Weekly IRS Roundup December 30, 2024 – January 3, 2025
Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of December 30, 2024 – January 3, 2025.
December 30, 2024: The IRS released Internal Revenue Bulletin 2025-1, which includes the following:
Revenue Procedure 2025-1, which contains the revised procedures for letter rulings and information letters issued by the different associate chief counsel offices. This revenue procedure also contains the revised procedures for determination letters issued by the Large Business and International Division, the Small Business/Self-Employed Division, the Wage and Investment Division, and the Tax Exempt and Government Entities (TE/GE) Division.
Revenue Procedure 2025-2, which explains when and how associate chief counsel offices should provide advice in technical advice memoranda (TAM) as well as taxpayers’ rights when a field office requests a TAM.
Revenue Procedure 2025-3, which provides a revised list of Internal Revenue Code (Code) areas under the jurisdiction of the following associate chief counsel offices: Corporate; Financial Institutions and Products; Income Tax and Accounting; Passthroughs and Special Industries; Procedure and Administration; and Employee Benefits, Exempt Organizations, and Employment Taxes. These relate to matters in which the IRS will not issue letter rulings or determination letters.
Revenue Procedure 2025-4, which provides guidance on the types of advice the IRS offers to taxpayers on issues under the jurisdiction of the IRS Commissioner, TE/GE Division, and Employee Plans Rulings and Agreements. It also details the procedures that apply to requests for determination letters and private letter rulings.
Revenue Procedure 2025-5, which provides the procedures for issuing determination letters on issues under the jurisdiction of the Exempt Organizations Rulings and Agreements. It also explains the procedures for issuing determination letters on tax-exempt statuses for organizations applying under Code Section 501 or 521, private foundation status, and other determinations related to tax-exempt organizations. Additionally, the revenue procedure applies to revocation or modification of determination letters and provides guidance on the exhaustion of administrative remedies for purposes of declaratory judgment under Code Section 7428.
Revenue Procedure 2025-7, which provides the areas under the jurisdiction of the associate chief counsel (international) in which letter rulings and determination letters will not be issued.
December 30, 2024: The IRS published Treasury Decision 10018, which contains final regulations regarding the filing of consolidated returns by affiliated corporations. They modify the consolidated return regulations to reflect statutory changes, update language to remove antiquated or regressive terminology, and enhance clarity. The IRS separately issued proposed regulations under which a transferee’s assumption of certain liabilities from a member of the same consolidated group will not reduce the transferor’s basis in the transferee’s stock received in the transfer.
December 30, 2024: The IRS published final regulations clarifying when tax-exempt bonds are considered retired for federal income tax purposes under Code Section 103. The regulations affect state and local governments issuing tax-exempt bonds and address significant modifications to bond terms or the acquisition and resale of bonds.
December 30, 2024: The IRS published final regulations on information reporting by brokers who regularly provide services for digital asset sales and exchanges. The regulations require brokers to file information returns and furnish payee statements reporting gross proceeds from digital asset transactions. The regulations also provide transitional penalty relief for brokers adapting to these new requirements. The regulations take effect February 28, 2025.
January 2, 2025: The IRS issued proposed regulations pertaining to the Code Section 5000D excise tax on the sales of certain drugs. The proposed regulations outline the imposition and calculation of the excise tax and would affect manufacturers, producers, and importers of designated drugs. The IRS also issued Revenue Procedure 2025-9, which provides a safe harbor and safe harbor percentage that a manufacturer, producer, or importer may use to identify applicable sales of a designated drug described in Section 5000D(b).
January 3, 2025: The IRS announced that on January 10, 2025, it will release final regulations for the Clean Hydrogen Production Tax Credit under Code Section 45V. The regulations will provide rules for:
Determining lifecycle greenhouse gas emissions rates resulting from hydrogen production processes
Petitioning for provisional emissions rates
Verifying the production and sale or use of clean hydrogen
Modifying or retrofitting existing qualified clean hydrogen production facilities
Using electricity from certain renewable or zero-emissions sources to produce qualified clean hydrogen
Electing to treat part of a specified clean hydrogen production facility as property eligible for the energy credit.
These regulations will affect all taxpayers who produce qualified clean hydrogen and claim the Clean Hydrogen Production Tax Credit, elect to treat part of a specified clean hydrogen production facility as property eligible for the energy credit, or produce electricity from certain renewable or zero emissions sources used by taxpayers or related persons to produce qualified clean hydrogen.
January 3, 2025: The IRS reminded disaster-area taxpayers who received extensions to file their 2023 returns that, depending upon their location, their returns are either due by February 3 or May 1, 2025:
Taxpayers in Louisiana, Vermont, Puerto Rico, and the Virgin Islands and parts of Arizona, Connecticut, Illinois, Kentucky, Minnesota, Missouri, Montana, New York, Pennsylvania, South Dakota, Texas, and Washington have until February 3, 2025, to file their 2023 returns.
Taxpayers in Alabama, Florida, Georgia, North Carolina, and South Carolina and parts of Alaska, New Mexico, Tennessee, Virginia, and West Virginia have until May 1, 2025, to file their 2023 returns. For these taxpayers, May 1 will also be the deadline for filing their 2024 returns and paying any tax due.
Eligible taxpayers include individuals and businesses affected by various disasters that occurred during the late spring through the end of 2024. The filing deadline extension for 2023 returns does not apply to payments.
Taxpayers who live or have a business in Israel, Gaza, or the West Bank and certain other taxpayers affected by the attacks in Israel have until September 30, 2025, to file and pay. This includes all 2023 and 2024 returns.
Important Information on California’s Wildfire Workplace Safety Regulations
In light of recent wildfires across Southern California, employers should make sure they are familiar with California’s wildfire smoke standard. Sadly, harmful air quality from wildfire smoke can occur anywhere in the state on short notice, so it is vital that employers prepare early.
With some exceptions, the wildfire smoke standard applies to workplaces where the air quality index is 151 (Unhealthy) or higher and where it’s reasonably anticipated that employees may be exposed to wildfire smoke.
