Indiana Department of Revenue Determines that Video Game Enhancement Offerings are Not Subject to Sales Tax

The Indiana Department of Revenue (“Department”) determined last month that a video game publishing company’s sales from optional video game enhancement features were not subject to sales tax in Indiana. Ind. Rev. Rul. No. 2024-04-RST (Jan. 7, 2025).
The Facts: A non-Indiana video game publisher (the “Company”) sells optional video game features that enhance gameplay experience. The Company does not sell video games itself; rather, video game sales are made by a related entity of the Company. After a video game is purchased, the Company offers three optional features to the video game purchaser: (1) a monthly online subscription that allows the purchaser to play the video game online and in a multi-player setting; (2) in-game items, such as character costumes and weapons; and (3) virtual currency that the purchaser can use to pay for a monthly subscription or in-game items.
The Company requested that the Department issue a revenue ruling regarding the applicability of Indiana’s sales tax on its offerings. The Department did and determined that the Company’s offerings are not subject to the State’s sales tax.
The Law: Indiana imposes a sales tax on retail transactions made in the State and on certain specified services delivered in the State. Indiana tax law generally defines a retail transaction as a transfer of tangible personal property in the ordinary course of business and also sets forth specific examples of “retail transactions.” 
Relevant here, transfers of prewritten computer software, whether delivered electronically or in a tangible medium, are retail transactions subject to sales tax. Sales tax is not imposed, however, on transactions that merely provide a right to remotely access prewritten computer software over the Internet or on sales of software as a service. Thus, if the transaction does not result in the purchaser having a possessory or ownership interest in the software, then sales tax does not apply.
In addition to transfers of prewritten computer software, electronic transfers—which grant a right of permanent use to an end user—of digital audio works, digital audiovisual works, and digital books are subject to sales tax. “Digital audio works” include works such as songs and ringtones, “digital audiovisual works” include works such as movies, and “digital books” include works that are generally recognized in the ordinary and usual sense as books. These are the only digital products on which Indiana imposes sales tax.
The Ruling: In determining whether the Company’s sales were subject to sales tax, the Department analyzed the Company’s offerings under the above provisions. Ultimately, the Department ruled that the Company’s sales of monthly subscriptions, in-game items, and virtual currency are not subject to sales tax because the sale of such items do not fit into Indiana’s definition of a “retail transaction,” and the items do not fall within the enumerated services on which Indiana imposes sales tax. The Department reasoned that the Company’s offerings are neither tangible personal property nor do they fall within the definitions of digital audio works, digital audiovisual works, or digital books. 
The Takeaway: This revenue ruling is helpful for taxpayers to better understand how the Department interprets Indiana’s sales tax law to apply to these digital transactions. While the revenue ruling applies only to the Company’s facts and circumstances as described, the ruling expressly states that other taxpayers with substantially identical factual situations may rely on the ruling in preparing returns and making tax decisions. Furthermore, taxpayers can and should use revenue rulings to try to persuade taxing authorities that their position is the correct one.

Procedural Foot Faults are a Trap for the Unwary

Whether filing a tax return, a protest, or an appeal, there are countless procedural requirements that must be met in order to avoid penalties or worse. While those requirements are oftentimes tedious, they are a necessary evil to avoid future headaches.
The recent decision of the Supreme Court of Nevada highlighted one such procedural misstep. In Hohl Motorsports, Inc. v. Nevada Department of Taxation, the company filed a petition for judicial review of a deficiency determination. Hohl, No. 87189, (Nev. Feb. 10, 2025). Under Nevada law, prior to filing a petition, the company was required to either (1) pay the amount of the determination or (2) enter into a written agreement with the Department of Taxation (“Department”) to pay later. The Hohl decision centered around what constituted a “written agreement.”
In that case, the company emailed a lawyer representative of the Department prior to filing its petition. The Department’s response to the company stated that the company would have an additional 90 days to pay the determination and should timely file its petition. The company filed its petition and paid the determination a few weeks later.
Despite its email, the Department moved to dismiss the appeal for failure of the company to comply with the procedural requirements. Specifically, the Department claimed that the company did not have a written agreement with the Department to pay the determination at a later date. Upon review, the Court held that the email from the Department constituted a written agreement, which satisfied the procedural requirements.
Significantly, the Court noted that “[t]axpayers should be able to rely on the advice that they receive from the Department.” The Court stated that this is even more true when the taxpayer discusses a particular issue with the Department. The Court admonished the Department for filing the motion to dismiss and asserted that the Department “violated basic notions of justice and fair play.” In today’s world, where courts often chide taxpayers for not seeking guidance from the Department on filing positions, while also alleging that taxpayers cannot rely on information received from the Department, it is a breath of fresh air for the Supreme Court of Nevada to be a voice of reason.
While this case was an important victory for the taxpayer on the procedural requirements in Nevada, the best place to be in is to never have potentially faulted at all. Be sure to dot those i’s and cross those t’s!

LLC’s Splitting into Six Companies Not Subject to Pennsylvania Realty Transfer Tax

The Pennsylvania Commonwealth Court held that the statutory division of a limited liability company (“LLC”) which resulted in the original LLC and five new companies—with each of the new companies owning a portion of the real estate of the original LLC—was not subject to state and local realty transfer tax as there was no transfer of real estate as contemplated by the statute. Kunj Harrisburg LLC, et. al. v. Commonwealth, No. 390 F.R. 2020 (Pa. Cmwlth. Jan. 10, 2025). 
The Facts: Kunj Harrisburg LLC (“Kunj”) owned a Condominium Association consisting of seven condominium units in Adams County, Pennsylvania. Pursuant to the Entity Transactions Law (“ETL”), it subsequently filed with the Department of State a Statement of Division and an accompanying Plan of Division which divided Kunj into six companies consisting of Kunj and five new companies. Kunj remained the owner of two condominium units and each of the five new companies became the owner of one condominium unit. The six companies recorded deeds in Adams County reflecting the Plan of Division and claimed exemption from the realty transfer tax.
The Department of Revenue issued Notices of Assessment to the five new companies asserting that the deeds did not qualify for exemption and assessing tax. The companies were unsuccessful in their appeals to the Board of Appeals and the Board of Finance and Revenue.
The Decision: The Commonwealth Court first reviewed the realty transfer tax which imposes tax for the recording of any document and which defines a “document” to include any deed which conveys title to real estate in the Commonwealth. It then looked to the ETL which permits an entity to divide into one or more new associations and which states that the property allocated to a new association vests “without reversion or impairment, and the division shall not constitute a transfer, directly or indirectly, of any of that property.” 15 Pa.C.S. § 367(a)(3)(ii). 
Relying on the “unambiguous language” in the ETL that an association created through a statutory division is a successor to the dividing association and does not acquire its property through the transfer of the property’s beneficial interest, the Court concluded that each deed at issue did not convey title to real estate, that each deed was therefore not a “document” as contemplated by the realty transfer tax law, and that no tax was due.
This case demonstrates that when there is unambiguous statutory support for a position, while it may take a couple of levels of appeal, a taxpayer should be victorious despite a taxing agency’s position.

