California Provides Additional Guidance on Mandatory Climate Disclosures
On May 29, 2025, the California Air Resources Board delivered a presentation that provided additional details concerning the soon-to-be implemented mandatory climate disclosures. Perhaps most significantly, the California regulator gave additional guidance on which companies will be subject to the law. Specifically, the California Air Resources Board stated that they planned to rely upon the tax code’s interpretation of “doing business in California” to determine whether a company needed to make the regulatory disclosure. So, in practical terms, this means that sales in California of $735,019 or more, or owning real property in California worth more than $73,502 or paying employees in California more than $73,502, would constitute “doing business in California” for purposes of complying with the mandatory climate disclosure (subject to the other statutory requirements–e.g., meeting the revenue threshold of either $1 billion or $500 million, depending upon the type of disclosure).
Additionally, the California Air Resources Board noted that the detailed implementing regulations–which were required by law to be published as of July 1, 2025–are still likely months away, which renders compliance by the initial deadline of January 1, 2026 quite challenging for companies.
Companies with more than $1 billion in annual revenue but as little as $735,000 in sales in California would have to report greenhouse gas emissions to the state under a new regulatory proposal. But they may be hard-pressed to meet those new disclosure requirements by January as regulators indicated they are still months away from issuing regulations, missing a July deadline. Sydney Vergis, an assistant division chief at the California Air Resources Board, which is writing the regulations, said Thursday the agency plans to issue the rules by the “end of the year,” but declined to give a specific date during a webinar.
www.bloomberglaw.com/…
Senator Tillis Introduced a Bill Taxing Proceeds of Litigation Financing Agreements
Senator Thom Tillis introduced a bill (called the “Tackling Predatory Litigation Funding Act”) that would impose additional significant taxes on litigation funding investments. Rep. Kevin Hern (R-OH) introduced a similar bill in the House of Representatives. The bill would apply to taxable years beginning after December 31, 2025, which could include future payments related to existing arrangements.
The following is a summary discussing the key points of such proposed legislation.
General Rule: A tax equal to the highest individual rate plus 3.8% (37% + 3.8%, or 40.8% under current law) would be imposed on any qualified litigation proceeds received by a covered party.
Covered Party: A covered party for these purposes includes any third party to a civil action which receives funds pursuant to a litigation financing agreement and is not an attorney representing a party to such civil action. If the covered party is a partnership, S-corporation or other pass-thru entity, the tax would be imposed at the entity level. If a U.S. corporation is a covered party receiving qualified litigation proceeds, it would be subject to a 40.8% in lieu of the normal 21% tax. The tax also applies to tax-exempt U.S. investors and non-U.S. investors, including investors described in section 892 of the U.S. Internal Revenue Code. The tax apparently applies even if the non-U.S. investor has no connection to the United States, although we are unsure whether this was intended. There is no apparent “treaty override” so investors that benefit from a tax treaty with the United States may be able to rely on the treaty.
Qualified Litigation Proceeds: Qualified litigation proceeds mean, with respect to any taxable year, an amount equal to the realized gains, net income or other profit received by a covered party during the taxable year which is derived from, or pursuant to, any litigation financing arrangement. These gains, income or profit are not reduced by any ordinary or capital losses, which could include losses from another litigation funding investment. This definition is not limited to U.S. source litigation proceeds, so it could include proceeds from non-U.S. litigation funding investments.
Litigation Financing Agreement: A litigation financing agreement is with respect to any civil action, administrative proceeding, claim or cause of action (collectively, a “civil action”), a written agreement (A) (1) where a third party agrees to provide funds to one of the named parties or a law firm affiliated with the civil action and (2) which creates a direct or collaterized interest in the proceeds of such civil action which is based, in whole or part, on a funding-based obligation to the civil action, the appearing counsel, any contractual co-counsel or the law firm of such counsel or co-counsel and (B) that is executed with any attorney representing a party of such civil action, any co-counsel in the litigation with a contingent fee interest in the representation, any third party that has a collateral based interest in the contingency fees of the counsel or co-counsel which is related to the fees derived from representing such party or any named party in the civil action. This term can also include any agreement which, as determined by the Secretary of the Treasury, is substantially similar. We believe this definition will apply to virtually all litigation funding agreements regardless of the form of the agreement (e.g., loan, option, forward, swap etc.). For purposes of these rules, the term “civil action” may include more than one civil action.
