Closing agreement still governs payments after section 162(f) amendment

Plain-English summary

A corporate group had entered a binding settlement agreement requiring perpetual annual payments and later entered an IRS closing agreement governing the payments' tax treatment. The closing agreement said the payments were deductible business expenses, not fines or capital expenditures, unless a later law required different treatment without protecting existing agreements or a later modification changed the payments' nature or character. Public Law 115-97 later amended section 162(f), but its transition rule did not apply the amendment to amounts paid under a binding agreement entered before December 22, 2017. Several follow-on agreements resolved disputes about a payment adjustment and could only reduce the original payments. The IRS concluded that neither the statutory amendment nor those follow-on agreements triggered an exception in the closing agreement. The closing agreement therefore continued to apply to payments made under the original settlement after December 22, 2017.

Ruling snapshot

• Question: Did the section 162(f) amendment or later payment-adjustment agreements prevent the existing IRS closing agreement from governing post-2017 settlement payments?
• Outcome: approved (the closing agreement continued to apply)
• Key authorities: IRC §§ 162, 263, and 7121; Treas. Reg. §§ 1.162-1 and 301.7121-1; P.L. 115-97 § 13306

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202019023 Third Party Communication: None
Release Date: 5/8/2020 Date of Communication: Not Applicable
Index Number: 162.00-00
Person To Contact:
-------------------------- ---------------------, ID No. -----------------
--------------------------- Telephone Number:
---------------------------- --------------------
-------------------------------------- Refer Reply To:
---------------------------------- CC:ITA:B02
PLR-119428-19
Date:
Re: ---------------------------- February 06, 2020
EIN: ----------------

LEGEND:

Taxpayer: ----------------------------

Subsidiary 1: ----------------------------------------------------------------------------

Subsidiary 2: ------------------------------------------------------------------------------

Subsidiary 3: ------------------------------------------------------ --------------------------

Subsidiary 4: ------------------------------------------------------------------------------

Year 1: -------

Year 2: -------

Year 3: -------

Year 4: -------

Year 5: -------

Year 6: -------

Date 1: --------------------------

W: -----------------------------------

X: --------------

PLR-119428-19 2

Y: ----------------------------------------------

Z: -----------------------------

Agreement A: ----------------------------------------

Agreement B: -------------------------------------

Agreement C: --------------------------------------------------------------------------

Agreement D: --------------------------

Agreement E: ----------------------------

Agreement F: ----------------------------

Agreement Z= --------------------------------------------------------------------------

Product 1: -----------------------

Product 2: ------------

aa: --------------------------------------------

bb: ----------------------------------------------------------

cc: ---

dd: ---

$x: ------------

Dear ------------------:

 This responds to a letter dated August 19, 2019, submitted on behalf of

Taxpayer1 requesting a ruling that neither the amendments to section 162(f) by P.L.
115-97 nor the execution of Agreement B, Agreement C, Agreement D, Agreement E,
or Agreement F (the “B, C, D, E and F Agreements”) prevents the closing agreement2

1
Taxpayer is the common parent of an affiliated group of corporations filing a consolidated federal income tax
return. This affiliated group includes Subsidiary 1, Subsidiary 2 and Subsidiary 3.
2
Subsidiary 1 entered into the closing agreement on its own behalf and as the common parent of an affiliated
group of corporations filing a consolidated federal income tax return at the time of the closing agreement.
This affiliated group included Subsidiary 4 and Subsidiary 3. Subsidiary 4 was merged into Subsidiary 2 in Year
2.

PLR-119428-19 3

between Subsidiary 1 (and its then-consolidated group, including Subsidiary 4 and
Subsidiary 3) and the Internal Revenue Service (the “Service”),which became effective
on Date 1, from applying to Settlement Payments that Subsidiary 2 and Subsidiary 3
make pursuant to Agreement A after December 22, 2017.3

FACTS

   Taxpayer represents as follows:

  Taxpayer is the parent company of a consolidated group of corporations that

includes Subsidiary 1, Subsidiary 2, and Subsidiary 3. Subsidiary 4 is a former
subsidiary of Subsidiary 1 that was merged into Subsidiary 2 in Year 2. Taxpayer files a
consolidated U.S. federal income tax return each year on behalf of itself and the
members of the consolidated group.