New York ALJ Upholds Convenience of Employer Rule Despite Employee Working Remotely Out-Of-State During COVID Lockdowns

In yet another challenge to New York’s so-called “convenience of the employer” rule, a New York Administrative Law Judge (“ALJ”) upheld the application of the rule against a Pennsylvania resident who worked remotely for a New York-based employer during the COVID-19 pandemic. In the Matter of the Petition of Myers and Langan, DTA No. 850197 (Jan. 8, 2025).
The Facts: Richard Myers, a resident of Pennsylvania, worked in New York for the Bank of Montreal (“BMO”) which provides a broad range of personal and commercial banking, wealth management, global markets, and investment banking products and services. Due to the COVID-19 pandemic, BMO temporarily closed its New York City office on March 16, 2020 and required employees to find alternative working arrangements. Mr. Myers worked from a BMO disaster recovery site in New Jersey on March 16 and March 17 and worked exclusively from his home in Pennsylvania for the remainder of the year. On his New York State nonresident income tax return, Mr. Myers claimed a refund of $104,182, which the New York Division of Taxation partially disallowed, leading to an audit and subsequent recalculation of his income allocation.
The Decision: The ALJ determined that Mr. Myers’ wages were correctly allocated to New York under the convenience of the employer rule. The rule provides that any allowance claimed for days worked outside New York for a New York-based employer must be based on the necessity of the employer, not the convenience of the employee. While there was an executive order in place requiring businesses to employ work from home policies to the maximum extent possible (the “Executive Order”), the order did not apply to essential businesses, including banks and related financial institutions, such as BMO. The ALJ found that BMO, as an essential business, was not legally mandated to close its New York office, and therefore, Mr. Myers’ remote work from out-of-state was deemed to be for his convenience rather than a necessity imposed by his employer. The ALJ noted that BMO’s decision to close its office did not qualify Mr. Myers’ remote work as a necessity for the company, and there was no evidence or explanation in the record as to why BMO closed its offices. 
The Takeaway: The decision underscores the consistent application of the convenience of the employer rule by New York State Tax Appeals Tribunal ALJs, even during the unprecedented circumstances of the COVID-19 pandemic. The decision highlights the challenges nonresident employees face in proving that their remote work is a necessity for their employer. Unless there is clear evidence that the employer required the employee to work from a location outside New York, the convenience of the employer rule will apply, resulting in the allocation of income to New York. Employers need to be aware of the convenience rule, as well, as they may be required to withhold taxes in the state where the employer’s office is located, even if an employee works remotely out-of-state. 
The decision suggests that if BMO were not exempt from the Executive Order as a bank or financial institution, the convenience of the employer rule would not apply, and Mr. Myers would be entitled to a refund. But, as discussed in a prior article I authored regarding application of the convenience rule, even in cases where the employer was not a bank or financial institution and was not exempt from the Executive Order, ALJs have still found that the convenience rule applies.
It remains to be seen whether appellate courts will step in to overrule ALJ decisions and find that when New York offices were closed during an unprecedented world-wide pandemic, employees were not working from their homes merely for their own convenience.

Remote Work in Puerto Rico: A Legal Update for Global Employers

Puerto Rico has recently relaxed its requirements for remote work, implementing significant changes. The first set of changes occurred in 2022 with the enactment of Law 52-2022. In January 2024, further reforms were enacted with the signing of Law 27-2024 by then-governor Pedro Pierluisi.

Quick Hits

Puerto Rico has relaxed its remote work requirements with Law 52-2022, which exempts foreign employers without a nexus to Puerto Rico from making income tax withholdings for employees working remotely in Puerto Rico, provided certain conditions are met.
Law 27-2024, effective January 2024, clarifies that nondomiciled employees temporarily residing in Puerto Rico are exempt from Puerto Rican employment laws and contributions, with their employment governed by their domiciles’ laws.
Puerto Rico’s new remote work regulations have provided increased flexibility for foreign employers and employees, allowing remote work without the burden of local employment laws and tax obligations, reflecting a global trend toward accommodating remote work arrangements.

Law 52-2022
Law 52-2022 exempts foreign employers without a nexus to Puerto Rico from making income tax withholdings for employees working remotely in Puerto Rico, provided certain conditions are met. These conditions include:

The employer must be a foreign entity, not registered or organized under Puerto Rican laws.
The employer must have no economic nexus to Puerto Rico, meaning no business operations, tax filings, fixed place of business, or sales of goods or services in Puerto Rico through employees, independent contractors, or any affiliates.
Remote workers cannot provide services to clients with a nexus in Puerto Rico and cannot be officers, directors, or majority owners of the employer.
Employers must ensure that Social Security and payroll contributions for employees are filed either through a W-2 in the United States or in Puerto Rico.

If these conditions are met, foreign employers can hire remote workers in Puerto Rico without the obligation of withholding and remitting income taxes to the Puerto Rico Department of the Treasury (Departamento de Hacienda de Puerto Rico).
Law 27-2024
Law 27-2024 addresses which employment laws will govern the employment relationships of remote employees working from Puerto Rico for employers with no business nexus to Puerto Rico, depending on whether the employees are domiciled in Puerto Rico or elsewhere. Law 27-2024 exempts nondomiciled employees temporarily residing in Puerto Rico from Puerto Rican employment laws and contributions. These employees are not entitled to employment benefits under Puerto Rican law, including workers’ compensation, unemployment, or certain disability benefits. The employment relationship will be governed by the employment contract, or if there is no contract, by the laws of the employee’s domicile location. The employer will have no income tax withholding obligations for these employees. If there is any tax obligation, the employee will be the one to file separately.
Domicile Considerations
The concept of “domicile” is crucial in determining the applicable laws. Domicile is based on the employee’s intention to reside in a particular location. Factors such as where the employee’s family, doctors, and children’s schools are located will be considered. If an employee is domiciled in Puerto Rico, and exempt under the Fair Labor Standards Act (FLSA), certain requirements apply. The employment relationship will be covered by an agreement between the parties, and Puerto Rican employment laws will not apply unless agreed upon. However, workers’ compensation, short-term disability, unemployment insurance, and driver’s insurance for employees who drive as part of their duties in Puerto Rico will be applicable unless the employer provides similar or greater benefits through private insurance.
Implications for Employers
Foreign employers hiring domiciled employees in Puerto Rico must comply with specific requirements. For example, if short-term disability and unemployment benefits are provided through a private policy or in another state, employers do not need to register with the Puerto Rico Department of Labor or obtain workers’ compensation insurance. However, if these benefits are not provided, employers must register and make the necessary contributions (even when income tax withholdings are not required).
Note: The exclusions and rules apply only to (i) nondomiciled employees and (ii) domiciled employees who are exempt under the FLSA. For domiciled, nonexempt employees covered by the FLSA, all Puerto Rican employment laws will be applicable.
Future Trends in Remote Work
There is a noticeable trend of employers accommodating remote work arrangements. This trend is proliferating globally, allowing employees to work remotely without being subject to local employment laws and tax obligations. Puerto Rico, as a U.S. territory, is at the forefront of this trend, providing increased flexibility for employees to work remotely and for employers to hire remote workers without the burden of compliance with local employment laws and tax obligations. Similar changes are likely to be adopted in other jurisdictions, further increasing the flexibility of remote work arrangements.
Conclusion
The new rules governing remote work in Puerto Rico represent a significant shift in employment law, providing greater flexibility for both employers and employees. As companies continue to adapt to the post-COVID-19 landscape, these changes offer a promising start for more flexible remote work arrangements.

Proposed Legislation Targets Nonprofits Supporting Immigrant Communities

Proposed legislation introduced in the US Senate last week would deny tax-exempt status to certain organizations that support undocumented immigrants. The legislation would change the eligibility requirements for 501(c)(3) tax-exempt status.

Fixing Exemptions for Networks Choosing to Enable Illegal Migration Act
On February 10, US Senator Bill Hagerty (R-TN) introduced S.497, the “Fixing Exemptions for Networks Choosing to Enable Illegal Migration Act” or the “FENCE Act” (Act). The Act would amend Section 501(c)(3) of the Internal Revenue Code to provide that an organization is only described in Section 501(c)(3) if it “does not engage in a pattern or practice of providing financial assistance, benefits, services, or other material support” to individuals the organization “knows or reasonably should know to be unlawfully present in the United States.”
The Act states that the added language “shall not be construed … to require a religious organization to act in violation of its religious belief.” The Act also states that the provision “should not be construed to require proof of citizenship or verification of an individual’s immigration status to be presented.”
If enacted, the Act could affect both new organizations seeking tax-exempt status and existing tax-exempt organizations that serve immigrant populations. New organizations applying for tax-exempt status under Section 501(c)(3) could be required to certify or otherwise establish that they will not provide prohibited support to persons described in the Act. An organization denied exempt status may appeal that decision through an administrative process and may ultimately seek a declaratory judgment in a court proceeding if needed. Existing organizations working with immigrant populations could also be impacted by, for example, an Internal Revenue Service (IRS) audit to evaluate whether an organization continues to operate exclusively for tax-exempt purposes within the meaning of Section 501(c)(3) or is engaged in activities that would be prohibited because of the Act. During an audit of a tax-exempt organization for this purpose, the IRS may examine the organization’s activities and finances to determine whether the organization complies with the criteria for exemption under Section 501(c)(3). Based on the examination, an organization could be asked to adjust its activities to ensure compliance or face an adverse determination as to its tax-exempt status. An organization has the right to appeal an adverse determination resulting from an audit through an administrative process similar to an organization denied tax-exempt status and it may also ultimately litigate the issue in court if needed.
S.497 has been referred to the Senate Finance Committee. It currently has no cosponsors, and there is no companion bill in the US House of Representatives.