Employers can monitor the AQI using the following websites:
U.S. EPA AirNow website
California Air Resources Board website
Local air pollution control district websites or local air quality management district website
In addition to applying to outdoor settings, the standard also applies to indoor locations where the air is not filtered or if doors and windows are kept open, such as warehouses, packing, manufacturing, and distribution facilities.
Under the wildfire smoke standard, employers must protect employees from smoke by:
Monitoring the local air quality index;
Ensuring open communication with employees;
Training employees on the information contained in Appendix B to Section 5141.1;
Modifying the workplace, if possible, to reduce exposure to wildfire smoke; and
Providing proper respiratory protection, like N95 respirators, for voluntary use when work must be performed in a location with poor air quality.
Moreover, if the air quality index for particulate matter (PM) 2.5 exceeds 500 due to wildfire smoke, respirator use is mandatory. Employers must make sure employees are using respirators correctly in these situations. If employers cannot move operations and do not have access to respiratory protection, then operations may need to be stopped until the air quality improves.
To assist employers, Cal/OSHA maintains a list of vendors who report available supplies of N95 disposable respirators, which is updated regularly.
Employers should also review requirements pertaining to compensation and wildfires. The California Labor Commissioner’s Office has FAQs pertaining to important employment issues that employers should consider when their employees or worksite are impacted by wildfires.
Federal Court Rules ESG-Guided Investing of 401(k) Plan Is a Breach of Fiduciary Duty
Following a bench trial, Judge O’Connor (N.D. Tex.) held that “that Defendants breached their fiduciary duty by failing to loyally act solely in the retirement plan’s best financial interests by allowing their corporate interests, as well as BlackRock’s ESG interests, to influence management of the plan.” In other words, investing a 401(k) retirement plan to reflect ESG interests–rather than strictly financial ones–constitutes a breach of the fiduciary duty of loyalty. (Notably, despite this holding, the court nonetheless ruled that the fiduciary duty of prudence had not been violated, because ESG-influenced investing was “act[ing] according to prevailing industry practices.”) In so holding, the Court emphasized that “[w]hile it is permissible to consider ESG risks when done through a strictly financial lens . . . ESG cannot stand on its own. . . . [as] ERISA does not permit a fiduciary to pursue a fiduciary to pursue a non-pecuniary interest no matter how noble it might view the aim.”
This decision–the first to consider ESG-focused investing of a 401(k) plan following a trial on the merits–will undoubtedly be influential, as it supports the position advocated by a number of critics of ESG that such ESG-influenced investment activity is per se a breach of fiduciary duty. Additionally, as this decision was issued by a federal district court in Texas, it is likely that it will be upheld on appeal, as the Fifth Circuit Court of Appeals–which oversees this particular district court–is the most conservative in the United States.
Still, this ruling does also offer a partial roadmap for ESG-focused investing to survive such challenges–as if ESG-focused investing can be justified based upon financial metrics, than it will pass legal muster.
Based upon the results in this case–although damages are yet to be determined–it is likely that additional lawsuits will be filed on behalf of 401(k) participants against investment managers who made use of ESG factors when determining investments.
American Airlines Inc. violated federal law by filling its 401(k) plan with funds from investment companies that pursue environmental, social, and corporate governance goals, a Texas federal judge ruled Friday in the biggest victory yet for opponents of the strategy. The airline breached its fiduciary duty of loyalty—but not its fiduciary duty of prudence—in allowing its $26 billion retirement plan to be influenced by corporate goals unrelated to workers’ best financial interests, Judge Reed O’Connor of the US District Court for the Northern District of Texas said after a four-day, non-jury trial. The 2023 lawsuit, which says the airline wrongly offered 401(k) funds managed by companies that pursue ESG policy goals through proxy voting and shareholder activism, is the latest battle in the broader debate over socially conscious investing.
www.bloomberglaw.com/…
Wildfires in Los Angeles: Key Considerations for Employers Navigating Disaster Response and Compliance
Wildfires continue to rage across the Los Angeles area, causing death, massive destruction of property, and forcing tens of thousands to flee their homes. President Biden has approved a “Major Disaster Declaration” for California because of the wildfires. This disaster also impacts employers’ obligations under California law, including California’s workplace safety and health statute, California wage and hour law, Cal-WARN, and the Los Angeles Fair Work Week ordinance.
Quick Hits
Wildfires sweeping through the Los Angeles area have prompted evacuation orders affecting tens of thousands of residents and creating dangerous conditions for travel.
Employers affected by the disaster may need to consider their emergency preparedness plans, immediate workplace safety risks, and employment and staffing concerns while maintaining critical business functions.
Wildfires, pushed by high winds and drought conditions, have swept through areas around Los Angeles, destroying homes and businesses. As firefighters work to control the blazes, tens of thousands of residents are under evacuation orders and schools are closed. Thousands across Southern California have lost power, and many more are at risk of experiencing preemptive power outages taken as a precaution to prevent additional fires.
The wildfires—as with similar natural disasters, such as hurricanes, earthquakes, and floods—have created further challenges for employers, forcing them to adapt their operations and put their emergency preparedness plans to the test. For others, the disaster is a devastating reminder of the importance of preparedness—and its limits—as natural disasters can arise quickly and without warning.
Here are some key considerations for employers impacted by these latest wildfires.
Emergency Preparedness
Emergency plans and communication protocols. Employers with employees or workplaces impacted by the wildfires may want to consider their emergency response plans and communication protocols and consult emergency contact lists. Communication with employees is critical to maintaining employee safety, keeping track of employees amid evacuations, and informing employees of potential hazards affecting the workplace or impacting transportation.
Business disruptions. Affected employers may want to determine which business functions are critical and implement plans to maintain these operations during the wildfires.
Flexible work arrangements. With evacuation orders and travel advisories, many employers may have to close physical workplaces and/or employees will need to find other work arrangements. Employers may want to consider temporary remote work arrangements, adjust schedules to accommodate for transportation or safety issues, or temporarily suspend operations if necessary to ensure safety.
