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Under the general rule of non-deductibility, 26 CFR sec. See the CRA forms and publications webpage for this information and other topics that may be of interest. For example, a business owner may not deduct tax penalties, parking tickets, or fines for violating city housing codes. For enquiries, contact us. For more information on these topics, see Income Tax Folio S5-F2-C1, Foreign Tax Credit and Interpretation Bulletin IT-506, Foreign income taxes as a deduction from income. 1.36 Pursuant to paragraph 18(9.1)(f), an amount deemed to have been paid as interest under paragraph 18(9.1)(e) is also deemed, for purposes of computing the taxpayer’s income from the business or property, to have been paid or payable by the taxpayer in that future tax year as follows: 1.37 The deeming rule in paragraph 18(9.1)(f) addresses some of the requirements for the deduction of interest under paragraph 20(1)(c). In ¶1.37, we refer to this value as the hypothetical interest value. Generally, a fine or penalty imposed under a federal, provincial, municipal or foreign law by any person or public body that has the necessary authority is not considered deductible. C.R. Links to jurisprudence are provided through CanLII. However, section 67.6 might apply (refer to ¶1.4 to 1.7). nondeductible fines or penalties from deductible com-pensatory damage payments is Allied-Signal Inc. v. Com-missioner.11 The IRS, Tax Court, and Third Circuit all rejected any deduction for an $8 million payment Allied-Signal made to eradicate a toxic pesticide from the environment. ), as amended and all references to a Regulation are to the Income Tax Regulations, C.R.C., c. 945, as amended. 1.22 If a fine or penalty (such as a penalty paid on the prepayment of a mortgage or hypothec) is incurred in connection with the disposition of a capital property, the fine or penalty is taken into account under subsection 40(1) for purposes of calculating any gain or loss on that disposition. There are a few narrow exceptions, for example, fines or penalties imposed before March 23, 2004. Taking a walk around your company is one way to spot obvious violations. Several provisions of the Act deny the deduction of a fine or penalty. The reader should, therefore, consider the chapter’s information in light of the relevant provisions of the law in force for the particular tax year being considered. Deductible business expense – subsection 9(1), Capital outlay or loss – paragraph 18(1)(b), Payments under specific acts – paragraph 18(1)(t), Prepayment penalties – subsection 18(9.1), Meaning of rate reduction fee and prepayment penalty, Treatment where subsection 18(9.1) does not apply, Fees incurred to object to or appeal an assessment of penalties, Canadian Imperial Bank of Commerce v The Queen, Key provision – Applicable to fines and penalties imposed after, General provisions – Where section 67.6 does not apply, a fine or penalty may be precluded from deduction under various general provisions in, the outlay must be deductible as a business expense in computing profit for purposes of, the outlay must have been made for the purpose of gaining or producing income from the business or property, the outlay must not be on account of capital, the outlay must not be made for the purpose of gaining or producing exempt income, the outlay must not be a personal expense, the outlay must be reasonable in the circumstances, Other specific provisions – In addition to, paragraph 18(1)(t) – Payments under different Acts. Deductibility of fines, penalties, etc September 2010 On 26 February 2010 SARS issued Interpretation Note No.54: regarding the prohibition, in terms of section 23(o) of the Income Tax Act No. Generally, IRC §162(f) disallows the … L. No. fines and penalties are not deductible in New Zealand because of the application of public policy considerations. The Some Fines and Penalties Are Deductible, And It Just Got Easier By Robert W. Wood • Wood LLP • San Francisco Are fines and penalties tax deductible? 1.10 Accordingly, a fine or penalty that is a business expense for purposes of computing profit under subsection 9(1), will be deductible for income tax purposes, unless such deduction is limited or precluded by another provision of the Act (such as section 18 or 67.6). As a result, at the end of the lease term in 2014, Mr. A was required to pay a penalty to the lessor. Paragraph 18(1)(t) does not preclude the deduction of fines, penalties and interest levied under other statutes. A fine or penalty will be on account of capital if it meets one of the following accepted legal criteria for distinguishing a payment on account of capital from a payment on account of income: 1.20 If a fine or penalty is incurred in connection with the acquisition of an asset for which capital cost allowance (CCA) may be claimed, the fine or penalty may be included in the capital cost of that asset (or the CCA class to which the asset belongs). Section 67.6 will apply where such persons or public bodies are authorized to levy the fine or penalty that is imposed under a federal, provincial, municipal, or foreign law. These regulations also provide guidance on the information reporting requirements under new section 6050X of the Internal Revenue Code for those fines and penalties. For tax purposes, they are broadly classified as follows: The tax treatment of a fine or penalty varies according to which category it belongs to. the payment creates an enduring benefit to a business. Y Corp. operates in the securities industry in Ontario. 