  In Year 1, Subsidiary 4 and other Ws of Product 1 executed Agreement A with

the Xs to resolve claims by the Xs for certain monetary, equitable, and injunctive relief.
Agreement A settled and resolved all existing and future claims of the Xs for the
recovery of aa and associated damages incurred, or to be incurred, by the Xs.
Agreement A requires each W to remit annual payments to the Xs, in perpetuity (the
Settlement Payments”4). The Ws are required to remit a base amount of over $x
(subject to the bb) in aggregate per year, and each W’s share of that amount is
computed based on that W’s Product 2 sales volume in the preceding year. Subsidiary
3 subsequently became a party to Agreement A.

 Subsidiary 1 and the IRS entered into a closing agreement effective on Date 1.

Paragraph (1) of the closing agreement provides:

   No portion of the Settlement Payments made in taxable years ending on or prior
   to the date of this closing agreement constitutes a fine or similar penalty within
   the meaning of section 162(f) of the Code or a capital expenditure within the
   meaning of section 263 of the Code; and the Internal Revenue Service will not
   challenge such treatment in taxable years ending after the date of this closing
   agreement except to the extent (a) any law enacted after the closing agreement

3
The closing agreement addresses settlement payments made pursuant to both Agreement A and Agreement
Z. However, Taxpayer has not requested a ruling with respect to the treatment of settlement payments made
pursuant to Agreement Z. Therefore, we do not rule on the treatment of settlement payments made pursuant
to Agreement Z. Nevertheless, we quote directly from the closing agreement herein, which references the
treatment of settlement payments made pursuant to both Agreement A and Agreement Z.
4
This letter ruling addresses only on the treatment of “Settlement Payments” made pursuant to Agreement A.
Nevertheless, as noted above, we quote directly from the closing agreement. The closing agreement
references both the treatment of settlement payments made pursuant to Agreement A and settlement
payments made pursuant to Agreement Z.

PLR-119428-19 4

  date requires different treatment of payments of the same nature and character
  as the Settlement Payments and does not contain an exception for payments
  made pursuant to an agreement executed prior to the date of enactment (or any
  other exception applicable to the Settlement Payments), or (b) any future
  modification of the terms of any of the five respective Settlement Agreements
  changes the nature or character of the Settlement Payments.

Paragraph (3) of the closing agreement provides:

  All Settlement Payments made in taxable years ending on or prior to the date of
  this closing agreement are ordinary and necessary expenses incurred in carrying
  on Subsidiary 1’s trade or business under section 162(a) of the Code, and are
  deductible when paid; and the Internal Revenue Service will not challenge such
  treatment in taxable years ending after the date of this closing agreement except
  to the extent (a) any law enacted after the closing agreement date requires
  different treatment of payments of the same nature and character as the
  Settlement Payments and does not contain an exception for payments made
  pursuant to an agreement executed prior to the date of enactment (or any other
  exception applicable to the Settlement Payments), or (b) any future modification
  of the terms of any of the five respective Settlement Agreements changes the
  nature or character of the Settlement Payments.

  Agreement A provides for a bb. Under certain specified circumstances, the bb

reduces the Settlement Payments that the Ws are required to make to the Xs under
Agreement A. The bb can never increase the amount of the Settlement Payments or
create any new payment obligations on the part of the Ws. Since Date 1, the Ws and a
number of the Xs have resolved certain longstanding disputes regarding how the bb is
to be computed and applied. These resolutions have taken three forms:

 (1) Agreement B resolved the disputes surrounding the bb with cc Xs. All but one
 of the cc Xs executed Agreement B prior to December 22, 2017. One of the Xs,
 Y, executed Agreement B after December 22, 2017.