Exceptions: Litigation funding agreement does not include: (1) any agreement under which the total amount of funds provided with respect to an individual civil action is less than $10,000, (2) any agreement under which the third party providing funds has a right to receive proceeds from the agreement that are limited to (x) repayment of principal on a loan, (y) repayment of principal plus interest as long as the interest does not exceed the greater of 7% or a rate equal to twice the average annual yield on a 30 year U.S. Treasury security or (z) reimbursement of attorney’s fees, or (3) the third party providing the funding bears a relationship as described in section 267(b) to the named party (e.g. generally includes two corporations that are members of the same controlled group or two entities that have 50% ownership overlap). We believe that these exceptions will be of only very limited use.
Withholding: The parties having control, receipt or custody of the proceeds from a civil action with respect to which such person has entered into a litigation financing agreement must withhold from such proceeds a tax equal to 50% of the applicable percentage (which would be a withholding rate of 20.4% under current law) of any payments which are required to be paid under such agreement. This withholding amount is based on any payments required to be made, which could result in over-withholding because the withheld amount is not reduced by the original amount funded. This withholding obligation appears to apply to any party in the world, even if the party has no connection to the U.S. and is making a payment to another non-U.S. person in respect of litigation that is outside of the United States. We do not know whether this extraordinarily broad scope was intended.
How Important Is It to Document Directors’ Decisions and Keep Contemporaneous Evidence? (UK)
The recent High Court case of Stacks Living Limited & Ors v Shergill & Ors (“Stacks Decision”) has further highlighted the importance of taking advice and documenting decisions following the much-publicised decision of Wright v Chappell (the “BHS Case”).
By way of reminder (see our previous blog here), the BHS Case introduced the concept of misfeasance trading and found that a director can be liable for misfeasance trading if they continue trading in breach of their duties when the company should have gone into administration or insolvent liquidation. Notably, this claim could arise much earlier than a wrongful trading claim, bringing into sharper focus the need for directors to be very mindful of their duties.
The BHS Case provided useful lessons about steps directors ought to take, to reduce the chance of a claim against them for misfeasance trading (and therefore personal liability) including holding regular, fully documented board meetings and taking (and applying) appropriate professional advice. The Stacks Decision expands further on the importance of contemporaneous documentation and proper record keeping when approaching insolvency.
Background
The case concerned applications by the joint liquidators of two companies, Stacks Living Limited (“Stacks”) and Staffs Furnishing Limited (“Staffs”), which entered compulsory liquidation following a failure of the companies to pay national non-domestic rates tax to the Council. The companies were wholly-owned by Mr Balvinder Shergill who also acted as director. For a limited period, Miss Miranda Smith, Mr Shergill’s partner, was appointed as director of Staffs, although Miss Smith admitted to having no involvement at all in the affairs and business of Staffs.
The liquidators brought claims: i) for fraudulent trading; ii) for wrongful trading; and iii) misfeasance against both Mr Shergill and Miss Smith in respect of allegedly unexplained and/or otherwise improper or unjustified payments by the companies. The claims were opposed and Mr Shergill and Miss Smith sought to rely on s 1157 of the Companies Act 2006 (“CA 2006”) to claim relief from liability, which was rejected.
The findings against the directors
Fraudulent trading
The Court found Mr Shergill liable for fraudulent trading, due to “no real or honest belief that those debts would be discharged and no real expectation of a reduction or discount”.
The judge criticised Mr Shergill for an intention to trade through a series of phoenix companies and incurring, but not paying, the rates liability and HMRC debts.