Workplace Safety and Health
Workplace safety obligations. During a natural disaster, employers’ workplace safety obligations in some ways become even more complicated and challenging. The California Division of Occupational Safety and Health (Cal/OSHA) requires employers to ensure employees are not exposed to unaddressed hazards, even if employers are displaced from their normal operating environment during a natural disaster.
Wildfire smoke. Smoke from wildfires creates health risks that can impact employers. Cal/OSHA has a specific wildfire smoke standard that applies to most outdoor workplaces in which the Air Quality Index (AQI) for airborne particulate matter 2.5 micrometers or smaller (PM2.5) is 151 or greater or where “employer[s] should reasonably anticipate that employees may be exposed to wildfire smoke.” Cal/OSHA has published more information on the wildfire smoke standards on its website.
California Wage and Hour Requirements
Nonexempt employees. Even during workplace disruptions caused by wildfires, California law and the Fair Labor Standards Act (FLSA) require that employers pay nonexempt employees for all work performed, and all hours worked must be recorded and tracked. Such disruptions also may result in overtime hours for other employees who are able to work.
Exempt employees. Exempt employees must still be paid for an entire week if they work any portion of a workweek, even if their physical work location is closed or they are forced to stay home and/or evacuate.
Reporting time pay requirements. California requires employers to pay “reporting time” each day an employee reports for a scheduled day’s work but is provided less than half of the employee’s usual or scheduled day’s work. However, reporting time obligations do not apply when “the interruption of work is caused by an Act of God or other cause not within the employer’s control.” (IWC Orders 1-16, Section 5(C)).
Los Angeles’s Fair Work Week Ordinance
The City of Los Angeles has confirmed that store closures caused by wildfires will be considered an exception to Los Angeles’s Fair Work Week Ordinance. The ordinance typically requires covered employers to provide employees with notice of their work schedules at least fourteen days in advance of the start of the work period and allows employees to decline hours if an employer makes changes to a shift or a work location after the notice deadline. The ordinance includes exceptions when employers’ operations are compromised due to force majeure, including fires, floods, earthquakes, epidemics, quarantine restrictions and other natural disasters or civil disturbances.
Leaves of Absence
Employers may be required to provide leave under the California Family Rights Act (CFRA) and/or Family and Medical Leave Act (FMLA) to employees with a serious health condition caused or exacerbated by a natural disaster, including smoke from wildfires. Employees also may need CFRA/FMLA leave to provide care for a covered family member suffering a serious health condition or medical emergency caused by a natural disaster.
Cal-WARN
The Los Angeles wildfires may force employers to reduce staff and/or temporarily shut down operations. The California Worker Adjustment and Retraining Notification Act (Cal-WARN) generally requires sixty days’ notice of a mass layoff, plant closure or relocation of at least one hundred miles. However, Cal-WARN exempts employers from providing this notice in situations involving “physical calamity.”
DOE Issues Unprecedented $25 Million Penalty for Violations of Federal Appliance Efficiency Standards
Capping a four-year effort to revitalize enforcement under its Appliance and Equipment Standards Program, earlier this week, the U.S. Department of Energy (DOE) announced that it had assessed and collected a civil penalty of $25,312,725 from Galanz Americas Limited Company and Zhongshan Galanz Consumer Electric Appliances Co., Ltd. (“Galanz”). This penalty, the largest in the history of this program, resulted from DOE testing showing that a single compact refrigerator-freezer model manufactured by Galanz for distribution in the United States failed to meet applicable energy efficiency standards. While DOE has not published sales figures, the high penalty likely means that Galanz sold a considerable volume of the model.
Violations of DOE’s energy efficiency standards can result in civil penalties of up to $575 per violation, with each unit sold of a non-compliant product considered a separate violation. DOE, therefore, has the statutory authority to assess penalties in the millions or even tens of millions of dollar range, but the Department typically exercises its discretion to settle violations for significantly below the maximum, applying factors set out in its Penalty Policy. The large majority of assessed civil penalties range between $20,000 and $1,000,000, but the Department has occasionally issued seven-figure penalties. During the Biden Administration, DOE has taken an increasingly aggressive enforcement posture and settled a number of enforcement actions with seven-figure civil penalties. Note also that because DOE is authorized to enjoin further distribution of non-compliant models, civil penalties constitute only a portion of the financial impact on manufacturers, importers, private labelers, and retailers found to be in violation of federal requirements.
DOE has settled over a dozen enforcement cases in the past few months, likely in an effort to resolve as many outstanding violations as possible before a presidential transition that will bring a major change in enforcement priorities.
TSCA Fee Payments for Manufacturers of Five High-Priority Substances
Companies that manufacture any of five chemicals are facing substantial fee payments under the Toxic Substances Control Act. The U.S. Environmental Protection Agency (EPA) has published preliminary lists of manufacturers that it plans to hold financially responsible for risk evaluations of five high-priority substances under TSCA section 6(b). The Agency published a notice announcing the availability of the preliminary lists of proposed manufacturers on December 31, 2024 at 89 Fed. Reg. 107099. The five high-priority substances for which risk evaluation fees will be assessed are acetaldehyde, acrylonitrile, benzenamine, vinyl chloride, and 4,4′-methylene bis(2-chloroaniline) (MBOCA). The preliminary lists themselves appear in the docket. Manufacturers of those chemicals whose names do not appear on the relevant preliminary list must notify EPA by March 3, 2025.
Background
EPA recently designated those five chemical substances as high priority, meaning that they are at the top of EPA’s priority list for section 6(b) risk evaluations. 89 Fed. Reg. 102900 (Dec. 18, 2024). Under TSCA section 26(b), EPA has the authority to offset costs associated with conducting risk evaluations under section 6(b), as well as certain other provisions of TSCA. Section 6(b)directs EPA to initiate risk evaluations for chemical substances to determine whether they present an unreasonable risk to health or the environment under their conditions of use.
Pursuant to the TSCA Fees Rule, codified at 40 C.F.R. Part 700, Subpart C, EPA will collect payment from companies that manufactured (including import) a chemical substance that is the subject of a risk evaluation under TSCA section 6(b) during the previous five years.
