Buried within last December’s massive Tax Cuts and Jobs Act of 2017, Pub. L. No. 115–97, 131 Stat. 2054 (TCJA), is an obscure provision that may change the litigation and settlement calculus for companies facing environmental enforcement actions.

Section 162 of the Tax Code allows businesses to deduct “necessary and ordinary” business expenses. But subsection (f) had long forbidden the deduction of “any fine or similar penalty paid to a government for the violation of any law.” While that language seems straightforward, courts and the IRS had issued several seemingly conflicting rulings and directives on the provision, necessitating a fine-grained analysis of whether consent decree payments were truly punitive (and hence nondeductible) or compensatory or remedial.

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