Privacy Tip #432 – DOGE Sued for Unauthorized Access to Our Personal Information

The Department of Government Efficiency’s (DOGE) staggering unfettered access to all Americans’ personal information is highly concerning. DOGE employees’ access includes databases at the Office of Personnel Management, the Department of Education, the Department of Health and Human Services, and the U.S. Treasury.
If you want more information about the DOGE employees who have access to this highly sensitive data, Wired and KrebsOnSecurity have provided fascinating but disturbing accounts.
Meanwhile, New York and other states have filed suit against DOGE, alleging that the unfettered access to the federal databases is a privacy violation. On February 14, 2025, a New York federal judge found “good cause to extend a temporary restraining order” stopping DOGE employees from accessing U.S. Treasury Department databases. However, the next day, another federal judge in Washington, D.C., denied a request to stop DOGE from accessing the databases of the Department of Labor, the Department of Health and Human Services, and the Consumer Financial Protection Bureau. That means that DOGE employees now have access to the sensitive health and claims information of Medicare recipients, as well as the identities of individuals who have made workplace health and safety complaints. NBC News has reported that “the Labor Department authorized DOGE employees to use software to remotely transfer large data sets.”
Currently, 11 lawsuits have been filed against DOGE over access to sensitive information in federal databases, alleging that the access violates privacy laws. The databases include student loan applications at the Department of Education, taxpayer information at the Department of the Treasury, and the personnel records of all federal employees contained in the database of the Office of Personnel Management, the Department of Labor, the Social Security Administration, FEMA, and USAID.
According to a plaintiff, the potential to misuse Americans’ personally identifiable information “is serious and irrevocable….The risks are staggering: identity theft, fraud, and political targeting. Once your data is exposed, it’s virtually impossible to undo the damage.” We will be closely watching the progress of these suits and their impact on the protection of our personal information.

Five Compliance Best Practices for … Minimizing Customs Tariffs (Part I)

Minimizing tariffs is a common objective for businesses engaged in international trade, as tariffs can significantly impact the cost of importing or exporting goods. Here are several strategies businesses can consider to minimize tariffs.

Duty Drawback. A duty drawback is a refund or remission of a customs duty, fee, or internal revenue tax previously imposed. The refunds occur when the product is exported from the United States or destroyed. Duty drawback programs allow businesses to claim refunds or credits for duties paid on imported inputs that are exported or incorporated into exported products. This is a complex process, as it involves imports and exports, but for certain types of transactions it can offer real duty savings.
Foreign Trade Zone (FTZ). A foreign trade zone is a secured location in or near CBP ports, where no tariffs apply while the product sits in the FTZ. The product can be stored, exhibited, assembled, manufactured, or processed in this zone without any duties being applied. This allows for duty deferral if the goods are eventually withdrawn into the U.S. Customs territory, or potentially no duties at all if the goods are shipped to another country.
Consider Holding Products in a Bonded Warehouse. Bonded warehouses provide similar benefits by allowing businesses to store imported goods under bond, deferring duty payments until the goods are removed for consumption. Bonded warehouses are buildings or secured locations in which products with duties can be stored or altered without paying the duties for a maximum of five years. If the products are exported, no duty is owed on the products.
Temporary Importation Under Bond (TIB). When using a TIB, an importer may post a bond for twice the amount of the duties and then must export or destroy the imported items within a specified time or pay damages. TIBs represent another way to handle temporary imports to secure duty savings.
American Goods Returned.For goods that were initially exported abroad and then returned to the United States, such as for servicing, warranty services, or value-added activities, it may be possible to declare an entered value equal to the value added abroad. If this is a common importing pattern for your company, you should check and see if you are appropriately taking advantage of opportunities to minimize tariffs using the American Goods Returned program.

For further information, check out our four-part “Managing Import Risks Under the New Trump Administration” series on risk-planning for the anticipated tariff increases:

Identifying Risks and Opportunities
The Implications of President Trump’s “America First” Trade Memorandum
A 12-Step Plan for Coping with Tariff and Supply Chain Uncertainties
Contractual Provisions to Cope with the Increasing Tariffs and Trade Wars

Is Your Nonprofit Slashing Benefits to Offset Federal Funding Cuts?