Wrongful trading
The Court found both directors liable for wrongful trading (albeit Miss Smith for Staffs only during the period of her directorship), notwithstanding Miss Smith had no actual knowledge of the prospect of insolvent liquidation – in her capacity as a director Miss Smith ought to have enquired into the company’s financial position.
Crucially the Court found that the company could not evidence how it could pay the monies owed. In addition, despite suggestions that there was a hope of trading through difficulties, the Court noted that there was:
no evidence of any advice to support a believe of any genuine prospect of doing so, particularly where Staffs took over from the business of Stacks with no discernible shift in business plan;
no business plan, management accounts or other detailed financial or management records and no foundation on which to conclude that the business could survive; and
no evidence to support Mr Shergill’s assertions that he was acting on a genuine belief that relief was available.
Misfeasance
Company directors owe several duties to the company, including a fiduciary duty to apply the company’s assets for the proper purposes of the company and to account for their use. In this case, the liquidators identified:
several payments to Mr Shergill personally (which were labelled as “wages”, but Mr Shergill provided inconsistent oral evidence to argue that this was to pay supplies);
cash withdrawals; and
payments to certain organisations (e.g. Sky), which did not appear to be legitimate business expenditure.
The court noted that once a liquidator identifies a payment has been made, the burden of proving the payment was made for proper purposes falls upon the respondents. The directors ought to be able to rely on contemporaneous documentation to prove the origins of any payment. The Court was very critical of the quality of Mr Shergill’s oral evidence and was therefore reluctant to place much reliance on his submissions, in the absence of any documentary evidence to demonstrate that such payments were for the company’s benefit.
The court noted that non-production of documentation may be conspicuous by its absence, if it is likely that it would exist, and that the court may draw inferences from its absence.
Therefore, as Mr Shergill was unable to provide credible evidence that the withdrawals/payments were for a proper purpose, owing to a failure to keep proper records (e.g. receipts and/or contracts), the court ordered the directors to compensate the respective companies for the unexplained payments.
The Importance of Contemporaneous Evidence
In this case, the respondents adduced little to no documentary evidence to support their assertions, and the judge was heavily critical of Mr Shergill’s oral evidence, noting that it was “fundamentally inconsistent with known facts and documents”.
The Court referred to various “observations” made in previous cases regarding the importance of contemporaneous evidence, namely:
memory is “especially unreliable” when it comes to recalling past beliefs, which are revised to make them “more consistent” with present beliefs
the best approach is to place “little if any reliance” on recollections of conversations and to base factual findings on documentary evidence and known/probable facts
the importance of contemporary documentation to ascertain the motivation and state of mind of those concerned (particularly internal documents)
the value to be placed on contemporaneous evidence for credibility – it was noted in particular that lacking contemporaneous evidence may be conspicuous and lead a judge to draw negative inferences from its absence
the “fallibility” of human memory and the need for memory to be assessed alongside contemporaneous documentary evidence
Crucially, the council (a creditor in respect of the rates liabilities) had records of telephone conversations and emails, providing contemporaneous evidence in which the company acknowledged that it could not pay the rates liabilities – contrary to Mr Shergill’s version of events.
Concluding Thoughts
The case highlights the importance of contemporaneous documentation and proper record keeping by directors who may later be required to provide an explanation for past events. As noted “recollections” of conversations and “memory” are not as credible as written documentation.
We cannot comment on whether the existence of such would have changed the outcome for the respondents in this particular case, but the case does demonstrate that without contemporaneous paperwork directors will find it much harder to convince the court of the reasons for their actions.
Abigail Harcombe also contributed to this article.