1.7 Section 67.6 also does not prohibit the deduction of: W Corp. operates in the construction industry. Section 162 (f) was revised by the 2017 tax law (Pub. Amounts paid for legal services to battle fines and penalties levied for safety violations, as well as many other causes, are tax deductible. Interest and/or penalties paid to the IRS are not deductible on your tax return. The following specific provisions may also be relevant: subsection 18(9.1) – prepayment penalties (see ¶, subsection 62(3) – eligible moving expenses (prepayment penalties) (see ¶. An occupational health and safety (OHS) review of the accident was conducted. While fines and penalties are generally not deductible, they are considered a business expense and may be deducted in certain circumstances. ", 1.15 The leading decision from the courts with respect to the deductibility of fines and penalties and the interpretation and application of the general limitation under paragraph 18(1)(a) is 65302 British Columbia Ltd. Per IRS Publication 529 Miscellaneous Deductions, page 15: Fines or Penalties You can't deduct fines or penalties you pay to a governmental unit for violating a law. The Act neither defines profit nor directs how it should be computed. W Corp. was found to be partially at fault for the accident due to its failure to provide the employee with proper safety equipment, training and supervision. The deemed interest is limited to the amount of the payment that reasonably relates to the value of the interest otherwise payable on the debt obligation (see ¶1.35) in a future tax year if the interest rate had not been reduced, or all or part of the debt obligation had not been repaid before its maturity. 1.27 Section 67.6 prohibits the deduction of a fine or penalty imposed under a foreign statute (see ¶1.4). How to Reduce OSHA Violations. Therefore, the provincial treatment of an amount paid may be different from how it is treated federally. This position is consistent with the Exchequer Court of Canada’s decision in Quemont Mining Corporation Limited, Rio Algom Mines Limited, and MacLeod-Cockshutt Gold Mines Limited v. MNR, [1966] CTC 570, 66 DTC 5376. Under the Revenue Department’s Board of Taxation Ruling No. Comments are provided in this Chapter to assist in making a determination under several of the provisions noted in ¶1.2. Fines and Penalties If your business has incurred a fine or penalty, you may be able to offset some of the costs by deducting it from your taxes. Fines and penalties are not deductible in New Zealand irrespective of whether the: • infringement for which the fine or penalty is imposed forms part of criminal proceedings; • fine is imposed by the court or another body; Corporation Tax penalties. Any amount payable under the provincial climate change legislation that is described as a fine or penalty as a consequence of the non-compliance will be precluded from deduction by section 67.6. Fines and penalties a person owes to the government for violating local, state, and federal laws are never deductible. ATO penalties for failure to lodge tax returns on time. 1.25 Paragraph 18(1)(t) does not prohibit a deduction for income or profits tax paid or payable to a foreign jurisdiction. in the course of carrying on a business in respect of borrowed money or on an amount payable for property acquired by the taxpayer (referred to as a. in the course of earning income from property in respect of a debt obligation. It is now generally accepted that it is s. 9(1) which authorizes the deduction of business expenses; the provisions of s. 18(1) are limiting provisions only.". can reasonably be considered to have been made in respect of the extension of the term of a debt obligation; can reasonably be considered to have been made in respect of the substitution or conversion of a debt obligation to another debt obligation or share; is contingent or dependent on the use of or production from property; is computed by reference to revenue, profit, cash flow, commodity price, or any other similar criterion; or. Section 67.6 prohibits the deduction of a fine or penalty imposed under provincial income tax legislation (see ¶1.4). Note that the rules regarding the deduction of fines and penalties may vary provincially. X Corp. is subject to greenhouse gas emission limits under provincial climate change legislation in the province in which it operates. The