The fee totals $4,287,000, which is to be shared among all identified manufacturers. The amount each entity pays will depend on the total number of entities identified, their production volumes, and the number of small businesses identified, which receive an 80% discount on their share of the fee. 40 CFR § 700.45(c).
Next Steps for Manufacturers
To compile the list of manufacturers subject to fees, EPA relies on information already at its disposal from the past five years, including submissions pursuant to TSCA sections 5(a) (Significant New Use Notice), 8(a) (Chemical Data Reporting), 8(b) (TSCA Inventory), and the Toxics Release Inventory, as well as relevant information submitted to other agencies.40 C.F.R. § 700.45(b)(2).
However, entities that have manufactured (including imported) the five chemical substances in the previous five years whose names do not appear on the preliminary lists have a duty to self-identify and “must submit notice to EPA, irrespective of whether they are included in the preliminary list.” 40 C.F.R. § 700.45(b)(5) (emphasis added). Notifications are due by March 3, 2025.
Within this window, entities must provide the following information electronically via the Central Data Exchange (CDX), EPA’s electronic reporting portal, using the Chemical Information Submission System (CISS) reporting tool, as applicable:
Contact information: Includes name and address of submitting company and other basic contact information.
Certification of cessation: This applies to entities (whether named in the Preliminary List or not) that have manufactured any of the chemical substances in the five year period preceding publication of the preliminary lists (but have ceased manufacture prior to the certification cutoff date).
Certification of no manufacture: This applies to entities named in a preliminary list that have not manufactured the chemical in the five year period preceding publication of the preliminary lists. It exempts those entities from fee obligations.
Certification of meeting exemption: This applies to entities named in a preliminary list that meets one or more of the exemptions discussed below. A certification statement attesting the applicability of the exemption must be submitted and will exempt those entities from fee obligations.
Production volume: Entities that are not exempt, and do not otherwise qualify for certifications of cessation or manufacture, must submit their production volume for the applicable chemical substance for the three calendar years prior to publication of the preliminary list – 2023, 2022, and 2021. Manufacturers should report volumes to two significant figures. Companies with multiple facilities producing the same chemical substance should include the total aggregated production volume from all facilities when calculating the average production volume.
Exemptions Available
Manufacturers are exempted from fee payment requirements if they meet one or more of the following criteria under 40 C.F.R. § 700.45(a)(3)(i) through (v) on or after the certification cutoff date, December 18, 2023, as follows:
Import articles containing that chemical substance;
Produce that chemical substance as a byproduct that is not later used for commercial purposes or distributed for commercial use;
Manufacture that chemical substance as an impurity;
Manufacture that chemical substance as a non-isolated intermediate; or
Manufacture small quantities of that chemical substance solely for research and development.
Manufacturers are also exempted if they meet the following criteria for the five years prior to and following publication of the preliminary lists:
Manufacture that chemical substance in quantities below a 2,500 lbs. annual production volume, unless all manufacturers of that chemical substance manufacture that chemical in quantities below a 2,500 lbs. annual production volume, in which case this exemption is not applicable.
The manufacturer must meet one or more of the listed exemptions in the successive five years and refrain from conducting manufacturing (including import) outside of those exemptions in the successive five years to qualify.
Next Steps
Companies should review the preliminary lists and, if not listed, evaluate whether self-identification, a certification, or an exemption is warranted well before the March 3, 2025 deadline and notify EPA accordingly.
After the close of the comment period, and once EPA has considered information received, EPA will publish final lists of manufacturers (including importers) subject to the TSCA Fees Rule.
EPA Further Extends Review Period for CBI Claims for the Identity of Chemicals on the TSCA Inventory
On January 6, 2025, the U.S. Environmental Protection Agency (EPA) announced the extension of the review period for confidential business information (CBI) claims for specific identities of all active chemical substances listed on the confidential portion of the Toxic Substances Control Act (TSCA) Inventory submitted to EPA under TSCA. 90 Fed. Reg. 645. As reported in our February 7, 2024, blog item, EPA previously extended the review period by one year, to February 19, 2025. According to EPA, several issues and factors caused delays that prevented EPA from completing its review within the five-year period and are going to prevent completion within the previous one-year extension. These issues include “a large universe of claims to review (more than 4,805 chemical substances in 5,787 often-complex submissions) and concurrent activities to update the public portion of the TSCA Inventory,” consistent with the requirements of TSCA Sections 8(b) and 14. EPA notes that adapting and maintaining its information technology (IT) systems to complete these reviews “has continued to contribute to delays in reviewing these CBI claims.” EPA states that the very large file size and other features of certain submissions caused IT difficulties that halted the CBI review process for about nine months while available resources were prioritized to address more critical IT needs. A lack of requested appropriated funds in fiscal years 2024 and 2025 resulted in insufficient contract resources to address IT system issues in addition to not allowing EPA to maintain the necessary staffing to make progress on these reviews. EPA was delayed in commencing Review Plan reviews for approximately six months to a year as a result of the decision of the U.S. Court of Appeals for the District of Columbia Circuit in Environmental Defense Fund v. EPA, 922 F.3d 446 (D.C. Cir. 2019), which resulted in a need for additional rulemaking activity to add a reporting requirement. According to EPA, the additional reporting requirement “created confusion among some reporting entities, further slowing the review process.” The review period is now extended to February 19, 2026.
D.C. Circuit Court Again Addresses NEPA’s Scope
On January 7, 2025, the U.S. Court of Appeals for the D.C. Circuit, in Citizens Action Coalition of Indiana v. FERC, rejected a National Environmental Protection Act (NEPA) and Natural Gas Act (NGA) challenge to FERC’s approval of a natural gas pipeline in Indiana after an Environmental Impact Statement was issued. Plaintiffs’ central challenge was that NEPA required FERC to analyze non-gas alternatives before approving the pipeline. The D.C. Circuit disagreed.