 (2) Agreement C was executed in Year 6 with cc Xs to resolve the amount of the
 bb for Year 4 and Year 5. Agreement D resolved the disputes surrounding the
 bb with additional Xs, on terms similar to those of Agreement B. dd Xs executed
 Agreement D after December 22, 2017.

 (3) Agreement E resolved the disputes surrounding the bb with Z under terms
 different from those of Agreement B and Agreement C. Agreement E was
 executed in Year 3. Agreement F contains certain factual stipulations related to
 Agreement E.

 The B, C, D, E and F Agreements resolved limited contractual disputes regarding

the application of the bb. None of the B, C, D, E and F Agreements required the
approval of a court, and no such approval was sought or obtained by the Ws or the Xs.

PLR-119428-19 5

The Settlement Payments continue to be an obligation of the Ws that stems solely from
Agreement A, which was an agreement in effect prior to December 22, 2017. The B, C,
D, E and F Agreements serve only to reduce the Settlement Payments payable by
Subsidiary 2 and Subsidiary 3 under Agreement A. The B, C, D, E and F Agreements
do not: increase the amount of the Settlement Payments required and made under
Agreement A; change the nature or character of the Settlement Payments required and
made under Agreement A; or create any new payment obligation on the part of the Ws.

LAW

 Section 7121(a) provides, in part, that the Secretary is authorized to enter into

any agreement in writing with any person relating to the liability of such person in
respect to any internal revenue tax for any taxable period.

  Section 7121(b) provides, in pertinent part, that if a closing agreement is

approved by the Secretary, such agreement shall be final and conclusive, and except
upon a showing of fraud or malfeasance, or misrepresentation of a material fact, the
case shall not be reopened as to the matters agreed upon or the agreement modified by
any officer, employee, or agent of the United States. Section 301.7121-1(c) of the
Income Tax Regulations provides that a closing agreement with respect to a taxable
period ending subsequent to the date of the agreement is subject to any change in, or
modification of, the law enacted subsequent to the date of the agreement and made
applicable to such taxable period, and each closing agreement shall so recite.

 Section 162(a) provides that there is allowed as a deduction all the ordinary and

necessary expenses paid or incurred during the taxable year in carrying on any trade or
business.

  Section 1.162-1(a) of the regulations provides that deductible business expenses

include the ordinary and necessary expenditures directly connected with or pertaining to
the taxpayer's trade or business.

  Section 13306(a)(1) of P.L. 115-97 amended section 162(f). As amended,

section 162(f)(1) provides that, except as provided in other paragraphs of section 162(f),
no deduction shall be allowed under section 162(a) for any amount paid or incurred
(whether by suit, agreement, or otherwise) to, or at the direction of, a government or
governmental entity in relation to the violation of any law or the investigation or inquiry
by such government or entity into the potential violation of any law.

  Section 162(f)(2)(A) provides in part that in general section 162(f)(1) shall not

apply to any amount that (i) the taxpayer establishes (I) constitutes restitution (including
remediation of property) for damage or harm which was caused by the violation of any
law or the potential violation of any law, or (II) is paid to come into compliance with any
law which was violated or otherwise involved in the investigation or inquiry described in
section 162(f)(1), and (ii) is identified as restitution or as an amount paid to come into

PLR-119428-19 6

compliance with such law, as the case may be, in the court order or settlement
agreement.

  Section 13306(a)(2) of P.L. 115-97 provides that the amendments to section

162(f) made by section 13306(a)(1) of P.L. 115-97 shall apply to amounts paid or
incurred on or after December 22, 2017, except that such amendments shall not apply
to amounts paid or incurred under any binding order or agreement entered into before
such date. Such exception shall not apply to an order or agreement requiring court
approval unless the approval was obtained before December 22, 2017.