Code says that no deduction can be taken for any fine or similar penalty paid to a government for the violation of any law. Penalties are based on the amount of tax you owe, and are payable in addition to the tax owed. 1.23 Paragraph 18(1)(t) prohibits the deduction of any amount paid or payable under the Act (such as income tax, fines, penalties and interest), with the exception of tax paid or payable under Part XII.2 or Part XII.6. In addition, a business may not deduct two-thirds of any damages paid for violation of the federal antitrust laws. 162-21 (a), the regulation makes it clear that (i) a fine or penalty is “an amount paid or incurred in relation to the violation of any civil or criminal law” and (ii) a routine investigation or inquiry, such as an audit or inspection, of a regulated business that is not related to evidence of wrongdoing or suspected wrongdoing … Fines and penalties a business pays to the government for violation of any law are never deductible. This position is consistent with the Exchequer Court of Canada’s decision in Clinton W. Roenisch v. MNR, [1931] Ex. Additionally, it may be eligible for deduction as part of the capital cost allowance of the property. But for the same reason that the federal government … Employers settling the employee’s liability. an assessment of tax, interest or penalties under: an act of a province that imposes a tax similar to the tax imposed under, an assessment of any income tax deductible by the taxpayer under. In this case, the penalty imposed under the lease agreement arose under a private contract. Examples of non-deductible penalties and fines include: Speeding fines incurred on work related travel. not deductible under any provision of the Act. 1.26 An exception to the general limitation in paragraph 18(1)(a) applies to the deduction of certain foreign taxes under subsections 20(11), (12), and (12.1). in the case of a rate reduction fee, as “interest pursuant to a legal obligation to pay, in the case of a prepayment penalty, where the repayment is in respect of all or part of the principal amount of a debt obligation that was borrowed money (except to the extent that the borrowed money was used by the taxpayer to acquire property), as “interest pursuant to a legal obligation to pay, in the case of a prepayment penalty, where the repayment is in respect of all or part of the principal amount of the debt obligation that was either borrowed money used to acquire property or an amount payable for property acquired by the taxpayer, as “interest pursuant to a legal obligation to pay, not deemed to be interest under paragraph 18(9.1)(e); and. The determination of profit is a question of law. For purposes of this answer I assume that what you are asking about the following situation. The Interpretation Note says that some commentators had argued that bribes, fines and penalties were deductible if they satisfied the criteria for deductibility laid down in the general deduction formula (that is to say, section 11 (a) read with section 23) of the Act, in other words, if the expenditure was incurred for the purpose of producing income. A fine or penalty can generally be classified into one of the following categories: 1.2 There are several provisions of the Act that should be considered in determining whether a particular fine or penalty is deductible for income tax purposes. On some occasions, such as the early repayment of a loan, you might even choose to pay them voluntarily. 10/2528 issued in 1985, tax penalties, surcharges, and criminal fines that are non-deductible for corporate income tax purposes only include those that are imposed under the Revenue Code. Only certain fines or penalties … 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, exceptions to this rule may apply where: 1.39 Paragraph 60(o) provides a deduction for (among other things) certain fees or expenses paid in the year to prepare, institute or prosecute an objection to, or an appeal relating to: This updated Chapter, which may be referenced as S4-F2-C1, is effective May 16, 2019. Penalties for errors on returns, payments and paperwork. Due to their technical nature, folios are used primarily by tax specialists and other individuals who have an interest in tax matters. IRS Issues Guidance on Deductibility of Fines and Penalties The TCJA disallows a deduction for the payment of fines, penalties, and certain other amounts. The Canada Revenue Agency (CRA) issues income tax folios to provide a summary of technical interpretations and positions regarding certain provisions contained in income tax law. File with confidence and accuracy - Canada's #1 Tax Software. In order to comply with its prescribed emission limit for a particular year, X Corp. purchases carbon offset credits. 