Use Caution When Responding to the Recent Executive Orders
On February 6, 2025, the Trump administration (the Administration) issued an executive order (the Review Order) directing the heads of Federal executive departments and agencies (Agencies) to review all funding the Agencies provide to “Nongovernmental Organizations.”[1] The Agencies were further ordered to align all future funding decisions with the interests of the United States and the Administration’s goals and priorities.
The Administration’s issuance of the Review Order, when coupled with an earlier executive order (the Funding Order) freezing federal spending on grants, loans, and other initiatives,[2] has shaken the nonprofit community by threatening the funding of nonprofit organizations both in the United States and around the world. Nonprofit organizations are now weighing their options for managing the potential impact the Funding Order and the Review Order may have on their operations and finances.
While some nonprofit organizations may turn to layoffs or furloughs as a means of cost-cutting,[3] others may consider reducing employer contributions to their employee benefit plans to stay afloat while the funding fight plays out. Like for-profit employers, nonprofit employers recognize the important role generous benefits play in hiring and retaining talented employees, and understand that reducing benefits mid-year is not a decision to be taken lightly. This article discusses some of the compliance challenges nonprofits may face if they elect to do so.
Health Care Plans
Nonprofit employers (like other employers) typically set the employee contribution levels for their health and welfare plans for the full plan year and don’t adjust those levels until the next year. As a result, if an employer wants to increase employee contributions during the plan year, it must make such changes carefully.
Plan Amendments and Employee Notifications:
A nonprofit employer should work with its third-party administrator and/or legal counsel to amend the terms of its health plan documents to implement any planned increase in employee contributions. In determining the effective date of any changes, the employer should consider both when it must notify its employees of the change and how best to do so.
SPDs and SMMs. Under ERISA, employers must provide retirement and welfare benefit plan participants[4] with a “summary plan description” (SPD) describing the terms of their plans in a way that is straightforward and understandable to participants. If an employer amends an ERISA benefit plan in a way that materially modifies the SPD, it must provide plan participants with a “summary of material modifications” (SMM) describing the change. Generally, an SMM must be provided to plan participants within 210 days after the end of the plan year in which the employer adopted the change.
Different timing rules apply, however, if the employer amends a health or welfare plan to materially reduce the plan’s “covered services or benefits.” A material reduction in covered services or benefits may occur due to increases in “premiums, deductibles, coinsurance, copayments, or other amounts to be paid by a participant or beneficiary.”[5] When an employer amends a health or welfare plan to materially reduce the plan’s covered services or benefits, it must provide plan participants with an SMM describing the change within 60 days after adopting that change.
SBCs. Sometimes, an employer may also be required to provide participants and beneficiaries with advance notice of a change to the employer’s health plan. Under the Patient Protection and Affordable Care Act (the ACA), an employer must provide its employees with a “Summary of Benefits and Coverage” (an SBC), an easy-to-understand summary of each coverage offered under the employer’s health plan. If a material modification to a health plan affects the content of the plan’s SBC, the employer must provide participants and beneficiaries with advance notice of the change – at least 60 days before the date on which the change becomes effective.
Cafeteria Plan Elections:
Even if an increase in employee premium contributions doesn’t affect a health plan’s SBC, from a practical standpoint, an employer will likely want to give plan participants advance notice of any premium increase. This will allow the employer to provide context for the increase, and if permitted under the employer’s Code §125 or “cafeteria” plan, to communicate to employees their ability to make new benefit elections under that plan.
A cafeteria plan allows employees to purchase (or pay the cost of) certain welfare benefits (such as premiums for group health benefits, group life and AD&D coverage, dependent care assistance, etc.) on a pre-tax basis. To receive that benefit, however, employee elections must be made during open enrollment (before the beginning of the applicable plan year) and are generally irrevocable for the entire year.
Employees may be permitted to change their elections, however, if they experience certain “change in status” events, such as marriage, birth/adoption of a child, etc. They may also be permitted to change prior elections because of a “significant” change in cost or coverage.[6] Whether a change in cost or coverage is significant is based on the relevant facts and circumstances, including the relative impact on the employee population, prior cost increases, etc. If increasing employee health care premium contributions is deemed “significant,” employees must be given the opportunity to change their prior health care elections.
Potential ACA Penalties:
If employees are permitted to change their health care elections due to an increase in their health care premium contributions, they may elect to drop a nonprofit employer’s health care coverage entirely. This could lead to unintended consequences for the employer. For instance, if after dropping the employer’s health care coverage, the employee then obtains alternate coverage on a state ACA marketplace and qualifies for a premium subsidy (because the employer’s coverage is now deemed to be unaffordable), the employer could be subject to ACA penalties.
Tax-Qualified Retirement Plans
Code §401(k) and §403(b) Plans:
A nonprofit employer may elect to offer its employees access to a Code §401(k) plan, a §403(b) plan, or (in some cases) both, to allow them to save for their retirements.[7] Nonprofits may provide employer nonelective or matching contributions as an additional benefit to their employees. If, as a cost-cutting measure, a nonprofit wishes to reduce its employer contributions to such a plan, it should look first to the plan’s terms.
Discretionary Contributions. If the plan grants the employer discretion to determine whether nonelective/matching contributions will be made each year, a plan amendment won’t be needed. The employer can simply reduce – or suspend entirely – its contributions going forward. (Note that any such change would need to be made prospectively.)
Because no plan amendment is required, technically, the employer would not be obligated to notify employees of the change. However, open communication with employees about the reduction/suspension is probably the better option, as it will allow the employer to explain the rationale for the change. Employees, for their parts, may want to adjust their own elective deferrals because of the reduction/suspension of employer contributions.
Fixed Rate of Contributions. If the plan specifies the rate of employer nonelective or matching contributions, the employer will need to amend the plan to implement a reduction/suspension of those contributions. 
Advance notice of the amendment isn’t required in this case, but the employer will be obligated to provide plan participants with an SMM. While the SMM isn’t due until 210 days after the end of the plan year in which the amendment is adopted, again, a nonprofit employer should consider whether communicating the change sooner rather than later (by providing the SMM to participants as soon as possible or by other means) makes sense under the circumstances.
“Safe Harbor” Plans. A “safe harbor” §401(k) or §403(b) plan will be deemed to pass certain nondiscrimination testing requirements, if the sponsoring employer satisfies various contribution and participant notice requirements.
If an employer makes “safe harbor” matching contributions on behalf of participants, it may amend its plan to reduce/suspend those contributions mid-year if:

The employer is “operating at an economic loss” during the plan year; or
For any reason, if the “safe harbor” notice provided annually to plan participants includes a statement allowing the employer to reduce or suspend the “safe harbor” matching contributions during the year.

The plan amendment may take effect no earlier than 30 days after the employer provides employees with a supplemental “safe harbor” notice describing the reduction/suspension of employer contributions.
Employers that use a pre-approved plan format should contact their plan vendors for help in preparing the needed amendment (working with their legal counsel as needed) and in coordinating the amendment’s effective date with the distribution of the supplemental “safe harbor” notice.
An employer that makes “safe harbor” nonelective contributions on behalf of plan participants may also amend its plan to reduce or suspend those contributions. While such employers are generally no longer required to provide an annual safe harbor notice (per the Setting Every Community Up for Retirement Enhancement (SECURE) Act), employers should still consider providing employees with timely notice of the change.
SMMs Required. Even if an employer must notify plan participants in advance of the reduction/suspension of employer “safe harbor” contributions (through the provision of a supplemental “safe harbor” notice), the employer will also need to provide participants with an SMM describing the change within the timeframe discussed above.
Non-Qualified Deferred Compensation Plans
Code §457(b) and §457(f) Plans:
A tax-exempt nongovernmental nonprofit[8] may establish a Code §457(b) plan to permit a select group of its highly-compensated or management employees to set aside additional funds towards their retirement (in excess of the amounts contributed to a Code §401(k) or §403(b) plan). Nonprofit employers may also make contributions on behalf of Code §457(b) plan participants.
In order to defer immediate taxes on those employer and employee contributions, a Code §457(b) plan must meet certain requirements, such as limits on annual contributions (combined between employee and employer contributions), timing of distributions, etc. Nonqualified deferred compensation plans that do not meet the requirements of Code §457(b) (typically because total contributions to the plan exceeds the annual contribution limit) are classified as Code §457(f) plans. (Together, this article refers to such plans as “457 Plans.”)
Amendment Needed? Like §401(k) and §403(b) plans, whether a 457 Plan must be amended to reduce/suspend the employer’s rate of contributions (if any) will depend on whether the plan documents give the employer discretion to determine its contributions each year, or whether such language is baked into the plan document. If a 457 Plan grants the employer total discretion to make contributions, no amendment will be needed. If the 457 Plan contains language describing the employer’s level of contributions, however, the 457 Plan will need to be amended if the employer wishes to reduce/suspend employer contributions.
No SMM Needed. Even if an amendment is needed (because the 457 Plan document specifies that the nonprofit employer will make a particular level of employer contributions), the employer is not required to provide 457 Plan participants with an SMM. Because participation in 457 Plans is limited to a small group of (at least presumably) financially-sophisticated employees, 457 Plans are considered “top-hat” plans. Top-hat plans are not subject to ERISA’s disclosure rules,[9] including its requirement to provide an SPD to participants or to update that SPD with an SMM any time the plan is materially modified.
Even so, given that participants in the 457 Plan will likely include the nonprofit’s senior executives and staff, a nonprofit amending its 457 Plans to reduce/suspend employer contributions will likely wish to be open with participants about the changes to its contributions and the rationale behind those changes.
Benefits in Employment Agreements. A nonprofit employer’s ability to amend a 457 Plan may be limited if the grant of benefits under the 457 Plan is only documented in an eligible participant’s employment agreement.[10] In that case, any amendment to the employer’s obligation to contribute to the arrangement will be subject to the terms of the employment agreement, and, as a result, may be subject to the employee’s approval.
Code §409A Issues. Code §457(b) plans are exempt from the requirements of Code §409A, while Code §457(f) plans) are not. Code §409A imposes stringent rules on both the timing of payment and changes to the timing of payment under nonqualified deferred compensation arrangements.[11] Failure to meet Code §409A’s requirements can result in significant penalties to the employee (and result in information reporting failures for the employer). While the reduction/suspension of employer contributions to a Code §457(f) plan probably won’t implicate Code §409A, a nonprofit employer should consult with its tax advisor or legal counsel before making any changes to such plans.

