 317–6911;
concerning submissions of comments,
the hearing and/access code to attend
the hearing by teleconferencing, Regina
Johnson at (202) 317–5177 (not toll-free
numbers) or [email protected], If
emailing please put Attend, Testify, or
Agenda Request and [REG–100956–19]
in the email subject line.
SUPPLEMENTARY INFORMATION: The
subject of the public hearing is the
notice of proposed rulemaking REG–
100956–19 that was published in the
Federal Register on Monday, December
30, 2019, 84 FR 71836.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish
to present oral comments telephonically
at the hearing that submitted written
comments by February 28, 2020, must
submit an outline of the topics to be
addressed and the amount of time to be
devoted to each topic by May 20, 2020.
A period of 10 minutes is allotted to
each person for presenting oral
comments. After the deadline for
receiving outlines has passed, the IRS
will prepare an agenda containing the
schedule of speakers. Copies of the
agenda will be made available, on
Regulations.gov, search IRS and REG–
100956–19, or by emailing your request
to [email protected]. Please put
‘‘REG–100956–19 Agenda Request’’ in
the subject line of the email.
Martin V. Franks,
Branch Chief, Publications and Regulations
Branch, Legal Processing Division, Associate
Chief Counsel (Procedure and
Administration).
[FR Doc. 2020–09966 Filed 5–12–20; 8:45 am]
BILLING CODE 4830–01–P

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28539

DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 100
[Docket No. USCG–2020–0066]

Special Local Regulations; Marine
Events Within the Fifth Coast Guard
District; Withdrawal
Coast Guard, DHS.
Notice of proposed rulemaking;
withdrawal.

AGENCY:
ACTION:

The Coast Guard is
withdrawing its proposed rule
concerning amendments to the regattas
and marine parades regulations. The
rulemaking was initiated to establish a
special local regulations during the
‘‘Cambridge Classic Power Boat
Regatta,’’ a marine event to be held on
certain navigable waters of the
Choptank River at Cambridge, MD on
May 16, 2020, and May 17, 2020. The
proposed rule is being withdrawn
because it is no longer necessary. The
event sponsor has cancelled the power
boat races.
DATES: The Coast Guard is withdrawing
the proposed rule published March 16,
2020 (85 FR 14837) as of May 13, 2020.
ADDRESSES: To view the docket for this
withdrawn rulemaking, go to https://
www.regulations.gov, type USCG–2020–
0066 in the ‘‘SEARCH’’ box and click
‘‘SEARCH.’’ Click on Open Docket
Folder on the line associated with this
rule.
FOR FURTHER INFORMATION CONTACT: If
you have questions about this notice,
call or email Mr. Ron Houck, Sector
Maryland-National Capital Region
Waterways Management Division, U.S.
Coast Guard; telephone 410–576– 2674,
email [email protected].
SUPPLEMENTARY INFORMATION:
SUMMARY:

Background
On March 16, 2020, we published a
notice of proposed rulemaking entitled
‘‘Special Local Regulations; Marine
Events within the Fifth Coast Guard
District’’ in the Federal Register (85 FR
14837). The rulemaking concerned the
Coast Guard’s proposal to establish
temporary special local regulations for
certain navigable waters of the
Choptank River at Cambridge, MD,
effective from 9 a.m. on May 16, 2020,
through 6:30 p.m. on May 17, 2020. This
action was necessary to provide for the
safety of life on these waters during a
high-speed power boat racing event.
This rulemaking would have prohibited
persons and vessels from entering the

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