The Tariff Roller Coaster: US Court of International Trade Invalidates Tariffs Imposed Under IEEPA, Only to Be Stayed by the Federal Circuit Court of Appeals
What Happened
On May 28, 2025, the US Court of International Trade (“CIT”) issued a major decision in V.O.S. Selections, Inc. v. United States invalidating two sweeping tariff programs imposed under the International Emergency Economic Powers Act (“IEEPA”) earlier this year. The decision strikes down the legal basis for key executive orders imposing tariffs on China, Canada, Mexico and dozens of other trading partners, reshaping the legal framework for future emergency-based trade actions. The court granted summary judgment in favor of both private-sector plaintiffs and a coalition of state governments, concluding that the tariff actions exceeded statutory authority under IEEPA and intruded upon Congress’s exclusive constitutional role in regulating trade.
However, less than 24 hours later, the Federal Circuit Court of Appeals issued an order administratively staying the CIT injunction while it considered an appeal on the case. Thus, notwithstanding the CIT order, the IEEPA tariffs remain in effect.
Background
IEEPA is a federal law that grants the President broad powers to regulate international commerce after declaring a national emergency in response to an unusual and extraordinary threat to the national security, foreign policy or economy of the United States. Typically, IEEPA has been used to impose sanctions on foreign states or individuals, control assets or restrict financial transactions in response to specific foreign threats. IEEPA’s authority traditionally has not been used to impose broad tariffs simply based on general economic concerns.
Since taking office in January 2025, President Trump has implemented a series of tariffs under IEEPA rather than by using traditional trade enforcement statutes such as Section 301 or Section 232 of the Trade Expansion Act of 1962.
These IEEPA tariffs include:
Trafficking tariffs: A 25 percent ad valorem duty on goods from Mexico and Canada and a 20 percent duty on goods from China, justified on grounds of transnational criminal threats and border security (see previous alert here).
Worldwide and retaliatory tariffs: A 10 percent baseline duty on all imports, with increased rates up to 50 percent for certain US trading partners, based on allegations of non-reciprocal trade policies and structural global imbalances (see previous alerts here and here).
Both types of tariffs were implemented via executive orders invoking national emergency declarations under IEEPA.
Key Legal Holdings
The CIT ruled that:
IEEPA does not authorize boundless tariff authority. The court narrowly interpreted IEEPA’s grant of power to “regulate . . . importation,” holding that it does not encompass the imposition of broad, discretionary tariffs absent a defined emergency directly tied to foreign threats.
The tariffs were ultra vires. The court found that the President’s actions exceeded the legal authority granted by Congress under IEEPA, effectively encroaching upon powers specifically reserved for Congress under Article I of the US Constitution to regulate trade.
IEEPA requires a foreign emergency nexus. The court concluded that generalized economic concerns—such as trade deficits, wage suppression abroad or retaliatory trade practices—do not meet IEEPA’s strict requirement of an “unusual and extraordinary threat” arising, outside the United States. This holding significantly narrows the executive’s discretion in declaring emergencies for trade purposes, emphasizing that the threat must be directly tied to foreign actions impacting national security or foreign policy, not merely economic competition.
Private and state plaintiffs had standing. The court recognized downstream economic harm (e.g., increased procurement costs, disrupted supply chains) as sufficient to establish standing, even for non-importers.
Impact and Effective Scope of the Ruling
The CIT’s judgment is nationwide in scope and normally would be immediately effective. Because the CIT invalidated the relevant executive orders and related Harmonized Tariff Schedule of the United States (HTSUS) modifications, the ruling would have had the practical effect of nullifying the challenged tariffs as a matter of law. However, the Federal Circuit’s administrative stay of the CIT injunction means that:
The tariffs remain in effect for now, pending further action by the appellate court.
The administrative stay is temporary and does not decide the appeal itself, but it preserves the status quo while the court considers the government’s full motion for a stay pending appeal.
Plaintiffs must respond to the government’s stay motion by June 5, 2025, with a reply due June 9, 2025.
Parties have been instructed to notify the Federal Circuit of any ruling on the parallel stay motion still pending before the CIT.
Unless and until the Federal Circuit denies the government’s stay request or the CIT separately lifts the stay, businesses should treat the tariffs as still in force.