Expressing frustration with what have become regular NEPA challenges to critical energy infrastructure projects – challenges that follow federal permitting actions “as night follows day” – the Court found that NEPA does not require FERC to consider alternatives that are outside of FERC’s jurisdiction and would fail to serve the purpose of the project.
In other words, where a project’s purpose is to support new natural gas units, NEPA requires only that the permitting agency consider alternatives that would satisfy that purpose.
Further, in defining a project’s purpose, the Court concluded that FERC may give substantial weight to the siting and design of a private developer. Here, FERC properly refused to reconsider the mix of electricity generation chosen by Indiana that the approved pipeline would support. It was not required to do so under NEPA, nor could it do so under the NGA, which does not authorize FERC to choose between electricity generation sources – that decision is left to the states.
The Court also rejected the claim that FERC’s consideration of the greenhouse gas (GHG) emissions from the project and from the downstream power plant was insufficient because FERC failed to make a significance determination, but instead chose to report those emissions in quantitative terms. Citing its recent decision in Food & Water Watch v. FERC, the Court plainly concluded “NEPA contains no such mandate.”
Importantly, on the issue of GHGs, the Court also concluded that “while NEPA requires FERC to consider environmental effects of the projects it approves, it is far from clear what statutory authority FERC has, if any, to give determinative weight to the environmental effects of projects beyond its jurisdiction.” Indeed, nothing in the NGA suggests that FERC can prioritize environmental concerns over the primary objective of natural gas market development.
Citizens Action represents a marked shift from recent law out of the D.C. Circuit, particularly the Court’s expansive approach to NEPA that is currently under review by the Supreme Court in Seven County Infrastructure Coalition v. Eagle County, Colorado. In that case, the D.C. Circuit held that the Surface Transportation Board (STB) should have considered the effect of the proposed 88-mile-long railway in Utah on increased oil refining along the Gulf coast, notwithstanding the limited authority of the STB. In Citizens Action,by contrast, the D.C. Circuit curtailed the scope of NEPA review by renewing the emphasis on the project’s purpose:
Citizens Action in effect seeks a judicial directive exhorting FERC to promote general environmental concerns. But such a directive would far exceed our review under the APA as well as FERC’s authority under the NGA and NEPA. Congress charged FERC with the development of natural gas pipelines, not with making local energy decisions or setting national environmental policy.
The volatility of the D.C. Circuit when it comes to the proper scope of federal agency review under NEPA—specifically whether NEPA requires an agency to study environmental impacts beyond the proximate effects of the action over which the agency has authority—may very well be settled by the Supreme Court in Seven County. In the interim, however, the D.C. Circuit this week rejected using NEPA to delay critical development projects.
FTC Imposes Record Fine on Oil Companies for Illegal Pre-Merger Conduct
On January, 7, 2025, the Federal Trade Commission (FTC) announced that crude oil producers XCL Resources Holdings, LLC (XCL), Verdun Oil Company II LLC (Verdun) and EP Energy LLC (EP) collectively will pay a $5.68 million civil penalty to resolve allegations they engaged in illegal pre-merger coordination, also known as “gun jumping,” in violation of the Hart-Scott-Rodino Act (HSR Act). This is the largest fine ever imposed for a gun jumping violation in US history.
The HSR Act requires merging parties to report transactions over certain size thresholds to the FTC and Department of Justice so that those agencies can conduct an antitrust review before closing. The agencies typically have 30 days after a transaction has been reported, which is known as the HSR waiting period, to conduct their initial assessment. The investigating agency can extend that waiting period by issuing a “second request” demand for additional information should they deem the transaction needs more in-depth review. During the HSR waiting period, the acquiror is prohibited from taking ownership or control over the target business. Such gun jumping is punishable by a civil penalty of up to $51,744 per day (the maximum penalty is adjusted annually).
On July 26, 2021, Verdun and XCL entered into a $1.45 billion agreement to acquire EP that triggered the HSR Act’s notification and waiting period requirements. During the initial 30-day HSR review period, the FTC’s investigation identified significant competitive concerns about the transaction, including that it would have eliminated head-to-head competition between two of only four significant energy producers in Utah’s Uinta Basin and would have harmed competition for the sale of Uinta Basin waxy crude oil to Salt Lake City refiners. To resolve those concerns, on March 25, 2022, the FTC entered into a consent agreement with XCL, Verdun and EP that required the divestiture of EP’s entire business and assets in Utah.
According to the FTC’s complaint, instead of observing the waiting period requirement, XCL and Verdun “jumped the gun” and assumed operational and decision-making control over significant aspects of EP’s day-to-day business operations immediately upon signing the purchase agreement. Per the complaint, the parties’ unlawful gun jumping activities during the interim period that were memorialized in the purchase agreement included:
Granting XCL and Verdun approval rights over EP’s ongoing and planned crude oil development and production activities. XCL immediately took advantage of these rights and ordered a stop to EP’s new well-drilling activities, resulting in a crude oil supply shortage for EP when the US market was facing significant supply shortages and multiyear highs in oil prices.
Providing that XCL and Verdun would bear all financial risk and liabilities associated with EP’s anticipated supply shortages, which resulted in XCL and EP working in concert to satisfy EP’s customers supply commitments, and EP employees reporting to their XCL counterparts with details on supply volumes and pricing terms. XCL engaged directly with EP’s customers and held itself out as coordinating EP’s supply and deliveries in the Uinta Basin.
Requiring EP to submit all expenditures above $250,000 to XCL or Verdun for approval. As a result, buyer approval was required before EP could perform a range of ordinary-course activities needed to conduct its business, such as purchasing supplies for its drilling operations and entering or extending contracts for drilling rigs.
Permitting XCL and Verdun to order EP to change certain ordinary-course business operations, including its well-drilling designs and leasing and renewal activities.
Allowing Verdun to review and coordinate with EP regarding prices for EP’s customers in the Eagle Ford region of Texas, with Verdun directing EP to raise prices in the next contracting period.
Providing XCL and Verdun with almost-unfettered access to EP’s competitively sensitive business information, including EP’s site design plans, customer contract and pricing information, and daily production and supply reports.
