IRS Roundup February 10 – 14, 2025
Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of February 10, 2025 – February 14, 2025.
TAX-CONTROVERSY-RELATED DEVELOPMENTS
The previous IRS Roundup provided general coverage of the proposed Taxpayer Assistance and Service (TAS) Act. This post highlights Section 310 of the TAS Act, which would give the US Tax Court authority to hear general refund suits similar to those currently heard in the US district courts and the US Court of Federal Claims.
Historically, taxpayers could only contest their tax liability by first paying the tax and then suing for a refund in a district court or the Court of Federal Claims. The Board of Tax Appeals (BTA), the forerunner to the Tax Court, was created in 1924 to give taxpayers a prepayment forum in which to dispute their tax liability. The BTA was initially proposed to have general refund suit jurisdiction, but Congress limited its jurisdiction to cases brought in response to a notice of deficiency. Several proposals have been made over the years to expand the jurisdiction of the BTA and (now) the Tax Court to include general refund suits, which they would share with the district courts and the Court of Federal Claims. Recent support for this approach has come from National Taxpayer Advocates Nina Olson and Erin Collins. As one commentator noted, the proposed expansion to the Tax Court’s jurisdiction has the potential to improve access to justice for taxpayers and reduce the burden on district courts and the Court of Federal Claims.
IRS GUIDANCE
February 12, 2025: The IRS issued Revenue Procedure 2015-16, which provides depreciation deduction limitations for “passenger automobiles” (including trucks and vans) placed in service during 2025 and income inclusion amounts for lessees of such vehicles. The revenue procedure also includes two tables detailing depreciation limits based on whether the Internal Revenue Code (Code) § 168(k) additional first-year depreciation deduction applies. Additionally, the revenue procedure outlines the inflation adjustment calculation for these limits and provides a table for determining income inclusions for leased passenger automobiles. The tables reflect the automobile price inflation adjustments required by Code § 280F(d)(7).
February 12, 2025: The IRS released Notice 2025-14, which provides guidance on the corporate bond monthly yield curve, spot segment rates under Code § 417(e)(3), and 24-month average segment rates under Code § 430(h)(2). The notice also provides guidance as to the interest rate on 30-year Treasury securities under Code § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code § 431(c)(6)(E)(ii)(I).
February 13, 2025: The IRS issued Revenue Procedure 2025-15, which provides discount factors for the 2024 accident year for insurance companies to use when computing discounted unpaid losses under Code § 846 and discounted estimated salvage recoverable under Code § 832. The revenue procedure includes tables with discount factors for various lines of business (both short- and long-tail) and addresses the use of the composite method for computing these factors. The IRS requests comments on the composite method and changes by the National Association of Insurance Commissioners to Schedule P of the annual statement.
Medicaid in the Crosshairs What Restructuring Could Mean for States, Providers, and Beneficiaries
As budget negotiations heat up in Washington, Medicaid has emerged as a key target for cost-cutting measures. With policymakers looking to trim federal spending while maintaining commitments to Social Security and Medicare, Medicaid is one of the few major programs left on the table. Proposals floating around Capitol Hill include everything from block grants and per capita caps to stricter eligibility requirements and reductions in federal matching rates. These potential changes could fundamentally alter the structure of Medicaid, shifting more financial responsibility to states and reshaping access to care for millions of Americans.
Waivers: A Policy Battleground
One of the most immediate levers for Medicaid reform lies in the use of Section 1115 waivers, which allow states to test innovative ways to deliver and finance care. Historically, waivers have been used to expand coverage, integrate social determinants of health into Medicaid, and experiment with new payment models. Under the Biden administration, states received waivers for initiatives like continuous eligibility for young children, health-related social needs interventions, and pre-release Medicaid coverage for individuals exiting incarceration. Many of these waivers are now under review, and the current administration may opt to roll them back, cutting off funding for programs designed to improve access and reduce health disparities.
At the same time, some states are eyeing waivers as a vehicle for more restrictive Medicaid policies, including work requirements and premium obligations for low-income enrollees. These policies, which were a hallmark of the first Trump administration, could return in full force, despite previous legal challenges. While work requirements are often framed as a way to encourage self-sufficiency, past attempts have led to significant coverage losses due to administrative complexity and reporting barriers. Georgia remains the only state actively implementing work requirements today, but other states could quickly follow suit if federal leadership signals support for these policies.
Federal Financing: More State Burden, Fewer Federal Dollars
The core structure of Medicaid financing—a federal-state matching system—has long provided states with a reliable source of funding for healthcare. However, a range of proposals could shift more of the financial burden to states.
One option is reducing the enhanced federal match for the Affordable Care Act expansion population, which currently stands at 90%. Rolling it back to standard Medicaid match rates would force expansion states to pick up a larger share of the tab, potentially leading some to scale back or even withdraw from expansion altogether.
Another major consideration is the reduction or elimination of provider taxes and intergovernmental transfers, which many states rely on to fund Medicaid. Provider taxes currently help states generate the non-federal share of Medicaid dollars, but restrictions on these financing tools could leave states scrambling to fill budget gaps. Without new revenue sources, states may have no choice but to cut provider rates, reduce optional benefits, or impose enrollment caps.
The Ripple Effect on Providers and Beneficiaries
The impact of Medicaid restructuring would extend beyond state governments. Providers—particularly safety-net hospitals, nursing homes, and home care agencies—could see sharp reductions in reimbursement, making it harder to sustain services for Medicaid populations. Proposals to limit state-directed payments and disproportionate share hospital funds could further destabilize facilities that serve a high percentage of low-income patients.
For Medicaid beneficiaries, the stakes are even higher. Changes in eligibility criteria, enrollment procedures, or benefit packages could leave millions without coverage. Older adults and individuals with disabilities who rely on Medicaid for long-term care may face significant barriers if states scale back HCBS funding, tighten income requirements, or impose cost-sharing mechanisms.
What Comes Next?
Medicaid is at a crossroads. As policymakers weigh different restructuring options, stakeholders across the healthcare landscape—including states, providers, and advocacy groups—must be prepared to engage. The decisions made in the coming months could redefine Medicaid’s role in the healthcare system, reshaping everything from eligibility and benefits to how care is financed and delivered.
For those invested in the future of Medicaid, now is the time to track policy developments, understand the implications of potential changes, and advocate for solutions that preserve access while ensuring financial sustainability. The outcome of this debate will determine whether Medicaid continues to serve as a safety net for millions—or whether its role is significantly diminished in the name of fiscal restraint.
President Trump Takes Additional Actions on Reciprocal Tariffs, Shipping, and Digital Services Taxes
On 21 February 2025, President Trump ordered three additional steps to implement the America First Trade Policy announced on 20 January 2025:
Establish a notice and comment process for the US Trade Representative (USTR) to collect input from interested parties on the proposed “reciprocal tariffs” announced 13 February.
Initiate a process for USTR to collect input on potential trade actions to address what USTR under the prior administration found to be China’s “targeting” of the maritime, logistics, and shipbuilding sectors in the United States and globally.
Direct the Treasury Secretary, working with USTR, Commerce, and the White House advisor to the President on trade and manufacturing, to formulate and impose tariffs and other measures to respond to other countries’ access barriers to and taxes on American digital services.
Each of these three steps launches parallel administrative proceedings before the relevant agencies that will culminate in recommendations to the President to impose tariffs or other trade measures. Companies and investors with interests impacted by the above topics should carefully review these announcements and the schedules for submitting comments and consider whether and how best to participate.
Notice and Comment Process Regarding Reciprocal Tariffs
USTR is requesting comments by 11 March 2025 regarding any unfair trade practices maintained by other countries and what steps USTR should take to address these practices. Comments should include the foreign country or economy concerned, the practice or trade arrangement of concern, a brief explanation of the operation of the practice or trade arrangement, and an explanation of the impact or effect of the practice or trade arrangement on the interested party or on US interests generally.
Of particular interest are comments on the trading practices and other tariff and non-tariff barriers and practices of Argentina, Australia, Brazil, Canada, China, the European Union, India, Indonesia, Japan, Korea, Malaysia, Mexico, Russia, Saudi Arabia, South Africa, Switzerland, Taiwan, Thailand, Türkiye, United Kingdom, and Vietnam. According to USTR, these countries cover 88 percent of total goods trade with the United States.
Submissions should quantify the harm or cost (including actual cost or opportunity cost) to American workers, manufacturers, farmers, ranchers, entrepreneurs and businesses from the practice or trade arrangement of concern – ideally ascribing a dollar amount to the harm or cost and describing the underlying methodology. Information that is business confidential can be submitted in confidence to USTR and separate from this specific process, USTR is also interested in ongoing engagement with and information from interested parties regarding unfair foreign trade practices of US trading partners.
Comments on Proposed Trade Remedies to Address China’s Maritime, Logistics, and Shipbuilding Practices
Separately, USTR is seeking comments from interested parties on how it should implement the findings of the Biden Administration pursuant to Section 301 of the Trade Act of 1974 that China was engaged in practices that targeted the maritime, logistics, and shipbuilding sectors in pursuit of what USTR found to be goals to dominate those sectors. Written comments are due by 24 March 2025. USTR will also hold a hearing on this matter on 24 March–requests to appear at the hearing are due by 10 March 2025. Additional written comments in rebuttal can be submitted no later than seven calendar days after the last day of hearings.
Action Against Foreign Countries’ Digital Services Taxes
In a 21 February 2025 memorandum, President Trump has separately directed the US Treasury Department, working with Commerce, USTR, and White House stakeholders, to formulate tariff and other responses to digital services taxes and related practices imposed by other countries. According to the memorandum, such practices are hindering the success of American digital services companies and investors in other markets and imposing unfair costs, barriers and risks on American companies, data, and jobs. Reports and recommendations on these issues are due to the president by 1 April 2025.Among the actions contemplated by the memorandum are:
Renewal of Section 301 trade actions from 2019 and 2020 against the digital services taxes of Austria, France, Italy, Spain, Turkey and the UK;
Consideration of dispute settlement against Canada and Mexico pursuant to the US-Mexico-Canada Agreement;
Recommended tariffs against US imported goods and services from countries imposing such taxes and other measures;
Actions to address mandates by other countries with regard to the content or content monitoring of US social media and other digital platforms and services;
A determination of whether to impose tariffs of up to 50% in response to tax measures that discriminate against US citizens and companies;
A moratorium on the levying of customs duties by other countries on electronic transmissions; and
A mechanism for American businesses to report to USTR on the foreign tax and regulatory practices of other nations that are believed to harm US companies.
Even Privilege Logs Can Be Privileged Under the Fifth Amendment
On January 28, 2025, the U.S. Court of Appeals for the Ninth Circuit issued a significant ruling reinforcing the Fifth Amendment’s protection against self-incrimination and clarifying the attorney-client privilege in the context of grand jury subpoenas.
In In Re Grand Jury Subpoena, 127 F.4th 139 (9th Cir. 2025), the Ninth Circuit held that counsel cannot be compelled to provide a privilege log delineating all documents a client previously sent to counsel for the purpose of obtaining legal advice unless and until the court conducts an in camera review of the documents at issue to determine whether the Fifth Amendment right against self-incrimination, as announced in Fisher v. United States, 425 U.S. 391 (1976), applies.[1]
The decision further defines the limits of government subpoenas in criminal investigations and clarifies when privilege logs themselves may be shielded from disclosure. This ruling has far-reaching implications for attorneys, clients, and government investigations, particularly in white-collar, tax fraud and corporate compliance matters.
Fisher v. United States: Fifth Amendment Protections for Document Production
The Ninth Circuit’s ruling relied upon the Supreme Court’s decision in Fisher v. United States, which laid the foundation of the “act of production” doctrine, governing the Fifth Amendment’s protection against self-incrimination in the context of document production.[2]
In Fisher, the Court held that, while the Fifth Amendment protects against compelled testimonial communication, it does not automatically shield pre-existing documents from disclosure. The Court reasoned that documents voluntarily created before a subpoena is issued are not “compelled testimonial” communication because they were not prepared under government coercion.[3]
The Court also clarified that attorney-client privilege does not extend to pre-existing documents that a client could have been forced to produce had they remained in the client’s possession.[4] Although attorney-client privilege protects confidential communications between a client and their lawyer, it does not transform otherwise discoverable records into privileged material.
However, the Supreme Court recognized that the act of producing documents can be “testimonial” if it forces a person to admit the existence, authenticity, or control of the documents.[5] In such cases, the Fifth Amendment may protect against compelled production, and the attorney-client privilege extends that protection to attorneys who possess documents on behalf of their client. Despite this protection, the Court also introduced the “foregone conclusion” exception, which allows the government to compel the production of documents if it can independently prove their existence, authenticity, and the individual’s possession of them.[6]
The Ninth Circuit’s Decision: When Privilege Logs are Protected
In In Re Grand Jury Subpoena, the Ninth Circuit clarified that Fisher extends beyond the production of documents to the content of privilege logs delineating documents withheld on the basis of privilege.[7]
The case arose from a grand jury investigation into an alleged tax evasion scheme. The government subpoenaed an individual, who declined to testify or produce documents, citing the Fifth Amendment. The government then subpoenaed a law firm that had previously represented the individual in connection with tax matters, demanding that the law firm produce documents related to its representation and prepare a privilege log listing any documents the firm withheld from its production. The law firm refused, asserting that production of the privilege log would violate the client’s Fifth Amendment rights. The district court disagreed and ordered the firm to comply.[8]
On appeal, the Ninth Circuit reversed, holding as a matter of first impression that a privilege log is protected under the Fifth Amendment if its production would confirm incriminating details about the existence, authenticity, or control of the documents.[9] The court reasoned that a privilege log can confirm facts the government cannot independently prove, making it potentially self-incriminating and protected under the Fifth Amendment. Because Fisher shields attorneys from producing documents their clients could not be compelled to provide, the court ruled that a privilege log—which would effectively reveal and confirm the existence and client’s custody of those same documents—may also be protected.[10]
The Ninth Circuit also rejected the government’s argument that the privilege log could be compelled under the “foregone conclusion” exception.[11] The government failed to independently establish the existence, authenticity, and control of the documents, meaning that compelling the privilege log would improperly force the client to provide self-incriminating testimony. To ensure courts properly apply Fisher, the Ninth Circuit further held that a district court must conduct an in camera review—a private judicial examination of the withheld documents—before ordering the production of the privilege log.[12]
Practical Implications
By recognizing that privilege logs can be testimonial, the decision strengthens Fifth Amendment protections and ensures that attorneys cannot be compelled to indirectly confirm the existence of incriminating documents.
The government is prevented from using privilege logs as a backdoor method to obtain knowledge of incriminating evidence that it could not otherwise access.
This case reiterates the importance of closely monitoring attorney-client privilege obligations and potential Fifth Amendment privilege issues when responding to a government subpoena.
ENDNOTES
[1] In Re Grand Jury Subpoena, 127 F.4th 139 (9th Cir. 2025).
[2] Id. at 142–43 (citing Fisher v. United States, 425 U.S. 391, 404–05 (1976).
[3] Fisher, 425 U.S. at 409–10.
[4] Id. at 404–05.
[5] Id. at 410–11.
[6] Id. at 411.
[7] 127 F.4th at 143–44.
[8] Id. at 142.
[9] Id. at 144–45.
[10] Id.
[11] Id.
[12] Id. at 145–46.
Will Pillar Two Crumble Before It’s Built?
Over 135 jurisdictions signed up for a global Organisation for Economic Cooperation and Development (OECD) project in October 2021 aimed at reforming the international taxation system. A Two-Pillar approach was developed to combat base erosion and profit-shifting strategies, which large multinational enterprises (MNEs) employ to move their profits to low or no-tax jurisdictions or to lower their tax bases through deductible expenses. On the first day in office of his second term, President Donald Trump withdrew from this “Global Tax Deal.” The threat of punitive measures now looms over countries that impose tax on US MNEs under their domestic Pillar Two legislation.
Pillars One and Two
In summary, Pillar One reallocates the profits of MNEs from jurisdictions where they earn income to those where they have substantial engagement (i.e., where they sell goods and supply services). Pillar Two imposes a minimum effective tax rate of 15 percent on MNEs (with over €750 million in turnover) in every country in which they operate, regardless of local tax rates or available reliefs. Pillar Two comprises a set of Global Anti-Base Erosion (GloBe) rules that include two key tax collecting mechanisms (applicable where the effective tax rate in a jurisdiction is lower than 15 percent):
Income Inclusion Rule (IIR): a top-up tax is paid in the jurisdiction of the ultimate parent entity or of the intermediate parent entity.
Undertaxed Payment Rule (UTPR): if the IIR does not collect all the top-up tax in a certain jurisdiction, the UTPR assigns the liability to pay the top-up tax to the other constituent entities (in other jurisdictions) of that MNE group.
Executive Orders
Among the numerous executive orders that President Trump has signed since his inauguration, two are particularly relevant here. First, as mentioned, President Trump withdrew all US commitments to the Global Tax Deal, stating that it “allows extraterritorial jurisdiction over American income,” and ordered that the Secretary of the Treasury shall investigate whether any foreign countries have put in place or are likely to put in place any tax rules that are “extraterritorial or disproportionately affect American companies” and develop options for protective measures. Second, the Secretary of Commerce and the Office of the United States Trade Representative have been tasked with investigating if any foreign countries subject US citizens or corporations to “discriminatory or extraterritorial taxes pursuant to section 891 of title 26, United States Code.” Section 891 allows for the doubling of US tax rates on foreign citizens and corporations without prior approval from Congress. Importantly, Section 891 has been on the statute book for approximately 90 years but has never been invoked.
What Might Happen Now?
President Trump has been highly critical of Pillar Two for several years, and it has long been speculated that under a Trump administration, countries may be reluctant to apply the UTPR to US corporations for fear of retaliation, specifically in the form of tariffs on their exports to the United States. As such, the withdrawal from the Global Tax Deal comes as no real surprise. However, two important questions arise: (i) how does this affect the US income of foreign individuals and corporations, and (ii) where does this leave the future of the Global Tax Deal?
As opposed to the retaliatory tariffs, doubling taxes under Section 891 would not only directly affect a significant number of corporations but also the income of individuals. The threat of invoking Section 891 is startling, given this is likely one of the most extreme options President Trump has at his disposal in this context. Several questions also remain unanswered. For example, how would these measures work in practice, what would their interactions be with Double Taxation Treaties (which generally take precedence over domestic rules) or how would this affect US dual citizens?
Section 891 measures seem so radical that they could be viewed as an exaggerated but unlikely threat. However, the US House Committee on Ways and Means has introduced a more realistic form of potential retaliatory measures in the form of the Defending American Jobs and Investment Act. This proposes the following: first, countries that impose “discriminatory taxes” on US businesses would be identified. The UTPR is given as an example of such “discriminatory taxes.” Then, the tax rates on the US income of individual investors and corporations from those countries would increase by 5 percent each year for four years, after which the tax rates would remain elevated by 20 percent while “the unfair taxes are in effect.” Though undoubtedly a lesser risk than the doubling of tax rates, this proposal would still result in a heavy financial and administrative burden on corporations (and individuals), affecting their profitability. Many corporations and individuals may also have to rethink or restructure planned business ventures, resulting in additional legal and advisory costs.
At the same time, numerous corporations have already incurred significant administrative costs in preparing for Pillar Two to come into effect — and around 50 countries have already implemented Pillar Two rules. However, with President Trump’s executive order withdrawing US support of the Global Tax Deal, Pillar Two’s future is now uncertain.
It is universally acknowledged that the success and future of Pillar Two rests on collective effort and cooperation between countries. The threat of the retaliatory measures as described above, including the potential for the imposition of tariffs by the United States (which is still highly pertinent), may give rise to two outcomes. On the one hand, many jurisdictions may be slower to adopt Pillar Two rules or avoid implementing them all together. This will likely depend on the severity of any retaliatory measures proposed rather than purely based on US withdrawal from the deal (given that House Republicans, who held a majority when Pillar Two came into being, were against its implementation — US implementation was never guaranteed).
On the other hand, US retaliation to Pillar Two implementation may escalate global economic tensions. Countries may recognize and use their existing leverage to fight such measures. For example, several countries have frozen their digital services taxes (which the United States has long opposed) due to the implementation of the Global Tax Deal, thereby benefitting US tech giants. As such, countries have the option of reinstating these taxes at their disposal.
Amongst so much uncertainty, one thing is clear: both corporations and individuals must monitor any updates in this area vigilantly. Developments, with respect to either the implementation (or lack thereof) of Pillar Two by countries or US retaliatory measures, may be highly consequential. Keeping on top of them will be key to proactively and effectively addressing resulting challenges as and when they arise.
*Georgia Griesbaum, trainee in the Transactional Tax Planning practice, contributed to this article.
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.