Importantly, neither the CIT nor the Federal Circuit order affect product-specific tariffs imposed under other authorities, such as Section 232 of the Trade Expansion Act of 1962. Tariffs on imports of aluminum, steel and certain automotive goods remain in force and are unaffected by these rulings.
Issues Potentially to Be Raised on Appeal
The government is widely expected to appeal the CIT’s decision to the Federal Circuit. Key legal questions likely to be raised on appeal include:
Scope of IEEPA authority: Whether the phrase “regulate . . . importation” authorizes tariff actions, particularly considering precedent under the Trading with the Enemy Act. The government is likely to argue that “regulate . . . importation” within IEEPA is a broad grant of power that includes the imposition of tariffs, citing historical precedent under the Trading with the Enemy Act (e.g., United States v. Yoshida Int’l, Inc., 526 F.2d 560 (C.C.P.A. 1975)) to support a more expansive view of presidential authority during emergencies.
Use of constitutional avoidance: Whether the CIT erred by interpreting IEEPA narrowly based on the nondelegation and major questions doctrines, rather than on plain statutory text.
Justiciability of emergency declarations: Whether the judiciary may review the President’s determination that a national emergency exists for IEEPA purposes. The government may contend that the President’s determination of a national emergency for IEEPA purposes is a political question and thus generally not subject to judicial review, arguing that the CIT overstepped its bounds in scrutinizing this executive determination.
APA applicability: Whether the CIT improperly imported Administrative Procedure Act (APA) standards in reviewing executive action not subject to the APA.
Standing of non-importers: Whether downstream purchasers without direct duty liability can challenge tariff actions under 28 U.S.C. § 1581(i).
The Federal Circuit’s treatment of these issues could have long-term effects on the balance of power between Congress and the executive branch in trade law and emergency economic policy.
Next Steps for Businesses
Businesses affected by the invalidated tariffs should:
Monitor for further court action, including whether the CIT grants or denies the pending stay motion, and any orders from the Federal Circuit on the full stay request.
Adjust forward-looking import planning to reflect the possibility of the tariffs being rolled back if the stay is lifted or the appeal is denied.
Monitor CBP implementation guidance. Companies should pay close attention to forthcoming communications from US Customs and Border Protection (CBP), particularly via Cargo Systems Messaging Service (CSMS) announcements, which are typically published on the CBP website. CBP has used CSMS in the past to communicate implementation steps in response to major litigation.
Importers should proactively review their Automated Commercial Environment (ACE) accounts and coordinate closely with their customs brokers to identify affected entries, assess potential refund claims and remain responsive to any agency developments or requests for information.
Court of International Trade Sets Aside Presidential IEEPA Tariffs and Federal Circuit Postpones Nationwide Injunction
A three-judge panel of the United States Court of International Trade (“CIT”) issued a landmark decision on May 28, 2025, in V.O.S. Selections, Inc. v. United States,[1] concluding that tariffs imposed by the President under the International Emergency Economic Powers Act (“IEEPA”) exceeded the President’s statutory authority. The court vacated the challenged tariff orders and permanently enjoined their operation nationwide. However, the U.S. Court of Appeals for the Federal Circuit less than twenty-four hours later temporarily stayed the lower court’s order, pending a decision on a more permanent stay until all appeals conclude. Accordingly, the President’s tariffs are presently preserved, as the lower court’s decision has been stayed. A second decision by the D.C. District Court, a different federal court, also held the President’s IEEPA tariffs are beyond the scope of the statute and imposed a more limited injunction for two parties.[2]
These rulings do not affect other tariff measures taken by the Trump Administration, such as section 232 duties against steel and aluminum, and automobiles.
Background
Since January 2025, the President has declared several national emergencies and imposed a range of tariffs on imports from its trading partners. These included:
Worldwide and retaliatory tariffs consisting of a rate of 10 percent on all imports from all U.S. trading partners, with higher rates for certain countries, as a response to persistent U.S. trade deficits and alleged unfair trade practices.