34. Section 67.6 prohibits the deduction of any fine or penalty imposed on W Corp. under provincial OHS legislation by the governing provincial OHS body authorized to do so. 1.5 A person or public body may include, for example, a government or government agency, regulatory authority, court, tribunal, or authorized representatives of such bodies. Restitution and other remedial payments are also fully deductible. But the present tax code allows businesses to deduct damages, even punitive damages. In 2014, an employee of W Corp. was injured in a workplace accident. 1.18 Even if a fine or penalty was incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a), other provisions of the Act may prohibit deduction of the fine or penalty. 1.38 Where subsection 18(9.1) does not apply, a rate reduction fee or prepayment penalty will generally be considered to be on account of capital and precluded from deduction by paragraph 18(1)(b). Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business. Section 67.6 prohibits the deduction of any such monetary sanction that is characterized as a fine or penalty under the Securities Act (Ontario). After 2016, the amounts incurred are generally considered depreciable property included in Class 14.1, as described in ¶1.20. Note: paragraph (d) of the definition of eligible capital expenditure in former subsection 14(5) is effective for amounts incurred before January 1, 2017. Where the requirements of subsection 18(9.1) are not met, a rate reduction fee or prepayment penalty will not generally be deductible for income tax purposes (see ¶1.38). 1.12 In the CRA’s view, a fine or penalty incurred in relation to a transaction that is outside the scope of a taxpayer’s normal business activities should not be included in the computation of profit from that business for purposes of subsection 9(1). 487 (1969)]. After all, a penalty is meant to be a punishment and it seems wrong that a tax deduction should be allowed for the cost of breaking the rules. Some commentators argued that bribes, fines and penalties actually incurred in the course of carrying on a trade were deductible for income tax purposes if they were an inevitable concomitant of the trade of the taxpayer. Section 67.6 does not prevent Mr. A from deducting the penalty because the penalty was not imposed under a federal, provincial, municipal, or foreign law. However, certain interest charges may be precluded from deduction under another provision of the Act, such as, amounts not characterized as a fine or penalty under the legislation imposing the particular amount; or. Fines and penalties a person owes to the government for violating local, state, and federal laws are never deductible. 115-97, the law that is often referred to as the “Tax Cuts and Jobs Act” (TCJA)). This Chapter discusses the deductibility of fines and penalties for income tax purposes. 1.21 If a fine or penalty is incurred before January 1, 2017, in connection with the acquisition of an eligible capital property, the fine or penalty is an eligible capital expenditure provided all the other tests in the former subsection 14(5) definition of eligible capital expenditure are met. However, there are a number of significant exceptions to this general rule. 1.28 Section 67.5 prohibits the deduction of an outlay made or expense incurred for the purpose of doing anything that is an offence under section 3 of the Corruption of Foreign Public Officials Act or under any of sections 119 to 121, 123 to 125, 393, and 426 of the Criminal Code, or an offence under section 465 of the Criminal Code as it relates to an offence described in any of those sections. 1.24 Paragraph 18(1)(t) does not prohibit the deduction of provincial income tax. Pursuant to section 7309 of the Regulations, the only prescribed fine or penalty for purposes of section 67.6 is a penalty imposed under paragraph 110.1(1)(a) of the Excise Act. As a corporate tax attorney of over 30 years’ experience with various types of taxes I am qualified to answer this question. According to the IRS, the … Copyright © Intuit Canada ULC, 2021. That is: "… were the expenses incurred for the purpose of gaining or producing income from a business? ), Claiming Expenses for Forestry Operations, Choosing An Accounting Method for Rental Income, Judicial or imposed by a court of law for the breach of a public law, Statutory or arising directly as a result of the application of a law, Levied by professional and similar organization, Levied by trade organizations and similar bodies on its members, Penalties paid under a private contract, such as early-repayment penalties for loans or a penalty charged for late performance in a construction contract, Interest charges, including interest arising on fines or penalties, Amounts not characterized as a fine or penalty under the legislation imposing the particular amount, Fines or penalties imposed before March 23, 2004. Except as otherwise noted, all statutory references herein are references to the provisions of the Income Tax Act, R.S.C., 1985, c.1 (5th Supp. (IRC § 162(f).) Fines and penalties are often an inevitable part of owning a business. 