ANALYSIS

As stated above, paragraph (1) of the closing agreement provides:

 No portion of the Settlement Payments made in taxable years ending on or prior
 to the date of this closing agreement constitutes a fine or similar penalty within
 the meaning of section 162(f) of the Code or a capital expenditure within the
 meaning of section 263 of the Code; and the Internal Revenue Service will not
 challenge such treatment in taxable years ending after the date of this closing
 agreement except to the extent (a) any law enacted after the closing agreement
 date requires different treatment of payments of the same nature and character
 as the Settlement Payments and does not contain an exception for payments
 made pursuant to an agreement executed prior to the date of enactment (or any
 other exception applicable to the Settlement Payments), or (b) any future
 modification of the terms of any of the five respective Settlement Agreements
 changes the nature or character of the Settlement Payments.

Paragraph (3) of the closing agreement provides:

 All Settlement Payments made in taxable years ending on or prior to the date of
 this closing agreement are ordinary and necessary expenses incurred in carrying
 on Subsidiary 1’s trade or business under section 162(a) of the Code, and are
 deductible when paid; and the Internal Revenue Service will not challenge such
 treatment in taxable years ending after the date of this closing agreement except
 to the extent (a) any law enacted after the closing agreement date requires
 different treatment of payments of the same nature and character as the
 Settlement Payments and does not contain an exception for payments made
 pursuant to an agreement executed prior to the date of enactment (or any other
 exception applicable to the Settlement Payments), or (b) any future modification
 of the terms of any of the five respective Settlement Agreements changes the
 nature or character of the Settlement Payments.

  Section 13306(a)(2) of P.L. 115-97 generally provides that the amendments

made to section 162(f) by P.L.115-97 do not apply to amounts paid or incurred under
any binding order or agreement entered into before the enactment of P.L. 115-97
(December 22, 2017). The agreement giving rise to Subsidiary 2 and Subsidiary 3’s

PLR-119428-19 7

obligation to make the Settlement Payments is Agreement A, which was entered into
prior to December 22, 2017, and Taxpayer represents that no court order was required
in respect of Agreement A on or after December 22, 2017. Accordingly, there has been
no change in law, as described in paragraphs (1)(a) and (3)(a) of the closing
agreement, that would cause the IRS to challenge the treatment of the Settlement
Payments made pursuant to Agreement A under the closing agreement.

  Further, there has been no modification of Agreement A that changes the nature

or character of the Settlement Payments. The B, C, D, E and F Agreements resolve
limited contractual disputes regarding the application of the bb, which can only reduce
the amount of Subsidiary 2 and Subsidiary 3’s Settlement Payments. The B, C, D, E
and F Agreements do not modify the terms of Agreement A in a way that changes the
nature or character of Subsidiary 2 and Subsidiary 3’s Settlement Payments.
Accordingly, the B, C, D, E and F Agreements have not modified Agreement A in a
manner described in paragraphs (1)(b) and (3)(b) of the closing agreement that would
cause the IRS to challenge the treatment of the Settlement Payments made pursuant to
Agreement A under the closing agreement.

CONCLUSION

  Neither the amendments to section 162(f) by P.L. 115-97 nor the execution of the

B, C, D, E and F Agreements prevents the closing agreement between Subsidiary 1
(and its then-consolidated group, including Subsidiary 4 and Subsidiary 3) and the IRS,
which became effective on Date 1, from applying to Settlement Payments that
Subsidiary 2 and Subsidiary 3 make pursuant to Agreement A after December 22, 2017.

 This letter ruling does not modify or amend the closing agreement entered into

on Date 1, or address the Settlement Payments made pursuant to Agreement Z.

 This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.

  A copy of this ruling must be attached to any income tax return to which it is

relevant. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of the letter ruling.

PLR-119428-19 8

    In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative. We are also sending a copy of
this letter to the appropriate operating division director. Enclosed is a copy of the letter
ruling showing the deletions proposed to be made in the letter when it is disclosed
under section 6110 of the Code.

                                      Sincerely,

                                      David B. Silber
                                      Acting Senior Technician Reviewer, Branch 2
                                      (Income Tax & Accounting)

cc: