Final Regulations Issued for Certain Partnership Related Party Basis Adjustment Transactions
Introduction
On January 10, 2025, the Treasury Department and the U.S. Internal Revenue Service (the “IRS”) released final regulations (the “regulations”) classifying certain partnership related party basis adjustment transactions and substantially similar transactions as transactions of interest, a type of reportable transaction, which requires disclosure for the taxpayer and its material advisors. The regulations finalize proposed regulations issued in June 2024.
These regulations were issued to require disclosure of transactions that the IRS viewed as objectionable from a policy matter. These transactions often involve distributions of appreciated property from a partnership among related partners under circumstances where the partnership would get a stepped-up basis in its remaining property without any tax cost to the distributee partner or the distributee partner has a step up in basis without cost to the remaining related party partners. However, the regulations also apply to transactions that do not present the same tax policy issues. Although the regulations generally will not apply to funds (which generally do not make section 754 elections and generally avoid having a substantial basis reduction), they could apply to continuation funds, restructuring of funds and fund investments (including as a result of distributions in-kind) and liquidations of splitters owned by blockers and transfers among related parties of interests in funds. The regulations can in certain cases apply retroactively for six years (generally covering transactions occurring on or after January 1, 2019 for partnerships and partners with the calendar year as its tax year).
The regulations apply only to transactions where the total stepped-up basis increases from all transactions engaged in by the same partner or partnership during the taxable year (generally without netting for any basis adjustment that results in a basis decrease in the same transaction or another transaction), reduced by the gain recognized, if any, on which income tax is imposed, equal or exceed $10 million for transactions occurring after the “six-year lookback period” (as discussed below), and $25 million for transactions that occurred during the “six-year lookback period”.
Penalties may be up to $50,000/transaction/participant. Because the penalties are severe and the regulations apply retroactively for six years (and memories may be fuzzy), we expect that many taxpayers and material advisors will “protectively” report many past transactions that in fact are not covered by the regulations.
The regulations largely adopt the proposed regulations but include an increased threshold for basis increases, the limited six-year retroactive lookback window, additional time for reporting, certain exclusions for publicly traded partnerships, and a narrowed scope of reporting for transfers between related transferors and transferees. As described above, the threshold amount is $25 million for transactions occurring within the six-year lookback period (discussed below) and $10 million for transactions occurring after the six-year lookback period.
This blog explains the transactions that the regulations target, the common and innocuous transactions they also seem to cover, and the consequences if a taxpayer enters (or has entered into) one of the transactions.
Background
Under section 734(b)(1),[1] if (i) a partnership has a section 754 election in place, (ii) the partnership distributes property to a partner, and (iii) the adjusted basis of the distributed property immediately before the distribution exceeds the partner’s adjusted basis in its partnership interest, the partnership must increase its basis in its remaining assets. In this situation, because the redeemed partnership has “lost basis” in the distributed asset (and the redeemed partner has not increased its basis), the partnership is permitted to increase its basis in its remaining assets to avoid “double gain”.
Under section 732(b), if a partner receives appreciated assets in complete liquidation of the partner’s interest in a partnership, the partner’s basis in the assets is generally equal to the adjusted basis of the partner’s interest in the partnership, reduced by any money distributed in that same transaction.[2] Thus, if the partnership’s basis in the asset is less than the partner’s outside basis, the partner will receive the asset with a basis that is “stepped up” to the partnership’s outside basis. This basis step-up also avoids double gain.
Under section 732(d), if a partnership does not have a section 754 election in place, a partner acquires an interest in the partnership, and the partner receives a distribution of property within two years after the partner acquired the partnership interest, the partner can elect to adjust the basis in the distributed property to what it would have been had the section 754 election been in place.
Under section 743, if a partnership has a section 754 election in place, and a partnership interest is transferred, the partnership adjusts the basis of its assets so that it is equal to the transferee’s basis in its partnership interest.
Each of these adjustments are designed to avoid possible “double gain.” However, where the partners are related and a distributee partner will not be subject to tax with respect to the distributed property, or a transferor of a partnership interest will not be subject to tax on the transfer, these sections can be used to create tax basis for the remaining partners (or the transferee).
For example, assume that elderly parents own 50% of a real estate partnership and their children own the other 50%. The partners have a zero basis in their partnership interest, and the partnership has a zero basis in its property, but the property has high fair market value. The partnership has a section 754 election in place. The partnership borrows funds, uses those funds to purchase an asset and distributes the asset to the parents in redemption of the parents’ interest in the partnership. The parents will have a zero basis in the asset and, were the parents to sell the asset, they would have gain.[3] However, the parents will hold the asset and receive a stepped-up basis on their death. Under section 734(b)(1), the partnership will get a stepped-up basis in its real estate equal to the fair market value of the distributed asset over the parents’ outside basis (zero), which the partnership could depreciate or use to offset gain on the sale of the property.
While this transaction complies with the relevant tax rules, the IRS views the result as objectionable as a tax policy matter because the children will get a stepped-up basis but the parents will not pay tax (by reason of the stepped-up basis at death).
Transactions of Interest
The following transactions are discussed in the regulations as transactions of interest:
Situation 1 (Section 734(b)): A partnership distributes property to a person who is a related partner in a current or liquidating distribution, the partnership increases the basis of one or more of its remaining properties under section 734(b) and (c) and the $10 million or $25 million threshold is met. A related party in this situation means two or more direct partners of a partnership that are related (within the meaning of section 267(b) (without regard to section 267(c)(3)) or section 707(b)(1), generally a 50% test) immediately before or immediately after the relevant transaction.
Situation 2 (Section 732(b)): A partnership distributes property to a person who is a related partner in liquidation of the person’s partnership interest (or in complete liquidation of the partnership), the basis of one or more distributed properties in increased under section 732(b) and (c) and the $10 million or $25 million threshold is met. A related party in this situation means two or more direct partners of a partnership that are related (within the meaning of section 267(b) (without regard to section 267(c)(3)) or section 707(b)(1)) immediately before or immediately after the relevant transaction.
Situation 3 (Section 732(d)): A partnership distributes property to a person who is a related partner, the basis of one or more distributed properties is increased under section 732(d), the related partner acquired all or a portion of its interest in the partnership in a transaction that would be a transaction described in Situation 4 if the partnership had a section 754 election in effect for the year of the transfer and the $10 million or $25 million threshold is met. A related partner in this situation means two or more direct partners of a partnership that are related (within the meaning of section 267(b) (without regard to section 267(c)(3)) or section 707(b)(1)) immediately before or immediately after the relevant transaction.
Situation 4 (Section 743): A partner transfers an interest in a partnership to a related partner in a nonrecognition transaction, the basis of one or more partnership properties is increased under section 743(b)(1) or (c) of the Code and a predetermined threshold is met. A transferor and transferee of a partnership interest are related for purposes of this situation if they are related (within the meaning of section 267(b) (without regard to section 267(c)(3)) or section 707(b)(1)) to each other immediately before or immediately after the relevant transaction.
Substantially Similar Transactions
The Final Regulations also cover “substantially similar transactions.” These transactions include any transaction that is the same or substantially similar to one of the types of transactions described above. Transactions are generally “substantially similar” if they are expected to obtain the same or similar types of tax consequences or are factually similar. The regulations specifically provide that a transaction is substantially similar if the partners are not related, but one or more partners are “tax-indifferent parties” that facilitate an increase in the basis of partnership property by receiving a distribution of property from the partnership or having a share of a corresponding decrease to the basis of partnership property, and the $10 million or $25 million threshold is satisfied. The transfer of a partnership interest in a partnership with a section 754 election by a tax-indifferent party is not specifically listed as substantially similar. A tax-indifferent party is, in general, a person that is either not liable for federal income tax by reason of the person’s tax-exempt status or foreign status, or to which any gain that would have resulted from a transaction (that is described in Situation 1 or Situation 2 except that the partners are not related and one or more of the partners is a tax-indifferent party) if the property subject to the basis decrease in such transaction were sold immediately after such transaction would not result in federal income tax liability, and whose status as a tax-indifferent party is known or should be known to any other person that participates in the transaction or to a partner in a partnership that participates in such a transaction. As a result, a transaction would be substantially similar if it is described in Situations 1 and 2 above, except it involves a tax-indifferent party (instead of related partners) and that status was known or should have been known.
Common Transactions
While these regulations are focused on the transactions described above, given their broad scope, the regulations may apply to many basic transactions and impose significant compliance burdens. Certain common transactions that may be covered by the regulations include the following:
Liquidations of “splitter” partnerships: Assume a fund sets up a “splitter” partnership for non-U.S. investors. The partners of the partnership are a U.S. corporation and a non-U.S. corporation owned by the non-U.S. feeder. At the end of the fund, the partnership liquidates and distributes assets to the U.S. corporation. The U.S. corporation’s basis in the partnership exceeds the partnership’s basis in its assets by more than $10 million. In this case, the U.S. corporation will receive a stepped-up basis by more than the $10 million threshold, and the two corporate partners are related to each other because they are owned by the same investors. The distribution is a transaction of interest under the regulations.
Certain continuation fund transactions: An existing fund (“Fund 1”) is at the end of its life and one of its remaining assets is an interest in a partnership (the “Investment”). Fund 1’s basis in its interest in Investment exceeds its share of Investment’s basis in its assets. Investment has section 754 elections in place. Fund 1 contributes Investment to a new fund (“Fund 2”) in exchange for interests in Fund 2 and Fund 1 distributes Fund 2 interests to Fund 1’s partners in liquidation of Fund 1. Assume that more than 50% of the partners in Fund 1 “rollover” to Fund 2. This is a “Situation 2 (Section 732(b)) transaction”: Fund 1’s investors will receive a stepped-up basis, and they are “related” to Fund 2’s investors. If the basis step up exceeds to $10/$25 million threshold, the distribution will be a transaction of interest.
Liquidation of a partnership AIV in connection with a blocker sale: A fund forms a partnership AIV to purchase a partnership portfolio company. The AIV is owned more than 50% by a blocker corporation and the balance is owned by the fund. The AIV and the portfolio company make section 754 elections. Subsequently, a buyer agrees to purchase the blocker and the AIV’s interest in the portfolio company but does not wish to acquire the AIV. Therefore, the AIV distributes the portfolio company to the fund and the blocker in liquidation, and the buyer purchases the blocker and the remaining interests in the portfolio company. The AIV’s basis in the portfolio company with respect to the blocker is more than $10 million greater than the blocker’s basis in the AIV. Because the blocker owns more than 50% of the AIV, they are related parties. Therefore, the distribution is a transaction of interest.
Distribution by a partnership owned by consolidated group members: Assume two members of a consolidated group set up a partnership. The partnership distributes assets to one of the members. The recipient partner’s basis in the partnership exceeds the partnership’s basis in its assets by more than $10 million. In this case, the recipient partner will receive a stepped-up basis by more than the $10 million threshold, and the two corporate partners are related to each other because they are members of a consolidated group. The distribution is a transaction of interest under the regulations.
Distribution by an Up-REIT partnership to its REIT: Assume a REIT distributes an asset to its REIT member. Assume that the asset is a capital gain asset, and the REIT’s basis in the partnership exceeds the partnership’s basis in its assets by more than $10 million. Although not entirely clear, the REIT may be a tax-indifferent party (because a tax-indifferent party is a person that is not liable for federal income tax and a REIT that designates a distribution as a capital gain dividend is not subject to tax on the capital gains). If so, the distribution would be a transaction of interest under the regulations.
Lookback Rule
The regulations require a taxpayer to report a transaction that was entered into prior to the publication of guidance identifying a transaction as transaction of interest. Many transactions that could be covered by the new rules would cause completed, non-abusive transactions that were done in accordance with law existing at such time to be treated as transactions of interest. Under the regulations, a participant of a transaction of interest must provide the information described in the regulations if the transaction of interest occurred within a six-year lookback period. This lookback period means the seventy-two months immediately preceding the first month of the taxpayer’s most recent taxable year that began before the date of publication of the regulations in the Federal Register. Taxpayers have 180 days from the publication of the regulations to file disclosure statements for transactions of interest in open tax years for which a tax return has already been filed and that fall within the six-year lookback period. Material advisors have an additional 90 days beyond the regular reporting deadline (which is generally the last day of the month that follows the end of the calendar quarter in which the advisor became a material advisor with respect to the transaction) to file the disclosure statements for transactions made prior to the publication of the regulations.
[1] All references to section numbers are to the U.S. Internal Revenue Code of 1986, as amended.
[2] “Marketable securities” are generally treated as cash for these purposes unless the partnership is an “investment partnership” and the partner is an “eligible partner”. See sections 731(a), 731(b), and 731(c)(3)(A)(iii).
[3] Under section 752(a), the parents’ basis in the partnership would increase by their share of the borrowing and then decrease when they are relieved of it, so the liability would have no effect on them.
Rita N. Halabi & Maggie Livingstone also contributed to this article.
President Trump’s 4 March Tariffs Against Canada, Mexico, and China
Today, President Trump announced the implementation of new tariffs targeting imports from Canada, Mexico, and China, making good on his promise last month in the event measures were not taken by these countries to stem the tide of fentanyl and illegal migration into the United States.
Details of the Tariffs
The newly enacted tariffs are as follows:
CanadaA tariff of 25% will be imposed on all imports from Canada. This includes a broad range of goods, notably steel, aluminum, and various manufactured products, significantly impacting industries that rely on Canadian materials and components.
Mexico Similar to Canada, imports from Mexico will face a 25% tariff. This measure affects key sectors, including automotive parts, electronics, and agricultural products, posing challenges for businesses that have integrated supply chains spanning both countries.
ChinaAll imports from China will now be subject to a 20% tariff which will be in addition to the Section 301 and Section 232 tariffs. This figure reflects an increase of an additional 10% on top of the 10% duty that was already imposed on Chinese goods last month. This elevated rate applies to various goods, including electronics, machinery, and consumer products, signaling the administration’s intensified focus on addressing unfair trade practices and protecting American manufacturing.
Key Implications for Businesses
Supply Chain Disruptions: The tariffs may cause disruptions to existing supply chains. Companies should assess their current sourcing strategies to identify alternative suppliers and mitigate risks associated with higher costs and import delays.
Compliance and Regulatory Challenges: Importers must navigate new compliance requirements associated with the tariffs. Businesses should ensure they have the correct documentation for customs and be prepared for increased scrutiny regarding product classifications and valuations.
Potential for Retaliation: These tariff measures will likely lead to retaliatory actions from Canada, Mexico, and China, potentially impacting US exports to these markets. Companies should anticipate possible trade barriers that could disrupt their international operations.
Recommendations
Assess Impact on Cost Structures and Explore Supply Chain Alternatives: Consider diversifying your supplier base to include domestic sources or suppliers from other countries, reducing reliance on imports from Canada, Mexico, and China and minimizing exposure to tariffs.
Monitor Trade Developments: Stay informed about future regulatory changes and potential retaliatory measures from Canada, Mexico, and China that could further impact your business landscape and operations.
Conclusion
The implementation of tariffs against Canada, Mexico, and China represents the core tenants imbedded in the America First US Trade Policy with broad implications for businesses engaged in imports. Companies must quickly adapt to these changes to mitigate risks and seize potential opportunities.
Attention North Carolina Retailers: Time to Renew Your ABC Permits!
If your business sells alcohol in North Carolina, now is the time to renew or register your Alcoholic Beverage Control (ABC) retail permit.
Failure to complete this process on time could result in penalties, increased costs, or even permit revocation. Here’s what you need to know to stay compliant and keep your retail business running smoothly.
Important Renewal Deadlines
April 30, 2025: This is the final day for retail permittees to renew their ABC permits without facing any penalties. Be sure to complete the process before this date to avoid unnecessary fees.
Late Fees: Beginning this year, SL-2024-41 mandates that permittees who fail to renew by April 30 will incur a 25% late fee. This additional cost could affect your business’s bottom line, so be sure to complete the renewal process promptly.
June 1, 2025: If your renewal is not completed by this date, your permit will be permanently revoked. If this happens, you’ll need to reapply for a new permit, which could cause significant disruptions to your business and an inability to sell alcoholic beverages until the permits are reissued.
How to Renew
The renewal process is simple and can be done online through the ABC Permittee Portal. Pull up the retail PIN assigned to your account by the ABC Commission and visit the portal here: https://epay.abc.nc.gov/ to submit your renewal and make the necessary payments.
Increased Duties on Chinese Imports and Guidance Regarding New Tariffs on Canada and Mexico
Effective today, most U.S. imports from China are now subject to 20% emergency tariffs and imports from Canada and Mexico are subject to 25% emergency tariffs, in addition to any other applicable import duties. These tariffs, while sweeping in coverage, do contain certain exemptions discussed below.
In an Executive Order signed late yesterday, President Trump followed through on his threat to increase tariffs on U.S. imports from China first implemented on February 4, 2025, imposed under the International Emergency Economic Powers Act (IEEPA). This directive increases the tariffs on Chinese products entering the United States from 10% to 20%, but makes no other changes to scope – meaning, that only limited products remain exempt from those duties (generally encompassing informational materials, donations intended to relieve human suffering and items ordinarily incident to travel to or from any country). Imports otherwise qualifying for duty-free entry (or reduced dutiable value treatment) under Chapter 98 may continue to benefit from that treatment; imports eligible for de minimis treatment may continue to benefit from it until such time as “adequate systems are in place to fully and expeditiously process and collect tariff revenue” arising from these new duties.
In addition, President Trump permitted the previously deferred duties on imports from Canada and Mexico to go into effect with an identical scope to the China import coverage. As previously announced, the duty rate for covered imported products of Canada (except for Canadian energy and energy resources) and Mexico will be 25%. Covered imported energy and energy resources of Canada will be subject to 10% duty rate.
Mere hours before these tariffs went into effect, U.S. Customs and Border Protection (CBP) issued Federal Register notices with guidance regarding imports newly subject to the Canada and Mexico tariffs. These notices amend Chapter 99 of the Harmonized Tariff Schedule of the U.S. (HTSUS) to implement the tariffs as previously stated in the Presidential Proclamations.
Two Employer-Friendly ACA Changes
Two recent developments make significant changes to Affordable Care Act (ACA) compliance, both effective immediately and offering important benefits for employers.
Providing Forms 1095 to Employees
Since ACA was first implemented, employers have been required to report their offers of health care coverage to employees by filing Form 1095-B or 1095-C with the IRS and providing a copy of the form to employees.
Beginning with the 2024 tax year, which the reporting forms were set to be distributed in early 2025, employers are no longer required to automatically provide these forms to employees, provided two requirements are met. First, employers must notify employees that the employer will no longer automatically provide Form 1095, including a statement saying employees may request a copy and instructions on how to do so. Second, employers must provide a copy of Form 1095 to any employee who requests it, within 30 days of the request.
Note that employers must still file Form 1094 and Form 1095 with the IRS; this new rule simply relieves the responsibility to provide a copy to employees. Employers who wish to take advantage of the new rule should continue to coordinate with their service providers to ensure that Forms 1095 are prepared in time for filing to the IRS, and available to provide to employees upon request. This change may help employers save on the cost and administrative responsibility of sending the forms to each employee.
ACA Penalty Statute of Limitations
Congress has also established a new six-year statute of limitations for employer penalty assessments under the ACA. While this may seem lengthy, especially considering the common three-year statute of limitations that applies to many tax assessments, the IRS had previously taken the position that there was no statute of limitations because Forms 1094 and 1095 were not tax returns.
This change is particularly important due to frequent delays between an employer’s alleged failure to comply with ACA requirements and the IRS’s notification of a proposed penalty assessment. This delay could be multiple years, meaning that if an employer had a systematic issue regarding its offers of coverage or reporting, penalties could be assessed for several years before the employer was notified that a change was necessary for compliance. Especially in corporate transactions, this change will help provide clarity and limit exposure for ACA compliance.
U.S. EPA Approves Class VI Injection Well Primacy in West Virginia
On February 26, 2025, the U.S. Environmental Protection Agency (EPA) published a notice in the Federal Register approving West Virginia’s application for Class VI injection well primary enforcement authority (primacy) pursuant to the Safe Drinking Water Act (SDWA) underground injection control (UIC) program. West Virginia is the first state in the Eastern U.S. to receive primacy. Primacy gives West Virginia the responsibility of overseeing and implementing a Class VI permitting program. Class VI wells are used to inject carbon dioxide into deep rock formations for permanent storage, known as carbon capture and sequestration (CCS), which is a tool used to reduce carbon dioxide emissions into the atmosphere. Point source emissions such as those from industrial facilities or power generation are common sources of carbon dioxide emissions and can be candidates for CCS. North Dakota, Wyoming, and Louisiana have already been granted Class VI primacy, and Alaska and Arizona currently have primacy applications pending with EPA. EPA has pledged to “fast-track” the agency’s review and approval of other Class VI well primacy applications.
The Class VI injection well permitting process generally starts with the applicant submitting an application, which undergoes a completeness review to ensure all required information is included. An applicant may receive a notice of deficiency or a request for additional information regarding their application. The application then undergoes a technical review to ensure the project does not pose a risk to drinking water. EPA indicates that it aims to complete its review of the permit application and issue Class VI permits “within approximately 24 months,” but states that have received Class VI permit primacy have completed the review process more quickly. Class VI well permit application requirements include site characterization, modeling to determine the impact of injection activities through the lifetime of the operation, well construction requirements, testing and monitoring throughout the life of the project, emergency and remedial response plans, operating requirements to prevent endangerment to human health or drinking water, and financial assurance mechanisms. If the application passes technical review, a draft permit is prepared and is made available for public comment period prior to the final permit being issued. Other requirements that apply to CCS projects in West Virginia are set forth in the West Virginia Underground Carbon Dioxide Sequestration and Storage Act, W.Va. Code § 22-11B-1, et seq.
CCS projects are eligible for the 45Q federal tax credit. The entity eligible to claim the tax credit is the owner of the capture equipment, and eligibility is determined based on the type of facility and its annual carbon capture thresholds. The eligibility thresholds are 1,000 metric tons of carbon dioxide for direct air capture facilities, 12,500 metric tons for industrial facilities, and 18,750 metric tons for electric generating units. Eligible projects that begin construction before January 1, 2033, can claim the tax credit for up to 12 years after being placed in service.