58 of 1962 (the Act), of the deductibility of expenditure in respect of corrupt activities, fines and penalties. whether the taxpayer’s conduct that gave rise to the fine or penalty could be considered egregious or repulsive. You will not receive a reply. 1.6 Section 67.6 does not prohibit the deduction of prescribed fines or penalties. the payment represents the acquisition cost (or part of the acquisition cost) of a capital asset; the payment can be considered to have been made to preserve or protect a capital asset; or. Such credits are purchased as a compliance measure and are not considered a penalty under the relevant provincial climate change legislation. Talking to … (a) Deduction Disallowed. 1.32 In order for subsection 18(9.1) to apply, a rate reduction fee or prepayment penalty must have been paid: 1.33 In addition, paragraphs 18(9.1)(a) and (b) provide that a payment will not be deemed to have been paid as interest under subsection 18(9.1) where the payment: 1.34 For tax purposes, an amount deemed to have been paid as interest under paragraph 18(9.1)(e) will be considered interest for tax years ending after the rate reduction fee or prepayment penalty is paid (such tax years are referred to below as future tax year(s)). The following year, X. Corp exceeds its prescribed emission limit and does not implement compliance measures within the necessary time period in which to avoid penalty. Specifically, taxpayers may … Paragraph 18(1)(t) also prohibits a deduction for any amount paid or payable as interest under Part IX of the Excise Tax Act (relating to the goods and services tax), or as interest under the Air Travellers Security Charge Act. 1.31 The term rate reduction fee refers to the consideration paid by a taxpayer for a reduction in the rate of interest payable by the taxpayer on a debt obligation. Penalties are calculated according to a statutory formula or in multiples of a 'penalty unit'. 1.8 Subsection 9(1) states that a taxpayer’s income for a tax year from a business or property is the taxpayer’s profit from that business or property subject to the rules in Part I of the Act. Mr. A exceeded the allowable mileage specified in the lease agreement. 1.11 In determining whether a particular amount is deductible in computing profit for purposes of subsection 9(1), the Federal Court of Appeal in Canadian Imperial Bank of Commerce v The Queen, 2013 FCA 122, 2013 DTC 5098, stated: "…it may be necessary to consider whether there is a sufficient factual connection between the amount in issue and the business in respect of which the deduction is claimed.". In Parts I through VI, the Portfolio explores the requirements of §162(c) and (f), which specifically address the deductibility of bribes, kickbacks, other illegal payments, and fines and penalties. This penalty will be part of your Statement of Business or Professional Activities and included in your income tax return. In determining whether an amount is deductible under paragraph 18(1)(a), the Supreme Court of Canada stated in Symes that the language of the provision itself provided the most appropriate test. If the requirements of paragraph 20(1)(c) are met, a taxpayer will be entitled to an interest deduction in a future tax year to the extent of the hypothetical interest value. Since 1969, Internal Revenue Code (IRC) section 162(f) has disallowed an ordinary and necessary business deduction in computing taxable income for any civil or criminal fine or similar penalty paid to a government or governmental entity for the violation of a law [Public Law No. 1.29 Fines or penalties levied as a result of a criminal conviction may be precluded from deduction by section 67.6 or various other provisions as outlined in ¶1.2. ATO penalties for false and misleading statements. “any tax imposed under this Act or interest or penalty imposed under any other Act administered by the Commissioner;”. This is intended to: 1. ensure that taxpayers who have underpaid their tax during this period do not receive an advantage over those who have paid their tax 2. compensate the community for the impact of la… HMRC’s long-standing view is that no tax deduction is due for fines or penalties and, generally, tax experts go along with it. If the payment is not made as part of the day-to-day operations of the business but instead as part of the acquisition of capital property, the fine or penalty may be considered part of the acquisition cost. The views expressed on this site are intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Employer fines for breach of work … IRS Issues Proposed Regulations on Deducting Fines or Penalties On May 13, 2020, the Internal Revenue Service (IRS) published proposed regulations in the Federal Register regarding the deductibility of fines and penalties. § 1.162-21 Denial of deduction for certain fines, penalties, and other amounts. The penalty imposed under subsection 19(2) of the Tobacco Tax Act is imposed under a law of a province and is not a prescribed penalty. is computed by reference to dividends paid or payable to shareholders of any class of shares of the capital stock of a corporation. Yet, on the facts, this was an easy case for the IRS. Income tax folios are available in electronic format only. Tax laws impose interest charges from the date a tax liability was due to be paid until it and the accrued interest charges are paid. Section 67.6, subsection 9(1), and paragraph 18(1)(a) (also section 67.3 and 67.5, subsections 18(9.1), 40(1) and 142.4(10), paragraphs 18(1)(b), 18(1)(c), 18(1)(h), 18(1)(t), 20(1)(c), and 60(o)). 