FOOTNOTES
[1] The Review Order doesn’t specifically define what a “Nongovernmental Organization” is. However, given the broad scope of the Review Order, it seems reasonable to assume the term includes any nonprofit organization accepting federal funds.
[2] The Funding Order was challenged in Federal court by Democratic Attorneys General in 22 states and the District of Columbia. Although the District Court hearing that challenge found that a “broad categorical and sweeping freeze of federal funds” was “likely unconstitutional,” the fight to force the Administration to resume payments for federal programs is ongoing.
[3] Nonprofits considering layoffs or furloughs as a means of saving funds should review our prior article about the impact of employer furloughs on employee benefits. While written at the beginning of the COVID-19 pandemic, the article provides helpful guidance to nonprofits navigating the potential effects a furlough or layoff may have on their workforce’s benefits. Be aware, however, that the COVID-19 relief programs mentioned in that article no longer apply.
[4] Beneficiaries receiving benefits under the plan are also entitled to receive an SPD.
[5] See 29 CFR §2520.104b-3(d)(3).
[6] See 26 CFR §1.125-4(f).
[7] While some nonprofits may offer defined benefit pension plans to their employees, this is not as common as in the past. As a result, we have not discussed changes to such plans in this article. However, additional information about such changes can be found here.
[8] For clarity, this article discusses the rules applicable to Code §457(b) and §457(f) plans maintained by non-governmental, tax-exempt nonprofit organizations. Different rules may apply to Code §457(b) plans maintained by governmental entities.
[9] They are, however, subject to certain other provisions of ERISA, such as ERISA’s claims and appeals procedures.
[10] This happens occasionally, especially where only a single employee is receiving a 457 Plan benefit. The better practice is to mention the 457 Plan in the employee’s employment agreement, while documenting the 457 Plan arrangement separately.
[11] A discussion of the parameters of Code §409A is outside the scope of this article. Consider yourself lucky.

DEI Executive Orders and Related Litigation

Executive Summary
On January 20, 2025, President Donald Trump signed 26 executive orders (EO), a record number of EOs signed by a President on Inauguration Day.1 In his first two weeks as President, a handful of these orders directly call for the end of diversity, equity and inclusion (DEI) and diversity, equity, inclusion and accessibility (DEIA) programs in both the public and private sectors. DEI is a framework for organizations to promote fair and equal opportunities throughout the organization. These EOs follow DEI bans that have been enacted by various states, terminating DEI programs and practices in their respective colleges and universities during former President Biden’s administration.2
President Trump called for each agency to conduct civil compliance investigations of “publicly traded corporations, large non-profit corporations or associations, foundations with assets of $500 million or more, State and local bar and medical associations and institutions of higher education with endowments over 1 billion dollars”3 to end “illegal discrimination and preferences.”4 President Trump holds that DEI programs are in violation of the Civil Rights Act of 1964, undermine national unity, and threaten the safety of the American people by “diminishing the importance of individuals merit, aptitude, hard work and determination when selecting people for jobs and services.”5 The EOs detail the first course of action – all federal agencies, coordinating with the Attorney General and Office of Management and Budget (OMB), must remove all DEI programming and policies from its records and amend rules and regulations to advance “the policy of individual initiative, excellence and hard work.”6
Download the latest summary of Executive Orders terminating DEI programs. The chart is current as of February 18, 2025, and will be updated as new information becomes available.
Implications: Enforcement of the Orders and Impact on Tax-Exempt Organizations
Federal agencies are working to revise their rules and regulations to redefine which DEI programs and policies are “illegal.” Generally, the Internal Revenue Service (IRS) has a mechanism in place known as the illegality doctrine that revokes an organization’s tax-exempt status if the organization is formed for an illegal purpose or its activities violate public policy, and a substantial part of the organization’s activities were in furtherance of that illegal purpose or violation of public policy. Under Section 501(c)(3) of the Internal Revenue Code, nonprofit organizations qualify for tax-exempt status when 1) the purpose of the organization is charitable; 2) the activities are not illegal, contrary to public policy, or in conflict with express statutory restrictions; and 3) the activities are in furtherance of the organization’s exempt purpose and are reasonably related to the accomplishment of the purpose.7 Depending on the structure of the orders and degree of enforcement, promoting DEI programs and policies in an organization could be subject to IRS investigation under the illegality doctrine. It is unclear from the orders what DEI initiatives would be contrary to public policy.
Federal agencies have issued guidance expanding upon what DEI programs fall under their authority. For example, a memorandum was released by the Department of Justice’s Civil Rights Division (Department) detailing that the Department will enforce all federal civil rights laws by investigating, eliminating and penalizing “illegal DEI and DEIA preferences, mandates, policies, programs and activities in the private sector and in educational institutions that receive federal funds.”8 The Department clarified that activities related to “educational, cultural or historical observance”9 are not prohibited under the law so long as they do not engage in exclusion or discrimination. Guidance has not been issued by the IRS categorizing DEI programs that would jeopardize an organization’s tax-exempt status.
Implications: Civil Litigation for Tax-Exempt Organizations
Tax-exempt organizations may be vulnerable to litigation brought by the federal government or private actors. The government has not brought civil lawsuits against tax-exempt organizations in violation of the EOs, however, private actors have begun filing lawsuits against organizations whose DEI practices are allegedly in violation of federal and state laws. On February 11, 2025, Pacific Legal Foundation, on behalf of a California high school student, filed a complaint against UCSF Benoiff Children’s Hospitals for its Community Health and Adolescent Mentoring Program for Success (CHAMPS) violating the Equal Protection Clause of the Fourteenth Amendment and California’s Proposition 209.10 CHAMPS is an internship that “supports minority high school students interested in health professions.”11 Pacific Legal Foundation argues that CHAMPS should not include a racial component when considering which students qualify for this program that provides internship experience and mentorship in the hospital setting.12
Other lawsuits were filed by private parties against organizations over their DEI practices before the EOs were signed. In one example, on January 12, 2025, the American Alliance for Equal Rights, a nonprofit organization whose mission is to “challeng[e] distinctions and preferences made on the basis of race and ethnicity”13, filed a complaint in U.S. District Court for the Middle District of Tennessee against McDonald’s for funding a college scholarship program for students with “at least one parent of Hispanic/Latino heritage.”14 The scholarship program is funded by McDonald’s and administered by International Scholarship & Tuition Services, a for-profit company. The parties ultimately settled with McDonald’s, agreeing to allow non-Latino individuals to qualify for the scholarship program.
Conversely, other organizations in opposition to the EOs argue that the EOs are unconstitutional and vague. Several lawsuits have been filed, seeking an injunction to block the federal government from enforcing these anti-DEI orders. The National Association of Diversity Officers in Higher Education, along with other plaintiffs, filed a complaint in US District Court for the District of Maryland Baltimore Division on February 3, 2025, against Trump and several federal agencies, that argues the anti-DEI orders violate several clauses under the Constitution including the Spending Clause, the Due Process Clause under the Fifth Amendment, Separation of Powers and Free Speech Clause under the First Amendment.15
Overall, these ongoing lawsuits are divided into substantive and procedural legal arguments on the constitutionality of the EOs and DEI practices. Opponents of DEI base their complaints on substantive laws, arguing that DEI programs and policies violate the Equal Protection Clause and Title VI Civil Rights Act of 1964 because they do not center meritorious qualifications for employment, internships, grants or other opportunities. On the other hand, defenders of DEI highlight the EOs are procedurally unconstitutional. They argue the executive branch cannot unilaterally enforce laws that go against the will of Congress (Spending Clause) and targeted organizations are not provided with sufficient notice about what is prohibited under the EOs by not defining key terms such as DEI or DEIA (Due Process Clause). These different legal approaches may shape the changing DEI legal landscape to adhere to the ruling in Students for Fair Admissions case or leave this issue open to further challenges for tax-exempt organizations to navigate the best practices that are in alignment with their charitable purposes while complying with federal state laws on DEI. 
Suggested Actions

Review your organization’s internal governing documents, DEI policies and programs and how those policies and programs further your organization’s charitable purpose.
Survey the organization’s ongoing federal, state, and local grants to ensure they comply with current federal regulations to the extent they are funded through federal funds, or to the extent state funds do not have similar restrictions at the state level.
Review your organization’s scholarship programs, applications, joint venture agreements, and other relevant agreements. Pay special attention to the qualifications for applicants in any application forms, internal policies or external marketing materials. Additionally, evaluate any agreements that reference the organization’s charitable purpose, particularly those related to DEI practices. Consider ways to achieve your organization’s goals while minimizing risk exposure.

[1] See The Washington Post, Here are the executive actions and orders Trump Signed on Day 1 (January 13, 2025) https://www.washingtonpost.com/politics/2025/01/20/trump-executive-orders-list/.
[2] See Best Colleges, These States’ Anti-DEI Legislation May Impact Higher Education (January 22, 2025) https://www.bestcolleges.com/news/anti-dei-legislation-tracker/.
[3] See White House, Ending Illegal Discrimination and Restoring Merit-Based Opportunity (January 21, 2025) https://www.whitehouse.gov/presidential-actions/2025/01/ending-illegal-discrimination-and-restoring-merit-based-opportunity/.
[4] Id.
[5] Id.
[6] Id.
[7] Rev. Rul. 80-278, 1980-2 C.B. 175.
[8] Department of Justice Ending Illegal DEI and DEIA Discrimination and Preferences (February 5, 2025) https://www.justice.gov/ag/media/1388501/dl?inline.
[9] Id.
[10] See Pacific Legal Foundation, UCSF healthcare internship selects participants based on race, denying students equal access to educational opportunities https://pacificlegal.org/case/ucsf-minority-healthcare-scholarship-discrimination/.
[11] See UCSF Benoiff Children’s Hospitals, CCCH Programs CHAMPS https://www.ucsfbenioffchildrens.org/about/ccch/programs/champs.
[12] G.H., a minor, by Rebecca Hooley the mother, legal guardian, and next friend of G.H., Plaintiffs v. UNIVERSITY OF CALIFORNIA BOARD O F REGENTS; USCSF BENIOFF CHILDREN’S HOSPITALS; Michelle Ednacot, in her individual and official capacity as the CHAMPS program manager at UCSF BENOIFF CHILDREN’S HOSPITAL OAKLAND; Dr. Nicolas Holmes, in his individual and official capacity as President of UCSF BENOIFF CHILDREN’S HOSPITALS; and Janet Reilly, in her official capacity as President of the UNIVERSITY OF CALIFORNIA BOARD OF REGENTS, Defendants, 4:25-cv-01399, (N.D. Cal. 2/11/2025).
[13] See American Alliance for Equal Rights, https://americanallianceforequalrights.org/.
[14] American Alliance for Equal Rights v. McDonald’s Corporation; McDonald’s USA, LLC; International Scholarship & Tuition Services, Inc., 3:25-cv-00050, (M.D. Tenn. 1/12/2025).
[15] NATIONAL ASSOCIATION OF DIVERSITY OFFICERS IN HIGHER EDUCATION; American Association of University Professors; Restaurant Opportunities Centers United; Mayor and City Council of Baltimore, Maryland, Plaintiffs, v. Donald J. TRUMP, in his official capacity as President of the United States; Department of Health and Human Services; Dorothy Fink, in her official capacity as Acting Secretary of Health and Human Services; Department of Education; Denise Carter, in her official capacity as Acting Secretary of Education; Department of Labor; Vincent Micone, in his official capacity as Acting Secretary of Labor; Department of Interior; Doug Burgum, in his official capacity as Secretary of the Interior; Department of Commerce; Jeremy Pelter, in his official capacity as Acting Secretary of Commerce; Department of Agriculture; Gary Washington, in his official capacity as Acting Secretary of Agriculture; Department of Energy; Ingrid Kolb, in her official capacity as Acting Secretary of Energy; Department of Transportation; Sean Duffy, in his official capacity as Secretary of Transportation; Department of Justice; James McHenry, in his official capacity as Acting Attorney General; National Science Foundation; Sethuraman Panchanathan, in his official capacity as Director of the National Science Foundation; Office of Management and Budget; Matthew Vaeth, in his official capacity as Acting Director of the Office of Management and Budget, Defendants., 2025 WL 391958 (D.Md.)

Micro-captive Insurance Reportable Transactions and the Reporting Requirements

Certain micro-captive transactions are back to being reportable. On January 14, 2025, the Treasury Department and the Internal Revenue Service (“IRS”) published final regulations (the “Regulations”) that named some micro-captive insurance transactions as listed transactions and others as transactions of interest. See Internal Revenue Service, Treasury. “Micro-Captive Listed Transactions and Micro-Captive Transactions of Interest. 90 Fed. Reg. 3534 (Jan. 14, 2025). These formal rules replace the reporting regime that developed first under IRS Notice 2016-66, which was voided for failure to comply with the Administrative Procedure Act.
A “Captive” elects 831(b) treatment and is at least 20% owned by an Insured-related party
The Regulations apply only to certain companies defined as “Captives.” A “Captive” is an entity that elects to be taxed under Section 831(b) of the Internal Revenue Code, issues or reinsures a contract that any party treats as insurance when filing federal taxes, and is at least 20 percent owned by an “Insured”, an “Owner” of an Insured, or a person related to an Insured or an Owner. The Regulations further define an “Insured” as any person who enters a contract with a Captive and treats amounts paid under the contract as insurance premiums for federal income tax purposes. An “Owner” is someone with a direct or indirect ownership interest in an Insured or its assets.
Reportability depends on loss ratio and related-party financing
The Regulations define the micro-captive listed transaction and the micro-captive transaction of interest based on two core ideas: loss ratio and related-party financing. The regulations calculate the loss ratio as:

The loss ratio is measured over a period of years, not just a single taxable year. For a transaction of interest, the loss ratio is measured over ten years or the life of the Captive, whichever is shorter. If the loss ratio is less than 60 percent over those years, then the Captive is a transaction of interest. For a listed transaction, the time period is the most recent ten years. So, a Captive must be at least ten years old to become a listed transaction. If the loss ratio over the most recent ten years is less than 30 percent, then the Captive may be a listed transaction.
The Regulations’ other focus is related-party financing. Related-party financing occurs when the Captive makes funds available to an Insured, an Owner, or some other related party through a non-taxable arrangement (e.g., a loan) and the amount made available is greater than the Captive’s cumulative after-tax earnings on investments. A Captive that has engaged in a related party financing in the last five years with an outstanding balance in effect at any point during an open tax year is a transaction of interest. If that Captive also has a loss ratio less than 30 percent over the most recent ten years, then the Captive is a listed transaction.
This interaction can be summarized in a convenient tabular format:

A transaction of interest is one where the IRS requires additional information to consider whether tax avoidance is present. A listed transaction is one where the IRS believes tax avoidance is present. Listed transactions are treated more consequentially than transactions of interest. Therefore, a Captive that meets both categories must file as a listed transaction.
“Seller’s Captives” and some employee-benefits captives are excluded
The Regulations offer two exceptions, both of which are excluded from the definition of a transaction of interest or listed transaction. First, Captives for which the U.S. Department of Labor has issued a Prohibited Transaction exception and that provide insurance for employee compensation or benefits are excluded.
Second, “Seller’s Captives” are also excluded. A “Seller” is an entity that sells products or services to customers and also sells those customers insurance contracts connected to the goods or services. A “Seller’s Captive” is a Captive related to a Seller, a Seller’s owner, or parties related to a Seller or owners of Sellers. To qualify for the exception, the Seller’s Captive’s only business must be to issue or reinsure insurance contracts in connection with the sales made by the Seller or its related persons, and at least 95 percent of the Seller’s Captive’s business in a year must be in connection to contracts purchased by customers unrelated to the Seller. If those conditions are met, then the Seller’s Captive has not engaged in a listed transaction or a transaction of interest.
Reporting requirements for participants in the transaction
The Regulations place reporting requirements on parties involved in any transaction covered by the Regulations (a “reportable transaction”). These reporting requirements apply to participants in the transaction and to “material advisors” to the transaction, both for the current year and for all years where the statute of limitations for assessing tax has not yet expired. The Regulations do not by themselves require the filing of amended tax returns. [NTD: This question of amended returns came up at WCF and with RMA.]
Captives, Owners, Insureds, and any other parties to a reportable transaction must file Form 8886, Reportable Transaction Disclosure Statement, with the IRS Office of Tax Shelter Analysis (“OTSA”). The filing must describe the transaction in sufficient detail, including the party’s involvement in the transaction and how the party learned about the transaction.
Captives and Insureds have additional reporting burdens. For every year that a Captive participated in a reportable transaction, it must also disclose the types of policies it provided, how much it received in premiums, how much it paid in claims, the contact information of those who helped determine premiums, and the names and ownership interest of anyone who meets a 20% ownership threshold in the Captive. An Insured must describe how much it paid in premiums for coverage by a Captive.
Participants have 90 days from the date the regulations were published, January 14, 2025, to file their initial reports. The initial filing should include all applicable open tax years and must be sent to OTSA. A copy of the initial filing, and all subsequent filings, should be included with the applicable tax return. 
There are two ways that a taxpayer can avoid filing under the Regulations. If a taxpayer has finalized a settlement with the IRS regarding a reportable transaction that was in examination or litigation, that taxpayer is treated as having made a disclosure for the years covered by the settlement. A taxpayer engaged in a transaction of interest who has been diligent in filing under the now-defunct Notice 2016-66 regime has a reduced filing burden. The taxpayer’s previous transaction of interest filings count under the Regulations, so the taxpayer does not have to refile for those past years.
There are also two “safe harbor” provisions which allow a taxpayer to not file a Form 8886. The first relates specifically to Owners who only participate in reportable transactions due to their ownership interests. In that case, the Owner does not have to file if the Insured complies with its own filing obligation, acknowledges the obligation in writing to the Owner, and identifies the Owner on its own Form 8886 as the recipient of the acknowledgement. The other safe harbor arises when a Captive revokes its Section 831(b) election. If a Captive revokes its election, then the transaction ceases to be a reportable transaction for any years that the revocation is effective and none of the participating taxpayers will have been party to a reportable transaction. To facilitate revocations, the IRS also released Revenue Procedure 2025-13 (Rev. Proc. 2025-13), which provides a streamlined procedure to revoke a taxpayer’s Section 831(b) election.
Reporting requirements for material advisors to the transaction
Material advisors to reportable transactions must also file with the IRS. A “material advisor” is a person who makes a tax statement to a party that needs or will need to disclose the transaction and the advisor derives gross income from it that surpasses a threshold. The advisor’s gross income can be based on almost anything the advisor does related to the transaction. The threshold for income on a listed transaction is $10,000 when most of the transaction’s benefits go to natural persons and $25,000 in other cases. For a transaction of interest, the threshold is higher, at $50,000 when the transaction mostly benefits natural persons and $250,000 otherwise.
Material advisors must file Form 8918, Material Advisor Disclosure Statement, with OTSA. Form 8918 must be filed with OTSA by the last day of the month following the end of the calendar quarter when one becomes a material advisor. In this case, that means by April 30, 2025.
Under these Regulations, material advisors are required to report for tax statements up to six years before the date of publication, or January 14, 2019. Additionally, there is no exception in the Regulations for material advisors who filed previously.
Differences between the proposed and final regulations
While the IRS continues to look unfavorably upon micro-captives, there are some positive signs in the Regulations. In particular, the IRS received comments from the regulated community, considered those comments, and adjusted its final position based on those comments.
The result is that the final regulations are less burdensome than the proposed regulations. The proposed regulations would have treated any related-party financing as a listed transaction. They also would have treated any Captive with a loss ratio of less than 65 percent over 10 years as a listed transaction. Finally, they would have treated a Captive with a loss ratio of less than 65 percent over the preceding nine years or the Captive’s lifetime, whichever was shorter, as engaging in a transaction of interest. The final regulations dramatically reduced the loss ratio needed to escape being considered a listed transaction, required a listed transaction to meet both the funding and loss ratio criteria, and slightly lowered the threshold to escape transaction of interest status.
Seek guidance for comprehensive compliance
The Regulations were issued with a lengthy background discussion and include many definitions and references to other laws. This article highlights the key provisions of the Regulations. Taxpayers that may be subject to the Regulations should consult (consider consulting?) professional advisors for detailed review and guidance on potential reporting requirements.

What Every Multinational Company Should Know About … The New Steel and Aluminum Tariffs

What Has President Trump Announced?
On February 10, 2025, President Trump signed proclamations titled Adjusting Imports of Steel Into the United States and Adjusting Imports of Aluminum into the United States. The proclamations cover both steel and aluminum tariffs, which will be raised to a flat 25%. In particular, the steel and aluminum proclamations establish the following tariff principles:

The Section 232 aluminum tariffs, which the Trump administration imposed in his first administration, are raised from 10 percent to 25 percent.
The Section 232 steel tariffs, which already were set at 25 percent but which contained significant carveouts for most major sources of steel products, including steel from Brazil, Canada, and South Korea, will be implemented “without exceptions or exemptions.”
All product-specific exemptions that had been granted under the prior Section 232 tariffs are eliminated.
The steel and aluminum proclamations apply not only to products previously identified in Proclamation 9705 (2018) and Proclamation 9980 (2020) but also to additional derivative steel products and derivative aluminum products to be identified in forthcoming annexes to the proclamations.
The United States will set up a process to allow U.S. industry groups and U.S. producers of steel and aluminum to request that other derivative products be added to the annexes.
The steel and aluminum proclamations include exemptions only for derivative steel products “melted and poured” in the United States and derivative aluminum products “smelted and cast” in the United States, to curb imports of minimally processed metals from other countries that circumvent the prior tariffs. In other words, derivative products that are produced from steel and aluminum that originated in the United States, which then were processed abroad into a derivative product, would be exempt from the new 25 percent tariffs.

The full impact of these tariffs will take time to work through the market. Nonetheless, the announcements sent major shock waves through the manufacturing community. To help companies sort out the potential impact of these new tariffs, this article works through the top-of-mind questions for most major aluminum and steel importers. It then provides some strategies for companies looking to manage tariff-related risks, including by buttressing supply chains and building in contractual flexibility.
Our expectation is that these are the opening salvos in a likely international trade war, not the last shot. Notably, after the issuance of the steel and aluminum proclamations, a White House official confirmed these tariffs would “stack” on any other tariffs. For example, if the currently suspended 25% increase in tariffs for Canada and Mexico are implemented, then imports of Canadian and Mexican aluminum and steel would face new 50% tariffs.
What Are the Key Open Questions and Ambiguities in the Announcement?

What products are covered? The coverage of the presidential proclamation is broad, covering all basic forms of steel and aluminum. In addition to steel and aluminum products subject to previous Section 232 duties, the proclamations will include forthcoming annexes incorporating further derivative steel and aluminum products.
How far downstream does the proclamation extend? The coverage likely extends to numerous downstream products such as pipes, tubes, and aluminum extrusions. The full list of derivative products covered by the proclamations will be listed in yet-to-be-published annexes.

How does this interact with the prior Section 232 duties imposed in President Trump’s first term? The effect of the steel and aluminum proclamations is basically to replace the prior Section 232 duties — including all their exemptions and negotiated alternative quota arrangements — with new, uniform duties under the current proclamations, including to a potentially larger set of products to be covered in the forthcoming annexes. This has the effect of both broadening the scope of the prior duties and also extending them to countries that had negotiated alternative measures to the prior Section 232 tariffs, such as by imposing quotas for exports of steel and aluminum to the United States in exchange for having the tariffs dropped. The proclamations also eliminate all the product-specific exemptions granted under both the prior Trump and Biden administrations. Thus, the proclamations represent a level-setting of the prior Section 232 tariffs, bringing everything to a uniform 25% rate for all countries and for all products.