As stated in the FTC’s complaint, the waiting period obligation for this transaction began on July 26, 2021, the date the parties executed their purchase agreement. On October 27, 2021, during the course of the FTC’s investigation, XCL, Verdun and EP executed an amendment to the purchase agreement that allowed EP to resume operating independently and in the ordinary course of business, without XCL’s or Verdun’s control over its day-to-day operations, thereby ending the illegal gun jumping conduct. Thus, XCL, Verdun and EP were in violation of the HSR Act for 94 days.
This case is noteworthy not only for the magnitude of the penalty imposed on the transaction parties, but also because the violation arose both from provisions in the purchase agreement itself, as well as the parties’ conduct after they executed the purchase agreement. It serves as an important reminder that merging businesses in HSR-reportable transactions must maintain independent operations at least until expiration of the HSR waiting period and in some cases until closing (similar obligations can also apply to M&A transactions involving competitors even in non HSR-reportable deals). This independence must be reflected in both the transaction documents and the actions of the parties. Antitrust counsel can assist with drafting appropriate conduct of business covenants in the purchase agreement and properly navigating integration planning and preclosing coordination during the interim period between sign and close.
EU Taxonomy Developments: EU Platform on Sustainable Finance Call for Feedback on Draft Report on New Activities and Updated Technical Screening Criteria
On 8 January 2025, the EU Platform on Sustainable Finance (PSF) published a draft report and launched a call for feedback on proposed updates to the EU taxonomy. This includes revisions to the Climate Delegated Act and new technical screening criteria. Stakeholders are invited to submit feedback by 5 February 2025.
Key areas sought for feedback include:
Technical Screening Criteria (TSC): Updates to the criteria and Do No Significant Harm (DNSH) requirements to improve usability.
Revised Energy-Related Thresholds: Adjustments to support ensuring consistency and relevance.
Harmonization Efforts: Aligning activity titles and descriptions between Mitigation and Adaptation Annexes.
New Activities and Criteria: Proposals for activities in mining and smelting.
The PSF has noted that the most useful and valuable feedback that can be incorporated should be evidence-based and substantiated, concrete, and explain usability issues or provide recommendations for criteria or usability improvement.
Whilst this is not an official European Commission consultation, part of the PSF’s mandate is to provide recommendations to the European Commission on simplifying the EU Taxonomy and the wider sustainable finance framework. The review of this legislation fulfils the legal requirement to revisit criteria for transitional activities every three years, while continuing to develop technical screening criteria for new activities. The PSF’s Technical Working Group is said to have incorporated usability feedback from targeted stakeholder consultations, but this public consultation is aimed to obtain additional feedback and to further enhance the EU Taxonomy’s usability.
Weekly IRS Roundup December 23 – December 27, 2024
Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of December 23, 2024 – December 27, 2024.
December 23, 2024: The IRS released Internal Revenue Bulletin 2024-52, which includes the following:
Treasury Decision 10015: These final regulations update the previous regulations under Section 48 of the Internal Revenue Code (Code), which provides for an investment tax credit for energy property (energy credit), and respond to changes made by the Inflation Reduction Act of 2022 (IRA).
The final regulations update the types of energy property eligible for the energy credit, including additional types of energy property added by the IRA; clarify the application of new credit transfer rules to recapture because of failure to satisfy the prevailing wage requirements, including notification requirements for eligible taxpayers; and include qualified interconnection costs in the basis of certain lower-output energy properties.
The final regulations also provide rules generally applicable to energy property, such as rules regarding functionally interdependent components, property that is an integral part of an energy property, application of the “80/20 rule” to retrofitted energy property, dual use property, ownership of components of an energy property, energy property that may be eligible for multiple federal income tax credits, and the election to treat qualified facilities eligible for the renewable electricity production credit under Code Section 45 as property eligible for the energy credit.
Notice 2024-82, which sets forth the 2024 Required Amendments List. The list applies to both individually designed plans under Code Section 401(a) and individually designed plans that satisfy the requirements of Code Section 403(b).
Notice 2024-86, which announces the extension of certain timeframes under the Employee Retirement Income Security Act of 1974 and the Code for group health plans; disability and other welfare plans; pension plans; and participants, beneficiaries, qualified beneficiaries, and claimants of these plans affected by Hurricane Helene, Tropical Storm Helene, or Hurricane Milton.
Revenue Procedure 2024-42, which updates the list of jurisdictions with which the United States has in effect a relevant information exchange agreement or an automatic exchange relationship under Treasury Regulation §§ 1.6049-4(b)(5) and 1.6049-8(a).
Announcement 2024-42, which provides a copy of the competent authority arrangement entered into by the competent authorities of the US and the Kingdom of Norway under paragraph 2 of Article 27 (Mutual Agreement Procedure) of the Convention between the US and Norway for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Property, signed on December 3, 1971.
The IRS issued a notice of proposed rulemaking, setting forth proposed regulations related to the definition of “qualified nonpersonal use vehicles.” Qualified nonpersonal use vehicles are excepted from the substantiation requirements that apply to certain listed property. The proposed regulations add unmarked vehicles used by firefighters or members of a rescue squad or ambulance crew as a new type of qualified nonpersonal use vehicle. The regulations affect governmental units that provide firefighter or rescue squad or ambulance crew member employees with unmarked qualified nonpersonal use vehicles and the employees who use those vehicles. Comments on the proposed regulations are due by March 3, 2025.
The IRS acquiesced to Green Rock LLC v. Internal Revenue Serv., 104 F.4th 220 (11th Cir. 2024). In that case, the US Court of Appeals for the Eleventh Circuit held that notices identifying certain conservation easement arrangements as reportable transactions are invalid under the Administrative Procedure Act because they failed to follow notice-and-comment rulemaking procedures.