524, Deductibility of Illegal Payments, Fines, and Penalties, consists of two elements, broadly speaking. The legislation imposing the fine or penalty will therefore determine whether an amount is a fine or penalty that may be precluded from deduction by section 67.6. Your Complete Guide to the Most Canadian Tax Slip, the T4A (T4 eh? It is a taxpayer’s responsibility to establish that this requirement is met. Simply so, are regulatory fines tax deductible? 1.13 However, in determining whether profit is correctly computed for purposes of subsection 9(1), the Federal Court of Appeal clarified in Canadian Imperial Bank of Commerce that questions relating to the morality of a taxpayer’s conduct will not be relevant. Your corporation can, however, deduct the taxes it pays to state and local governments on Form 1120. S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009 (CTA 2009) Penalty for infractions of the law are not allowable (further discussion) However, the Court went on to say that, "if the taxpayer cannot establish that the fine was in fact incurred for the purpose of gaining or producing income, then the fine or penalty cannot be deducted.". 1.35 The value of the interest otherwise payable on the debt obligation must be measured at the time the rate reduction fee or prepayment penalty is paid and may be determined using a straight line or present value method. Where the requirements of subsection 18(9.1) are met, such payments are deemed for purposes of the Act to have been paid by the taxpayer and received by the recipient as interest on a debt obligation pursuant to paragraph 18(9.1)(e). This Supreme Court of Canada decision was heard prior to the introduction of section 67.6 but continues to be relevant where section 67.6 does not apply. Any technical updates from the cancelled interpretation bulletin can be viewed in the Chapter History page. a prepayment penalty qualifies as a current expense for the particular business. Capital Gains Tax for property Disposals. They include the following: 1.3 The deductibility of a fine or penalty can only be determined after examining all the relevant facts. 1.30 In some circumstances, a rate reduction fee or prepayment penalty paid in respect of a debt obligation will be deductible for income tax purposes. A penalty paid on the prepayment of a mortgage or hypothec does not qualify as an eligible capital expenditure by virtue of paragraph (d) of that definition in former subsection 14(5). On May 13, 2020, the Internal Revenue Service (IRS) proposed regulations offering guidance on section 162(f) of the Internal Revenue Code, which concerns the deduction of certain fines, penalties, and other amounts. Under the Income Tax Act, Section 67.6, generally, fines or penalties are not tax-deductible, and unfortunately, this includes CRA fines and penalties (According to the CRA – Income Tax Folio S4-F2- C1, ‘Deductibility of Fines and Penalties’). To deduct a penalty, you must include it in the regular computation of your business income, similar to any other expense. Interpretation Bulletin IT-104R3, deductibility of Illegal payments, fines and penalties, consists of two elements broadly! Also does not prohibit the deduction of a fine or penalty for information... Provisions noted in ¶1.2 two-thirds of any Class of shares of the Internal Revenue Code for those and! Cra forms and publications webpage for this information and other individuals who have an interest in tax.. To this value as the “ tax Cuts and Jobs Act ” ( TCJA ) ), could... Industry in Ontario ( OHS ) review of the capital cost allowance of the Internal Revenue for! Have been careless, the provincial treatment of an amount paid may eligible. Jobs Act ” ( TCJA ) ) the violation of any Class of fines and penalties tax deductible of the capital stock of fine! ¶1.4 to 1.7 ) important to be considered deductible, the amount of tax you owe, federal... I am qualified to answer this question public policy considerations information and other who! 67.6 does not preclude the deduction of fines and penalties may vary provincially new reporting requirements under new 6050X... Discussed in this case, the fine or penalty imposed under the tax..., 2015, it will be part of the federal antitrust laws in respect of corrupt activities fines. For errors on returns, payments and paperwork may vary provincially often inevitable! 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