What about the Section 301 duties? The Section 301 duties applicable to Chinese-origin products remain fully in place. Because those tariffs (recently increased by an additional 10%) cover basically all imports from China, including aluminum and steel products, the new aluminum and steel tariffs ladder on top of the Section 301 duties. Thus, there can be duties as high as 60% for Chinese aluminum and steel, in addition to the normal Chapter 1–97 tariffs, of the Harmonized Tariff Schedule of the United States (HTSUS) that generally apply to imports from all countries.
What about all the antidumping and countervailing duty orders on various steel and aluminum products? In addition to Section 232, Section 301, and standard Chapter 1–97 duties, in situations where there are antidumping or countervailing duty orders on steel or aluminum products, these duties also would be added on. Because antidumping and countervailing duty orders are placed on products from a particular country or countries, the analysis of whether such additional duties are due for steel and aluminum imports would depend on the country at issue, as well as whether the product being imported falls within the written scope of the antidumping and countervailing duty orders. But because of the large number of antidumping and countervailing duty orders, an appreciable number of products will be covered by these tariffs as well. It accordingly is essential for steel and aluminum importers to be carefully scrutinizing the potential applicability of such orders to their steel and aluminum products.
Would the USMCA allow us to avoid these duties by importing first into Canada or Mexico? Merely transshipping products through a third country, such as Canada or Mexico, does not alter the tariffs to be paid on that product if it eventually comes into the U.S. customs territory. Further, the steel and aluminum proclamations impose a new U.S. melt-and-pour requirement for steel and a smelting requirement for aluminum in order to claim an exemption from the Section 232 tariffs.
Can we avoid the tariffs by doing a moderate amount of processing before importing the steel and aluminum? This would depend on whether the processing is sufficient to take the product out of the HTS classifications listed in the forthcoming annexes of derivative steel/aluminum products.
Are the trade courts likely to strike this measure down? The imposition under Section 232 of aluminum and steel tariffs in the first Trump administration was appealed to both the Court of International Trade and the Court of Appeals for the Federal Circuit. The end result was that the prior use of Section 232 to invoke national security grounds to impose tariffs to protect the U.S. aluminum and steel industries was upheld. While a challenge to the new proclamations is likely, these precedents will make it difficult for such a challenge to succeed.
Don’t these special tariffs violate the WTO Agreements? WTO agreements will not provide relief from these tariffs for steel and aluminum importers. Several countries have already brought a WTO challenge or indicated that they will be doing so soon. But the WTO’s dispute resolution process has been effectively brought to a standstill in recent years, as multiple U.S. administrations have blocked appointments of panelists to the WTO’s Appellate Body, which is the final stage of any dispute resolution. Also, WTO dispute resolution takes years to finish.
Will major importing countries negotiate a resolution to these tariffs? It is likely that they will try. Australia already has indicated it will seek to negotiate an alternative to the imposition of the tariffs. Australia is viewed as being better positioned than most countries for such a resolution because it maintains a trade deficit with the United States, whereas other major steel and aluminum exporters to the United States have trade surpluses. That said, it would not make sense to eliminate the prior settlements through the new imposition of aluminum and steel tariffs if the end goal were to put something similar back in place. Because the U.S. aluminum and steel industries were viewed as having their relief undermined by prior negotiated alternative provisions, as well as the grant of hundreds of product-specific exemptions, it is expected that negotiated alternatives to the tariffs will be much more difficult to achieve this time around.
How will we get clarity regarding the scope of these new tariffs? The new Section 232 tariffs are to go into effect on March 12, 2025. Additional information — including the publication of the annexes — will need to be provided so these tariffs can be applied. We expect that the publication of the proclamations in the Federal Register will provide at least some further clarification as to the scope of the measures — including the annexes — as well as subsequent guidance from U.S. Customs & Border Protection.
Are there any other trade- or tariff-related measures we need to be monitoring? Yes. Speaking from the Oval Office, President Trump said the steel and aluminum tariffs were “the first of many” to come. In particular, he said his international trade team would be meeting over the next four weeks to discuss potential new tariffs on cars, chips, pharmaceuticals, and other goods. He already has imposed 10-percent tariffs on Chinese-origin imports (on top of the existing Section 301 duties from the first Trump administration, which apply to around half of all goods imported from China and impose tariffs up to 25 percent). He has threatened tariffs of up to 25 percent on all goods from Canada and Mexico, which are currently suspended for 30 days to give negotiators time to work out an agreement to address unauthorized immigration and illegal trafficking in fentanyl and other drugs. And he has threatened reciprocal tariffs, which would raise U.S. tariff rates on any products from countries that impose higher tariffs on the same goods when exported from the United States. Finally, he also has vowed to raise U.S. tariffs still further on any country that retaliates against the U.S. tariffs.

What Should Our Company Do to Cope With These Potentially Costly New Duties?

Gather information on importing patterns to determine tariff-related vulnerability. Importers should gather information regarding their steel and aluminum products, and their importing patterns related to those products, to pinpoint tariff-related risks and vulnerabilities. Supply chain mapping, the process of documenting all suppliers and the flow of goods and products in a supply network, can be an important tool for importers looking to gain proper insight into their network. A clear picture of one’s supply chain allows importers to identify tariff-saving opportunities and to proactively address pressure-points creating vulnerabilities.
Gather contracts and determine tariff-related flexibility. Global trade dynamics necessitate flexible supply chain contracts for both suppliers and purchasers. The starting point is to identify goods facing high tariff rates and to gather all of your supply- and sell-side contracts and determine how they handle tariff-related risks for these goods. In general, when it comes to tariff-related risks, these contracts generally fall into two buckets: (1) ones that contain no provision relating to tariffs or that contain pricing-related provisions, which may indirectly allocate risks relating to tariffs but not provide any real flexibility to deal with unexpected tariff changes; and (2) ones that include clear tariff-related provisions. To the extent possible, in any situation where your company bears tariff-related risks (generally, where your company has agreed to act as the importer of record), you want to be in the posture of moving contracts toward the second scenario.
Look for ways to update supply-side contracts for supply chain flexibility and sharing of risk. Fixed-price contracts typically assign cost risk to the seller. If tariffs increase costs, suppliers cannot unilaterally demand price adjustments unless the contract allows for cost-sharing mechanisms. An example of price adjustment protection language would be as follows: Supplier reserves the right to adjust prices to reflect the impact of any tariffs, duties, or similar governmental charges imposed after the date of this proposal. These adjustments will be calculated to ensure fair allocation of the increased costs. Supplier will provide advance notice of any such adjustments along with documentation supporting the changes.
Look for ways to update sell-side contracts for allowing surcharges and pricing flexibility.  Sellers wanting to protect themselves and to have added flexibility should seek to include price adjustment rights in their contracts. Some contracts tie prices to commodity indexes, mitigating the impact of sudden market changes. If a supplier anticipates tariff risks, an indexed pricing structure may provide some protection.
Incorporate procedures to regularly review new contracts and contracts coming up for renewal to incorporate tariff flexibility and tariff-sharing provisions. Regularly reviewing new contracts and contracts up for renewal allows companies the opportunity to amend their standard terms and conditions and to incorporate provisions that can lead to more flexibility and an equal tariff-sharing burden. An example of contract language to create flexibility in a tariff-changing environment would be: If new tariffs, duties, or similar government-imposed charges are introduced after contract execution, the parties will renegotiate pricing in good faith to reflect the impact of such charges.
Look for ways to create commercial leverage to share tariff-related risks. The imposition of additional tariffs can be just as devastating for sellers as it is for buyers. Look for contractual leverage points relating to contract renewals or potential expansion of purchasing patterns. Consider moving up contract renewals to combine term extensions with tariff-related risk sharing. By proactively addressing these issues in supply chain agreements, businesses can better navigate economic volatility while maintaining contractual clarity and financial stability.