December 23, 2024: The US Department of the Treasury and the IRS released final regulations regarding supervisory approval of penalties assessed pursuant to Code Section 6751(b). Section 6751(b) provides that no penalty “shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination….” The final regulations clarify the application of Section 6751(b) as to the timing of supervisory approval, the identities of the individual who first proposes the penalty and their supervisor, the requirement that the approval be “personally approved (in writing)” by the supervisor, and other aspects of the statute.
December 27, 2024: The IRS announced via Notice 2025-3 transitional relief with respect to the reporting of information and backup withholding on digital assets for digital asset brokers providing trading front-end services.
ESG and Supply Chains in 2024: Key Trends, Challenges, and Future Outlook
In 2024, supply chains remained a critical focal point for companies committed to environmental, social, and governance (ESG) principles. Given their significant contribution to a company’s environmental footprint and social impact, supply chains have become an essential area for implementing sustainable and ethical practices.
Advancements in technology, evolving regulatory frameworks, and innovative corporate strategies defined the landscape of ESG in supply chains this year. However, challenges such as data reliability, cost pressures, and geopolitical risks persisted in 2024. Here are seven observations highlighting progress, challenges, and potential future directions in ESG and supply chains.
1. Regulatory and Market Drivers
Governments and international organizations introduced stringent regulations in 2024, compelling companies to prioritize ESG considerations in their supply chains. These policies aimed to address environmental degradation, human rights abuses, and climate-related risks while fostering greater transparency and accountability.
EU’s Corporate Sustainability Due Diligence Directive (CSDDD): The European Union’s CSDDD came into force, mandating companies operating in the EU to identify, prevent and mitigate adverse human rights and environmental impacts throughout their supply chains. This regulation required businesses to map their suppliers, assess risks, and implement corrective actions, driving improvements in traceability and supplier accountability.
U.S. Uyghur Forced Labor Prevention Act (UFLPA): In the United States, the Department of Homeland Security’s enforcement of the UFLPA intensified. This act targeted goods produced with forced labor, particularly in China’s Xinjiang region, and placed the burden of proof on companies to demonstrate compliance. Businesses were required to adopt rigorous traceability systems to ensure their products were free from forced labor.
Carbon Border Adjustment Mechanisms (CBAMs): Carbon tariffs, implemented by the EU and other regions, incentivized companies to measure and reduce the carbon intensity of imported goods. These mechanisms encouraged businesses to collaborate with suppliers to lower emissions and adopt cleaner technologies.
2. Advances in Supply Chain Traceability and Transparency
Technological innovations were central to advancing supply chain traceability and transparency, enabling companies to identify risks, ensure compliance, and improve sustainability performance.
Blockchain Technology: Blockchain emerged as a cornerstone of supply chain transparency. By creating immutable records of transactions and product origins, blockchain technology provided stakeholders with verifiable proof of ethical sourcing and environmental compliance. Companies used blockchain to authenticate claims about sustainability, such as the origin of raw materials and the environmental credentials of finished goods.
Artificial Intelligence (AI): AI played a transformative role in supply chain management, helping companies analyze supplier risks, predict disruptions, and optimize logistics for lower emissions. AI-powered tools also enabled real-time monitoring of supply chain activities, such as emissions tracking, labor compliance, and waste reduction.
Internet of Things (IoT): IoT sensors provided granular, real-time data on supply chain metrics, such as energy consumption, shipping efficiency, and waste generation. This technology enabled companies to address inefficiencies and enhance the sustainability of their operations.
3. Responsible Sourcing Practices
Responsible sourcing became a cornerstone of supply chain ESG efforts, with companies adopting ethical and sustainable procurement practices to address environmental and social risks.
Raw Material Sourcing: Businesses focused on sourcing raw materials like cobalt, palm oil, and timber from certified suppliers to ensure compliance with environmental and labor standards. Industry-specific certifications, such as the Forest Stewardship Council and the Roundtable on Sustainable Palm Oil, gained prominence.
Fair Trade and Ethical Labor: Companies partnered with organizations promoting fair wages, equitable treatment, and safe working conditions. Certifications like Fair Trade and Sedex Responsible Business Practices helped businesses verify their commitment to ethical labor practices throughout their supply chains.
Local Sourcing: To reduce carbon footprints and enhance supply chain resilience, some companies prioritized local sourcing of raw materials and components. This shift minimized emissions from transportation and provided economic support to local communities.
4. Decarbonizing Supply Chains
As companies pursued net-zero commitments, decarbonizing supply chains became a top priority in 2024. Key strategies included:
Supplier Engagement: Companies collaborated with suppliers to reduce emissions through energy efficiency measures, renewable energy adoption, and low-carbon manufacturing techniques.
Sustainable Logistics: Businesses invested in cleaner transportation methods, such as electric vehicles, hydrogen-powered trucks, and optimized shipping routes. The rise of “green corridors” for shipping exemplified collaborative efforts to decarbonize freight transport.
Circular Economy Integration: Companies embraced circular economy principles, focusing on reusing materials, designing for recyclability, and minimizing waste. Circular supply chains not only reduced environmental impact, but also created cost-saving opportunities and new revenue streams.
5. Challenges in ESG Supply Chain Management
Despite progress, companies faced significant challenges in implementing ESG principles across their supply chains.
Data Gaps and Inconsistencies: Collecting reliable ESG data from multitiered supply chains remains a critical hurdle. Smaller suppliers often lack the tools or expertise to comply with reporting requirements, leading to incomplete transparency and inconsistent metrics.
Cost Pressures: Implementing sustainable practices, such as adopting renewable energy or traceability technologies, requires significant upfront investment. These costs are particularly burdensome for small and medium-sized enterprises (SMEs) and create financial tension for larger companies balancing competitive pricing.
Geopolitical Risks: Trade restrictions, regional conflicts, and sanctions disrupt global supply chains, complicating compliance with ESG regulations like forced labor bans or carbon tariffs. Navigating these challenges requires constant adaptation to volatile geopolitical landscapes.
Greenwashing Risks: Increasing regulatory and public scrutiny amplifies the consequences of unverified sustainability claims. Missteps in ESG disclosures expose companies to legal risks, reputational damage, and loss of stakeholder trust.