Senators Crapo and Wyden Release Draft Bipartisan Taxpayer Rights Legislation
I. Introduction
On January 30, 2025, Mike Crapo (R-ID), the Chairman of the Senate Finance Committee, and Senator Ron Wyden (D-OR), the Ranking Member of the Senate Finance Committee released a discussion draft of the “Taxpayer Assistance and Service Act” (the “bill”), a bipartisan taxpayer rights bill intended to streamline tax compliance and procedure.[1]
Many of the provisions are based on recommendations by the Taxpayer Advocate Service, an independent organization within the Internal Revenue Service (the “IRS”).
The Senators request comments on the discussion draft of the bill by March 31, 2025.[2] This blog post summarizes the bill’s key provisions.
II. Summary of the Bill’s Key Provisions
a. IRS Office of Appeals
The bill would include several provisions related to the IRS Independent Office of Appeals (“IRS Appeals”).
When a taxpayer receives a notice of deficiency (a “30-day letter’) from the IRS and disagrees with the IRS’ proposed adjustment(s), the taxpayer has the option, within 30 days of receiving the 30-day letter, to request an administrative appeal in IRS Appeals.[3] Many tax disputes are settled or compromised in IRS Appeals and without going to Tax Court. Section 7803(e)(4) provides that access to IRS Appeals is “generally available to all taxpayers”, but the regulations under section 7803(e)(4) provides a list of 24 exceptions to IRS Appeals’ consideration.[4]
In the IRS Appeals process, the taxpayer submits a protest of the IRS revenue agent’s findings, which the revenue agent submits to IRS Appeals (sometimes with the revenue agent’s rebuttal). The IRS Appeals officers review the protest and rebuttal, then request a conference to negotiate the settlement or compromise. IRS Appeals have the discretion to consider the “hazards of litigation”, or the probability that the revenue agent’s position would not be sustained in court.
IRS Appeals functions as an independent organization within the IRS and is independent of the IRS office that proposed the adjustment. Further, the revenue agent and other IRS employees are generally prohibited from engaging in ex parte communications on substantive issues with IRS Appeals without the presence of the taxpayer or their representative.[5] Still, IRS Appeals reports directly to the Commissioner. In addition, IRS Appeals may not hire its own attorneys and, instead, receives advice from IRS Chief Counsel attorneys, who often attend initial conferences.
The Taxpayer Advocate Service has previously criticized the apparent lack of impartiality in IRS Appeals and has stated that for IRS Appeals to have its own independent legal counsel “would ensure that the IRS appeals process is free of agency influence in both reality and public perception, thereby bolstering taxpayer morale and confidence in the system’s impartiality.”
The bill would authorize IRS Appeals to hire its own attorneys who report directly to the Chief of IRS Appeals (an official appointed by the Commissioner to supervise and direct IRS Appeals)[6] but would not otherwise change the role of Chief Counsel attorneys who provide advice to IRS Appeals.
Another provision in the bill would authorize IRS Appeals to directly hire candidates that are not IRS employees engaged in enforcement functions.
In addition, the bill would explicitly require IRS Appeals to evaluate and consider, “without exception”, all “hazards of litigation” in resolving tax disputes. As stated above, under current law, this is a discretionary right.
Finally, the bill would codify certain exceptions to taxpayers’ broad access to IRS Appeals, including:
Disputes that do not involve liability for tax, penalties or additions thereto;
Disputes based solely on the argument that a statute, regulation or other guidance is unconstitutional or otherwise invalid (unless there is an unreviewable decision from a federal court holding that the item is unconstitutional or otherwise invalid);
Positions rejected in federal court or identified by the Secretary of the Treasury as frivolous;
Issues resolved by closing agreements;
Matters that could interfere with criminal prosecutions of tax-related offenses; and
Cases designated by Chief Counsel for litigation.
If codified, these exceptions would enable IRS Appeals and the IRS audit function generally to avoid challenges under Loper Bright,[7] which we are seeing in many docketed cases.
Each of these provisions would be effective on the date of enactment.
b. Extend “Mailbox Rule” to Electronic Submissions So Taxpayers Have Certainty Their Materials Are Submitted on Time
Under section 7502, documents (including tax returns) and payments to the IRS are treated as timely filed and paid if they are postmarked by certain couriers by the due date, even if the IRS physically receives them after that date (the “mailbox rule”). The mailbox rule does not apply to electronic submissions and payments. If the IRS receives a document or payment late, it is treated as timely if the taxpayer can show it was timely mailed using certain delivery services. While the mailbox rule applies to electronic submissions of tax returns through electronic return transmitters, it does not apply to most electronic payments (including the Electronic Federal Tax Payment System). Accordingly, if a taxpayer whose tax return and payment is due on April 15 electronically submits the return and mails a check to the IRS on April 15, the check will be postmarked as of the due date, and the payment will be considered timely. However, if the same taxpayer instead makes the payment electronically on April 15, the payment may not be debited from the taxpayer’s account until after that date, and the payment would be considered late.
The bill would extend the mailbox rule to electronic submissions using any method permitted by the Secretary of the Treasury. The bill would also require the Secretary of the Treasury to issue regulations or other guidance not later than the date that is one year after the date of enactment, and the provision would be effective for documents and payments sent on or after that one-year anniversary.
c. Tax Court Jurisdiction & Powers
The Tax Court is one of the courts in which taxpayers may litigate tax disputes with the IRS.[8] Taxpayers do not need to pre-pay any portion of the disputed taxes in order to bring a case to the Tax Court. Appeals from the Tax Court can be made to the U.S. Court of Appeals in which, at the time the Tax Court petition was filed, the taxpayer resided or had a principal place of business, principal office or principal agency of the corporation.[9]
1. Tax Court jurisdiction & certain powers
While most cases lodged in Tax Court involve tax deficiencies and collection due process cases (i.e., “lien and levy actions”), the Tax Court also has jurisdiction over TEFRA[10] items, BBA[11] actions, certain declaratory judgment actions (including those related to an organization’s tax-exempt status), section 6110 disclosure actions and determinations of relief from joint and several liability on returns in “innocent spouse relief” cases.[12]
The bill would clarify that the Tax Court has jurisdiction to:
Redetermine IRS bans on taxpayers’ ability to claim the Earned Income Tax Credit, Child Tax Credit and American Opportunity Tax Credit (effective as of the date of enactment);
Apply equitable tolling to extend the 30-day deadline in section 6213(a) for filing a petition in a collection due process case (applies to filings made after the date of enactment);
Determine tax liabilities in collection due process appeals (effective as of the date of enactment); and
Issue refunds and credits in refund cases (effective for actions filed after the date that is 18 months after the date of enactment).
In addition, the bill would expand the Tax Court’s power to review de novo and consider all relevant evidence in “innocent spouse relief” cases; under current law, a taxpayer is only permitted to submit to the Tax Court evidence that it has not yet submitted to the IRS if the evidence is “newly discovered.”[13] The provision would be effective for petitions and requests for “innocent spouse relief” filed or pending on or after the date of enactment.
The bill would also expand the Tax Court’s pre-trial discovery powers by authorizing the Tax Court to issue pre-trial third-party subpoenas. As a result, the Tax Court would have the power to issue subpoenas for the attendance of parties or witnesses, and the production of books, papers and other documents. The provision explicitly states that this grant of power is intended to facilitate pre-trial settlements. This provision would be effective on the date of enactment.
Further, bill would authorize the Tax Court to issue refunds and credits in collection due process cases in which it has jurisdiction to determine the taxpayer’s liability. The provision would be effective on the date of enactment.
2. Relaxation of “finality rule”
To appeal a Tax Court decision, a taxpayer must file a notice of appeal with the Tax Court clerk within 90 days after the decision was made.[14] If a Tax Court decision is not appealed to a higher court, it is not appealable or the deadline for filing a notice of appeal passes, the decision becomes final 90 days after it was made (the “finality rule”).[15]
Because of the finality rule, the Tax Court has less authority than other courts to modify or revise decisions that have become final. However, in certain cases, the Tax Court has relied on Rule 60(b) of the Federal Rules of Civil Procedure to vacate or alter a judgment, order or other part of the record to make corrections,[16] but some appellate courts have held that the Tax Court does not have the authority to rely on Rule 60 for this purpose.[17]
The bill would authorize the Tax Court to provide relief from a final judgment or order in certain circumstances where justice so requires, the standards for which are consistent with Rule 60. The bill would also clarify that the Tax Court has the authority to correct clerical errors, or mistakes from oversights or omissions, in judgments, orders or other parts of the record. The provision would be effective as of the date of enactment.
3. Judges in Tax Court
The Tax Court is made up of 19 presidentially appointed judges,[18] who are assisted in certain cases by special trial judges appointed by the Chief Judge of the Tax Court.[19]
The bill would authorize the parties to a tax case to consent to the assignment of the case to a special trial judge. This provision would be effective when the Tax Court adopts implementing rules. In addition, the bill would grant contempt authority to special trial judges in certain cases. This provision would be effective on the date of enactment.
Finally, the bill would extend the disqualification standards applicable to all federal judges to Tax Court judges and special trial judges. This provision would be effective on the date of enactment.
d. Notices of Math or Clerical Error
When a math or clerical error is identified on a taxpayer’s tax return, the IRS has the authority under section 6213(b) to send the taxpayer a notice, stating an additional amount of tax due (along with interest and penalties) or an amount of a refund (along with interest). The notices are not sent via certified or registered mail. Taxpayers have 60 days from the date of the notice to request abatement; otherwise, the assessment in the notice is final, and taxpayers lose the right to challenge the IRS in Tax Court. The notices do not always state this 60-day response period. Further, the process for screening returns for errors is highly automated, and the notices do not contain specific information on the cause or causes of the error. Given the short response period, lack of specificity and lack of guidelines on procedure, commentators (including the Taxpayer Advocate Service) have noted that many taxpayers lose their rights before they have the chance to respond.
The bill would require the IRS to provide specific information about the math or clerical error (i.e., the type and nature of the error, the Code section to which it relates, the specific line of the tax return to which it relates, and the IRS’ computation of adjustments). Further, it would require the IRS to include a response date near the top of the notice. Finally, it would require the IRS to send the notices by certified or registered mail. The provision would be effective for notices sent after the date which is 12 months after the date of enactment.
[1] A section-by-section summary of the bill is accessible at TAS Act Discussion Draft Section by Section.
[2] Comments can be sent to [email protected].
[3] Taxpayers that initially bypass the IRS Appeals process and go directly to Tax Court generally still have the right and opportunity to settle the dispute in IRS Appeals.
[4] See generally T.D. 10030.
[5] See, e.g., Internal Revenue Service Restructuring and Reform Act of 1988, Pub. L. No. 105-206, 112 Stat. 685 (July 22, 1998); Rev. Proc. 2012-18, 2012-1 C.B. 455.
[6] Section 7804(e)(2).
[7] See generally Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024).
[8] The Tax Court is established under section 7441, pursuant to Article 1 of the U.S. Constitution.
[9] Section 7482.
[10] Tax Equity and Fiscal Responsibility Act.
[11] Bipartisan Budget Act of 2015.
[12] See Tax Court Rule 13.
[13] Section 6015(e).
[14] Section 7483.
[15] Section 7481.
[16] When there is no applicable Tax Court procedural rule, Tax Court Rule 1(b) authorizes the Tax Court to rely on the Federal Rules of Civil Procedure “to the extent that they are suitably adaptable to govern the matter at hand.”
[17] See, e.g., Heim v. Comm’r, 872 F.2d 245 (8th Cir. 1989).
[18] Section 7443(a).
[19] Section 7443A.
The Inside Basis: Post-Wayfair Sales Tax Compliance and Exposure [Podcast]
K&L Gates Tax partner Will LeDoux joins Randy Clark for a discussion of the 2018 Supreme Court case South Dakota v. Wayfair and its impact on sales tax nexus and subsequent transaction considerations.
Trusts as Accredited Investors: Navigating Trusts and Private Market Investments
Investments in private markets are rapidly becoming an essential part of a well-rounded investment portfolio, especially for ultra-high-net-worth individuals and families. According to Ernst & Young, the assets under management in private markets more than doubled from $9.7 trillion in 2012 to $22.6 trillion in 2022. This growth is projected to continue, with an estimated $72.6 trillion expected to be transferred to heirs by 2045, marking the largest intergenerational wealth transfer in history.
Given this backdrop, it’s critical for investors to familiarize themselves with the laws and regulations surrounding alternative investments in private securities. In particular, trusts—commonly used as estate planning tools—play a significant role in this arena.
This article is the first part of a three-part series discussing trusts in the context of certain common investor thresholds for investment in private securities. This article will examine trusts as “accredited investors” under the Securities Act of 1933.
Trusts as Investment Vehicles
Many private securities take advantage of Regulation D of the Securities Act of 1933, which allows for the private offering of securities subject to specific requirements. In Regulation D, Rule 506 requires that investors be “accredited investors”—a term that has significant implications for trusts looking to invest in private markets.
How a Trust Can Qualify as an Accredited Investor
A trust can qualify as an accredited investor under the Securities Act of 1933 in three primary scenarios:
Trust with Assets Over $5 MillionA trust may qualify as an accredited investor if it meets the following criteria:
The trust has assets of over $5 million.
The trust was not specifically formed to acquire the securities offered.
A sophisticated individual, who can demonstrate experience and knowledge in financial matters, directs the trust’s investment decisions.
For more information on whether a trust is formed for the purpose of acquiring the securities offered or whether a person is a “sophisticated person,” please visit: SEC Considerations – Investments in Private Securities.
Bank-Served TrustIf a bank serves as the trustee of a trust and makes investment decisions on behalf of the trust, the trust can qualify as an accredited investor, regardless of the trust’s size or other factors.
Grantor Trusts: Revocable vs. IrrevocableThe qualifications for grantor trusts depend on whether the trust is revocable or irrevocable:A revocable trust qualifies if:
The grantors (the individuals who created the trust) independently meet the criteria to be accredited investors.
The grantors are the only beneficiaries of the trust.
There is also a highly fact-specific test for irrevocable grantor trusts to qualify as accredited investors. For more information, please visit: SEC Considerations – Investments in Private Securities.
What This Means for Trust Advisors:
When advising clients about structuring trusts for investment in private securities, an advisor should understand how a trust may qualify as an accredited investor. Structuring a trust to meet these qualifications can be complex. Still, it offers a valuable opportunity for clients to participate in private market investments—especially given the ongoing wealth transfer and growth of private assets.
Careful consideration of these rules and regulations is essential in helping trusts navigate the world of private market investments. With the right planning, trusts can serve as effective tools for both wealth transfer and participation in private securities, enabling clients to grow their assets in a regulated, secure manner.
The increasing prominence of private market investments and the massive wealth transfer underway highlight the importance of understanding the regulatory landscape for trusts looking to invest in private securities. By keeping these guidelines in mind, advisors can ensure that clients’ trust structures are positioned to take advantage of new opportunities in private markets. As the world of private securities continues to expand, staying informed about these regulations will help trust advisors better serve their clients and ensure the long-term success of investments in private securities.
Majority Owners Achieving Balance: Incentivizing Employees Without Giving Up the Keys to the Whole Kingdom
Success is not just an elusive goal – it can also be difficult to maintain once achieved. For majority owners in private companies, achieving success is just the first hurdle, because once they arrive at this pinnacle, they may soon face a new challenge. Some of their key employees may want a piece of the pie and push for an ownership stake in the company. The dilemma for business owners when their employees are clamoring for ownership is that by issuing equity to employees, this dilutes the company’s stock and also provides employees with legal rights they can enforce against the majority owner.
There is no single answer that meets the needs of majority owners and employees in all situations, but owners who want to incentivize their employees through the use of equity should consider all available options. This includes the potential for owners to provide their employees with “phantom equity” or stock appreciation rights rather than actual ownership (equity) in the company. This approach may help thread the needle effectively for all parties.
Section 1: The Distinctions Between Equity and Phantom Stock
As a starting point, there are important differences between actual equity ownership in a company and phantom equity. Employees who receive stock (corporations) or units (LLCs) in their company have actual ownership, which generally provides them with an array of legal rights. These rights are subject to modification, but equity holders are typically permitted to vote on some issues, to obtain access to the company’s financial records, and to bring claims against the company’s management for violations of their fiduciary duties.
By contrast, employees who receive phantom stock (also called synthetic equity or stock appreciation rights (SARs)) enter into an agreement that provides them with contract rights but not actual ownership in the company. For example, under a phantom equity award, the employee may receive a guaranteed payment if the company’s profits or revenues increase by a specific percentage, if the company is sold, or if the company’s value increases during a specific period in time.
Section 2: The Majority Owner’s Perspective on Equity and Phantom Stock
From the majority owner’s perspective, there are both pros and cons to granting equity ownership that may make the phantom equity approach more desirable in efforts to incentive employees.
The Pros of Granting Equity Ownership
One of the most important benefits of issuing equity to employees is that once they become part owners of the business, their financial interests are more directly aligned with the majority owner. The employees are now officially on the team, and this connection assists with succession planning, it helps secure long-term retention of employees, and it allows for employees to view the business on a longer-term basis. Employees will appreciate that their shares may become much more valuable over time and in any future sale or merger of the business, the sale of their shares will provide a handsome financial return and at a lower tax rate than is applied to capital gains.
The Cons of Equity Ownership
Company owners who issue equity to their employees may come to rue that decision if the employees later become disruptive in their approach to the business or hostile to the owner. As noted above, issuing equity to employees will dilute the percentage of shares available to the owner. Further, employees holding equity are generally entitled to access the company’s financial records, to call shareholder meetings and to bring up issues for discussion at shareholders meetings. In addition, company owners are virtually always part of the senior management team, and they can be subject to claims by employees holding equity who contend that the majority owner breached fiduciary duties owed to the company.
Finally, and importantly, if the employee later resigns or is fired, that does not extinguish his or her equity in the company, and the former employee retains all the same rights of shareholders or members. The company should have a buy-sell agreement in place with the employee that allows for the majority owner to repurchase the former employee’s shares, but this buyout process may become protracted and contentious, which creates a major distraction for the owner who wants to remain focused on the business.
The Pros of Granting Phantom Stock Rights
There are a number of benefits for the owner in issuing phantom stock rather than actual equity. First, the rights granted in the contract are specific, and the employee can easily calculate the payment that will be made if the revenue or profit targets in the contract are achieved, which has a strong incentivizing impact. Second, the employee receives only those rights set forth in the contract, which will not provide access to financial records, the right to vote on company business or the right to bring claims against the company or the majority owner other than for breach of the contract itself. Third, in most of these agreements, the employee needs to remain employed to receive the rights granted, and as a result, the termination of employment eliminates all further rights. Thus, there is no need to go through a buy-back procedure to reacquire equity.
The Cons of Granting Phantom Stock Rights
There are no major cons to the phantom equity approach for the majority owner, but it may not satisfy the employee who truly wants to have an ownership stake in the business. In addition, the employee may be reluctant to accept this type of contract arrangement and accept the risk of being fired before any of the financial benefits have been realized. The majority owner may therefore need to provide some assurances to the employee such as agreeing that the payment will be made if the targets are met even in the event the employee is terminated or agreeing that the employee can only be terminated for cause during the period that the phantom stock agreement is in place.
Section 3: The Employee’s Perspective – Pros and Cons
The Pros of Equity Ownership for Employees
For employees, receiving actual equity in the business affords them the status of being co-owners in the business, which provides both financial and psychological benefits. When the employee also holds ownership in the company, the interests of the company and the employee are more aligned. Employees who are also stakeholders recognize that they are benefitting from the growing value of the business, and they also have some opportunity to participate in major decisions by the company. When they do cash out of their investment through some type of liquidity event, the employees will receive favorable tax treatment paying capital gains on the increased value of their equity stake.
The Cons of Equity Ownership for Employees
On the downside, employees who want equity may have to “pay to play” and spend a considerable amount to purchase the equity they receive in the business. While the upside is that the value of their equity in the company may increase significantly over time, their shares or units are typically illiquid and, as a result, they cannot monetize this value until a major event takes place, such as a sale or merger of the business. Further, growing private companies often do not issue dividends or distributions on a current basis. The net effect is that the employees who have equity in the business may have to wait many years before they receive a financial benefit from their ownership interest in the company.
The Pros of Phantom Stock for Employees
In contrast with the ownership of actual equity, phantom stock provides employees with a contract that offers more certainty about current payments. While private companies often do not issue distributions to owners, the point of phantom stock is to provide payments to employees when they help the company achieve financial milestones. When those financial targets are met, the employee is assured of receiving a payment based on the formula set forth in the phantom stock agreement. In short, phantom stock provides guaranteed payments to employees when the financial targets are achieved — there is a direct performance and award connection.
The Cons of Phantom Stock for Employees
There are three disadvantages to phantom stock compared to equity ownership. The first is that unless the phantom stock contract provides the employee with some protection, the rights that are granted to the employee in the contract are immediately extinguished when the employee is fired. This is obviously an important negotiating point for the employee to secure protection from a last-minute firing that pulls the rug out before a payment is required to be made to the employee under the contract.
The second disadvantage is that the payments made to the employee under the phantom stock contract are typically taxed as ordinary income rather than capital gains. The upside here, however, is that the payments are made under the phantom equity contract on a current basis and the employee does not have to wait for years for a liquidity event to take place that will monetize the value of the employee’s shares or units in the the company.
The final disadvantage to phantom stock awards is that they do not provide the employee with the rights of an equity holder. Specifically, the employee holding phantom stock does not have the right to (i) attend owner meetings, (ii) obtain access to the company’s financial records, and (iii) bring claims against the company’s management for breach of fiduciary duties.
Conclusion
Majority owners who want to incentivize their employees in growing the business should carefully consider whether issuing equity to the employees is the best option. Granting equity to employees will dilute the company’s stock and also provide the employees with legal rights they may wield against the owner – a case of biting the hand that fed them. But owners who choose to grant phantom equity to employees will avoid both these downsides while also providing the employees with potentially robust financial incentives.
Employees may also agree that phantom equity, despite the name, will provide them with significant financial benefits they receive on a current basis. Further, the owner can use the phantom equity program as a testing ground to see if it provides a win-win for both owners and employees over some period of time. If the phantom equity approach is successful, there are increasing instances of owners who are adopting hybrid plans where phantom equity is converted to actual equity upon triggering events such as achieving certain valuation thresholds, securing certain amounts of financing, or successfully launching an IPO. This hybrid approach may open the door for the owner as part of a succession plan for the business.
The Omnibus Package: Changes in Sustainability and Due Diligence Reporting Requirements Under the CSRD and the CSDDD
On February 26, 2025, the European Commission (EC) released its much-anticipated Omnibus Package, aimed at streamlining EU regulations, enhancing competitiveness, and unlocking greater investment potential. The context for the proposal is the Competitiveness Compass introduced in January 2025 and the Commission’s work programme published on February 11, which mentioned a series of proposals – among which is the Omnibus Package – to drastically reduce the regulatory and administrative burden by achieving at least 25% reduction in administrative burdens and at least 35% for SMEs until the end of the EC’s mandate.
The first Omnibus Package includes the following set of measures:
A proposal for a Directive amending the CSRD and the CSDDD (Omnibus II)[1]
A proposal that postpones the application of all reporting requirements in the CSRD for companies that are due to report in 2026 and 2027 (so-called wave 2 and 3 companies) and which postpones the transposition deadline and the first wave of application of the CSDDD by one year to 2028 (Omnibus I)[2]
A draft Delegated act amending the Taxonomy Disclosures and the Taxonomy Climate and Environmental Delegated Acts open for public consultation until 26 March 2025[3]
A proposal for a Regulation amending the Carbon Border Adjustment Mechanism Regulation (to which only the Annex has been published)[4]
A proposal for a Regulation amending the InvestEu Regulation
In this Advisory, we will focus on the changes introduced by the Omnibus Package in the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD).
I. Amendments to the Corporate Sustainability Reporting Directive (CSRD)
Today’s package proposes a two-year delay in the reporting requirements for large companies that have not yet begun implementing the CSRD, as well as for listed SMEs (Waves 2 and 3). This postponement aims to give co-legislators time to finalize the Commission’s proposed substantive changes. However, the CSRD has already been transposed into national laws across most EU member states, and many U.S. companies have begun preparations to comply with reporting obligations for financial years starting on or after January 1, 2025. As a result, while some companies may benefit from the additional time, others—having already invested in compliance efforts—now face uncertainty about the evolving regulatory landscape and whether further changes may impact their reporting strategies.
The main changes include:
1. Reduction of the scope of reporting companies:
The Commission proposes raising reporting thresholds to better align with the Corporate Sustainability Due Diligence Directive (CSDDD), potentially excluding many companies from the scope of the CSRD by 80%. In detail, this means:
Under the current framework, EU companies and groups fall within the reporting scope if they exceed at least two out of three thresholds: a balance sheet total of €25 million, a worldwide net turnover of €50 million, or a workforce of 250 employees. However, under the proposed changes, only EU entities with at least 1,000 employees would be required to report, and they must also exceed either a €25 million balance sheet total or a €50 million net turnover. This shift significantly narrows the scope of companies subject to reporting obligations.
For non-EU ultimate parent companies, the current rules require reporting if the company generates at least €150 million in EU net turnover at the group level and has either an EU subsidiary already subject to CSRD or an EU branch with a turnover of at least €40 million. The proposed changes raise the EU net turnover threshold to €450 million and require that the company have at least one large EU subsidiary—defined as an entity exceeding two out of three criteria: a €25 million balance sheet total, a €50 million turnover, or 250 employees—or an EU branch generating €50 million in turnover.
2. Restrictions on Value Chain Reporting:
At present, companies are required to disclose information on their own operations, subsidiaries, and both upstream and downstream value chains, with certain reporting obligations benefiting from a three-year transition period. Under the Omnibus Package, however, CSRD-compliant companies would no longer be obligated to gather data from entities within their value chain that do not fall under CSRD’s scope. Instead, they would refer to new voluntary reporting standards established by the Commission, which will be based on the Voluntary Sustainable Reporting Standard for Non-Listed SMEs (VSME) developed by EFRAG.
3. No delay to assurance requirements and no transition to reasonable assurance:
CSRD reporting will continue to be subject to limited assurance, and the Omnibus Package does not introduce any further delays beyond the two-year general stop-the-clock extension. However, in response to concerns about excessive assurance procedures raised by the first wave of CSRD reporters, the Commission intends to issue targeted guidance on assurance requirements before finalizing limited assurance standards, which are expected to be adopted by October 1, 2026.
Under current rules, the Commission is required to assess the feasibility of transitioning to reasonable assurance and adopt corresponding standards by October 1, 2028. The Omnibus Package removes this obligation, meaning that CSRD reports will remain under limited assurance indefinitely. This change eliminates the possibility of stricter assurance requirements in the future, reducing the compliance burden on companies.
4. Significant revisions to the ESRS:
The Commission has reaffirmed its commitment to revising the European Sustainability Reporting Standards (ESRS). The revised delegated act will aim to reduce the number of required data points, clarify provisions that have been deemed unclear, and eliminate redundant reporting requirements. These updates are expected to be finalized in time for the second wave of CSRD-reporting companies, whose obligations will now begin for financial year 2027, rather than 2025 as originally planned.
5. Deletion of sector-specific standards requirement:
Previously, sector-specific ESRS standards were scheduled for adoption by June 30, 2026. However, the Omnibus Package proposes deleting this requirement, meaning companies will no longer be subject to mandatory sector-specific reporting standards. Instead, they will need to rely on entity-specific disclosures whenever material sustainability issues are not adequately addressed by the existing ESRS framework.
II. Amendments to the Corporate Sustainability Due Diligence Directive (CSDDD)
The CSDDD is scheduled to come into effect on July 26, 2027. Unlike the CSRD, however, the CSDDD has not yet been incorporated into the national laws of any EU member states. If the proposed Omnibus package passes without changes, the scoping thresholds will stay the same, meaning that companies previously identified as falling under the CSDDD will likely remain within its scope. A one-year delay will push back the transposition deadline to July 26, 2027, and extend the start of its application to July 26, 2028. In the meantime, the necessary guidelines by the Commission will be advanced to July 2026, to provide additional guidance and allow an extra year to prepare for compliance.
The main changes to the CSDDD include:
1. Exempting companies from the requirement to consistently carry out detailed assessments of potential or actual negative impacts in complex value chains involving indirect business partners and requiring full due diligence beyond direct partners only when the company has credible evidence suggesting that such impacts may have occurred or could occur in those areas.
2. Simplifying various aspects of sustainability due diligence to reduce unnecessary complexity and costs for large companies. This includes extending the time between regular assessments and updates from one year to five years, while clarifying that a company must evaluate the effectiveness of its due diligence measures and update them if there are reasonable grounds to believe they are no longer sufficient. Additionally, the stakeholder engagement requirements will be streamlined, and the obligation to terminate business relationships as a last resort will be removed.
3. Limiting the flow of information companies can request from their small and medium-sized business partners (defined as companies with fewer than 500 employees) to the information outlined in the CSRD’s voluntary sustainability reporting standards (VSME standard), unless additional data is needed for mapping impacts not covered by these standards, and the information cannot reasonably be obtained in other ways.
4. Removing the EU’s harmonized civil liability conditions and leaving the responsibility for defining civil liability standards to national laws. This also includes revoking the obligation for Member States to allow trade unions or NGOs to initiate representative actions and letting national law determine whether its civil liability rules override those of third countries where harm occurs.
5. Aligning climate mitigation transition plan requirements with those in the CSRD.
6. Extending maximum harmonization to more provisions concerning core due diligence obligations to ensure a consistent level playing field across the EU.
7. Eliminating the review clause on including financial services within the scope of the due diligence directive.
III. Next Steps
The legislative proposals are currently undergoing the ordinary legislative procedure. The Commission has urged the European Parliament and the European Council to expedite the Omnibus package without revisiting other parts of the legislation. However, once the legislative process begins, the Commission will have limited influence over whether the Parliament and Council propose additional amendments. As a result, a seamless adoption of the proposed changes is not guaranteed, and further amendments or new requirements may still arise.
As a directive, the Omnibus II Proposal amending the CSRD and CSDDD requires that, even if it is quickly agreed upon and adopted, member states will have 12 months to incorporate the omnibus text into their national laws.
[1] Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directives 2006/43/EC, 2013/34/EU, (EU) 2022/2464, and (EU) 2024/1760, as regards certain corporate sustainability reporting and due diligence requirements. Available at: https://commission.europa.eu/document/download/892fa84e-d027-439b-8527-72669cc42844_en?filename=COM_2025_81_EN.pdf
[2] Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directives (EU) 2022/2464 and (EU) 2024/1760 as regards the dates from which Member States are to apply certain corporate sustainability reporting and due diligence requirements. Available at: https://commission.europa.eu/document/download/0affa9a8-2ac5-46a9-98f8-19205bf61eb5_en?filename=COM_2025_80_EN.pdf
[3] https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/14546-Taxonomy-Delegated-Acts-amendments-to-make-reporting-simpler-and-more-cost-effective-for-companies_en
[4] ANNEXES to the Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2023/956 as regards simplifying and strengthening the carbon border adjustment mechanism. Available at: https://commission.europa.eu/document/download/dc72f9cb-2b58-465a-8a33-8c5d6b6efe8b_en?filename=COM_2025_87_annexes_EN.pdf
Beltway Buzz, February 28, 2025
The Beltway Buzz™ is a weekly update summarizing labor and employment news from inside the Beltway and clarifying how what’s happening in Washington, D.C., could impact your business.
House Budget Resolution: No Tax on Tips? Nope. This week, the U.S. House of Representatives passed a budget resolution, a critical step in Republican lawmakers’ plan to use the budgetary reconciliation process to score legislative wins on taxes, the border, defense spending, and energy production. But this is just a first step in what is expected to be an arduous legislative process: both the U.S. Senate and House must agree on the same budget resolution before the individual legislative committees in each chamber can begin drafting legislation as instructed by such a resolution. Accordingly, despite some internet rumors to the contrary, the House-passed budget resolution does not—by itself—eliminate taxes on overtime pay or tipped wages.
Regulatory EO Asserts More Control Over Independent Agencies. On February 18, 2025, President Trump issued an executive order (EO), entitled, “Ensuring Accountability for all Agencies.” The EO strengthens President Trump’s authority over the executive branch—particularly over independent agencies such as the National Labor Relations Board (NLRB), U.S. Equal Opportunity Commission (EEOC), and Federal Trade Commission—by ordering the following:
Independent agencies will be required to submit proposed and final rules to the White House’s Office of Information and Regulatory Affairs (OIRA) for review. (Some agencies, such as the EEOC, already submit their rules for review by OIRA.)
The director of the Office of Management and Budget (OMB) will set “performance standards and management objectives for independent agency heads” and the director will also be required to “report periodically to the President on their performance and efficiency in attaining such standards and objectives.”
The OMB director is required to consult with agency chairs about their spending to prohibit them “from expending appropriations on particular activities, functions, projects, or objects, so long as such restrictions are consistent with law.”
The heads of agencies must “regularly consult with and coordinate policies and priorities” with the White House and submit strategic plans to OMB for approval.
A White House Liaison will be established within each independent agency.
Executive branch agencies—including independent agencies—are prohibited from advancing any policy “that contravenes the President or the Attorney General’s opinion on a matter of law.”
Along with the terminations of EEOC and NLRB members, the EO is an effort to align the policy objectives of independent agencies with those of the White House.
DOL Nominee News. This week, the Senate Committee on Health, Education, Labor and Pensions (HELP) voted to approve Lori Chavez-DeRemer’s nomination to be secretary of labor by a vote of 14–9. Senator Rand Paul (R-KY) voted “no,” while Democratic Senators Maggie Hassan (NH), John Hickenlooper (CO), and Tim Kaine (VA) voted in favor of the nomination. Chavez-DeRemer’s nomination is now teed up for a vote on the Senate floor. The bipartisan nature of the committee vote indicates that Chavez-DeRemer has a good chance of being confirmed.
Additionally, the HELP Committee held a hearing to examine the nomination of Keith Sonderling to be deputy secretary of labor. The committee will vote on Sonderling’s nomination on March 6, 2025.
FTC to Begin “Labor Markets Task Force.” According to media reports, Federal Trade Commission (FTC) Chair Andrew Ferguson announced at a recent event that the FTC will initiate a “labor markets task force.” The task force will reportedly focus on noncompete agreements, as well as no-hire and no-poach contracts. In June 2024, Ferguson voted against the FTC’s non-compete rule while writing, “Whatever the Final Rule’s wisdom as a matter of public policy, it is unlawful. Congress has not authorized us to issue it. The Constitution forbids it. And it violates the basic requirements of the Administrative Procedure Act.” The Buzz will be monitoring this situation as it develops.
DHS to Require Registration, Fingerprinting. U.S. Citizenship and Immigration Services (USCIS) announced that it is resuscitating a provision of the Immigration Nationality Act that will require all individuals “14 years of age or older who were not fingerprinted or registered when applying for a U.S. visa and who remain in the United States for 30 days or longer” to apply for registration and fingerprinting. After doing so, proof of this registration must be carried at all times by such individuals who are over the age of eighteen. The requirement dates back to World War II, but an eventual lack of an operable implementation procedure resulted in the abandonment of the policy. Individuals who will not have to register under this policy include, but are not limited to, lawful permanent residents, individuals with work permits, and visa holders with an arrival/departure record (Form I-94). Individuals who will have to register include the undocumented, previously registered children who turn fourteen, those present in the United States pursuant to programs such as Deferred Action for Childhood Arrivals or Temporary Protected Status who do not have work permits, and Canadians who arrive via land ports of entry. According to the announcement, the U.S. Department of Homeland Security (DHS) “will soon announce a form and process for aliens to complete the registration requirement.”
Capital Murder? Previously, we’ve discussed the caning of Charles Sumner, as well as the 1798 brawl between representatives from Vermont and Connecticut over an accusation of stolen valor. And then there was the deadly duel in 1838 between Representatives William Graves of Kentucky and Jonathan Cilley of Maine that stemmed from criticism of President Martin Van Buren. Well, today marks the anniversary of another unfortunate instance of violence perpetrated within the halls of the U.S. Congress.
William Preston Taulbee was a Democratic representative from Kentucky who served in Congress from 1885 to 1889. During his time in Congress, Taulbee had a difficult relationship with a Kentucky journalist named Charles Kincaid, who wrote frequently—and critically—about Taulbee’s political service. The breaking point came in late 1887, when Kincaid wrote a story about Taulbee engaging in an extramarital affair. This story sank Taulbee’s political career, as he did not seek another term. However, Taulbee became a lobbyist and, therefore, remained a frequent visitor in Congress. On February 28, 1890, a meeting between the two men became physical, causing Kincaid to retrieve his pistol, which he used later that day to shoot Taulbee when he confronted him on a staircase in the Capitol Building. Taulbee died eleven days later. The slight Kincaid—described as “a little pint-of-cider fellow”—later claimed self-defense and was acquitted of Taulbee’s murder. Amazingly, Kincaid’s attorney was sitting U.S. Senator Daniel W. Voorhees of Indiana, who, like Taulbee, was a Democrat.