Supply Chain Complexity: Global supply chains are vast and intricate, often spanning multiple tiers and regions. Mapping these networks to monitor ESG compliance and identify risks such as labor violations or environmental harm is a resource-intensive challenge.
Technological Gaps Among Suppliers: While advanced technologies like blockchain improve traceability, many smaller suppliers lack access to these tools, creating disparities in ESG data collection and compliance across the supply chain.
Resistance to Change: Suppliers in regions with weaker regulatory frameworks often resist adopting ESG principles due to limited awareness, operational costs, or lack of incentives, requiring significant corporate investment in education and capacity-building.
Market Demand for Low-Cost Goods: Consumer demand for affordable products often conflicts with the higher costs of implementing sustainable practices, especially in competitive industries such as fast fashion and consumer electronics.
Resource Scarcity and Climate Impacts: Extreme weather events, rising energy costs, and material shortages – exacerbated by climate change – disrupt supply chains and increase the difficulty of maintaining ESG commitments.
Measurement and Reporting Challenges: A lack of universally accepted metrics for critical ESG indicators, such as Scope 3 emissions or biodiversity impact, complicates efforts to measure progress and report transparently across supply chains.
6. Leading Examples of ESG-Driven Supply Chains
In 2024, several organizations across various industries demonstrated innovative approaches to integrating ESG principles into their supply chains. These efforts highlighted best practices in sustainability, transparency, and ethical procurement, including a number of the recent advances noted above.
Outdoor Apparel Brand: A leading outdoor apparel company prioritized fair labor practices and reduction of environmental-related impacts in its supply chain. The brand collaborates with suppliers and other brands to develop and utilize tools to measure and communicate their environmental impacts, which allows for industry-wide benchmarking and large-scale improvement.
Global Food and Beverage Producer: A major food and beverage producer expanded its regenerative agriculture program by collaborating with farmers to enhance soil health, reduce greenhouse gas emissions, and promote biodiversity. Additionally, the company leveraged blockchain technology to ensure traceability in its supply chains for commodities such as coffee and cocoa, strengthening its commitment to sustainability.
Global Furniture Retailer: A prominent furniture retailer invested heavily in renewable energy and circular design principles to decarbonize its supply chain by reducing, replacing and rethinking. A formal due diligence system employs dozens of wood supply and forestry specialists to assure that wood is sourced from responsibly managed forests.
Multinational Technology Company: A technology giant implemented energy-efficient practices across its supply chain, including transitioning to renewable energy sources for manufacturing facilities and using AI-powered tools to optimize logistics, with a goal of becoming carbon neutral across its entire supply chain by 2030.
Consumer Goods Manufacturer: A global consumer goods manufacturer introduced water-saving technologies into its supply chain, particularly in regions facing water scarcity. The company also prioritized reducing plastic waste by incorporating recycled materials into its packaging and partnering with local recycling initiatives.
Global Shipping Firm: A logistics and shipping company adopted low-carbon transportation technologies, such as green fuel for its vessels, decarbonizing container terminals, electric powered vehicles for landside transport, and optimized routes to minimize emissions. The firm also collaborated with industry partners to develop “green corridors” that support cleaner and more sustainable freight transport.
7. Future Directions in ESG and Supply Chains
Integrating ESG principles into supply chain management is expected to continue evolving, with the following trends among those shaping the future:
AI-Powered Supply Chains: Artificial intelligence will transform supply chain management by predicting risks, optimizing logistics, and enhancing sustainability. Advanced analytics will enable businesses to identify inefficiencies and implement targeted improvements, reducing emissions and ensuring ethical practices. There will, however, be challenges accounting for the growing number of laws and regulations worldwide governing AI’s use and development.
Circular Economy Models: Supply chains will embrace circular economy principles, focusing on waste reduction, material reuse, and extended product life cycles. Closed-loop systems and upcycling initiatives will mitigate environmental impacts while creating new revenue streams.
Blockchain-Enabled Certification Programs: Blockchain technology will enhance transparency and accountability by providing real-time verification of ESG metrics, such as emissions reductions and ethical sourcing. This will foster trust among consumers, investors and regulators.
Supply Chain Readiness Level (SCRL) Analysis: ESG benefits will continue to flow from the steps taken by the Biden Administration to strengthen America’s supply chains over the past four years. Additionally, the Department of Energy’s Office of Manufacturing and Energy Supply Chains SCRL tool that was recently rolled out to evaluate global energy supply chain needs and gaps, quantify and eliminate risks and vulnerabilities, and strengthen U.S. energy supply chains is expected to facilitate decarbonization of supply chains.
Decentralized Energy Solutions: Decentralized energy systems, including on-site renewable energy installations and energy-sharing networks, will reduce dependence on traditional power grids. These solutions will decarbonize supply chains while promoting sustainability.
Nature-Based Solutions: Supply chains will integrate nature-based approaches, such as agroforestry partnerships and wetland restoration, to enhance biodiversity and provide environmental services like carbon sequestration and water filtration.
Advanced Water Stewardship: Companies will adopt innovative water management practices, including water recycling technologies and watershed restoration projects, to address water scarcity and ensure sustainable supplies for all stakeholders.
Scope 3 Emissions Reduction: Businesses will prioritize reducing emissions across their value chains by collaborating with suppliers, setting science-based targets, and implementing robust carbon accounting tools.
Industry-Wide Collaboration Platforms: Collaborative platforms will enable companies to share sustainability data and best practices and develop sector-specific solutions. This approach will help address systemic challenges, such as decarbonizing aviation or achieving sustainable fashion production.
Developments in ESG and supply chains in 2024 reflect a growing recognition of their critical role in achieving sustainability goals. From enhanced regulatory frameworks and technological innovations to responsible sourcing and decarbonization efforts, companies are making strides toward more sustainable and ethical supply chains.
However, challenges such as data gaps, cost pressures, and geopolitical risks highlight the complexities of this transformation. By addressing these issues and embracing future opportunities, businesses can create resilient, transparent, and sustainable supply chains that drive both success in business and environmental and social progress.