Country-specific tariffs consisting of a 25 percent duty on Canadian and Mexican products (10 percent on Canadian oil and potash) and a 20 percent duty on Chinese products. These were implemented to address declared threats “to the safety and security of Americans, including the public health crisis of deaths due to the use of fentanyl and other illicit drugs” from international cartels, drug trafficking, and related criminal activity.
Multiple states and businesses challenged these tariffs, arguing that the President had exceeded his authority granted by IEEPA and that the actions violated important constitutional principles.
Key Legal Findings
The CIT held that IEEPA does not grant the President unlimited tariff authority. While the statute allows the President to “regulate . . . importation” in response to an “unusual and extraordinary threat” following a declared national emergency, the court held that this language does not authorize the imposition of unbounded tariffs. The court emphasized that any delegation of tariff authority to the President must be clearly limited and guided by an “intelligible principle” to avoid violating the separation of powers. The court also explained that the current tariffs are distinguishable from prior, more limited uses of emergency powers, noting that the challenged tariffs lacked meaningful limitations in scope or duration, effectively entailing unlimited Presidential authority.
The court held that the worldwide and retaliatory tariffs were unbounded by any limitation in duration or scope and, accordingly, ultra vires and contrary to law.
It also held that the country-specific tariffs failed to comply with IEEPA because the statute requires that emergency powers be exercised only to “deal with an unusual and extraordinary threat” and there is no direct connection between the tariffs and the stated threat. Rather, the tariffs were used as leverage in negotiating a solution, which the statute does not contemplate.
The D.C. District Court found that IEEPA does not support the President’s tariffs, and the implementing agency violated the Administrative Procedure Act, but declined to reach arguments specific to the President’s tariffs and IEEPA. It remains to be seen which court will ultimately have jurisdiction, as both have held that they do.
Pending Relief
Though the CIT vacated the President’s tariff orders and permanently enjoined their enforcement nationwide, the Federal Circuit’s administrative stay, pending resolution of the government’s motion to stay pending appeal, postpones the lower courts actions. The tariffs, accordingly, remain in effect for the moment. If implemented, the CIT’s decision would have far-reaching consequences for anyone dealing with merchandise exported into the United States. Practically speaking:
All tariffs imposed under the challenged executive orders would be set aside, and importers would no longer be subject to the additional duties previously in effect under these orders.
The decision indicates that the President’s authority to impose tariffs under IEEPA is not open-ended and must be exercised within clear statutory and constitutional boundaries.
The decision also signals that future attempts to use IEEPA to impose broad tariffs—especially in response to trade deficits or as general leverage—will likely face significant judicial scrutiny.
Next Steps and Key Takeaways
In addition to the Federal Circuit’s quick action to administratively stay the CIT’s order, the government has already appealed the CIT’s decision. Given the fluidity of the current situation, importers and affected parties should monitor developments closely and consult with counsel regarding the status of the ongoing litigation and any duties paid under the relevant tariffs and potential refund procedures. It is also important to recognize that IEEPA is not the sole mechanism available to the Trump Administration for imposing tariffs. Tariffs implemented on steel, aluminum, autos, and potentially future products under “Section 232” investigations are not covered by this decision.
Despite the superior court’s stay, the lower courts’ decisions mark a significant statement of congressional control over tariff policy and, until the appellate courts decide, a limitation on the use of IEEPA to regulate importation.
[1] https://www.cit.uscourts.gov/sites/cit/files/25-66.pdf
[2] https://www.courthousenews.com/wp-content/uploads/2025/05/contreras-blocks-certain-trump-tariffs.pdf
White House Publishes Executive Orders Aimed at Accelerating Nuclear Energy
On May 23, 2025, President Donald Trump signed four executive orders aimed at launching a “renaissance” for the U.S. nuclear energy sector. The orders announce objectives of deploying 300 GW of new nuclear energy capacity by 2050 (a fourfold increase over current levels) and having 10 large reactors under construction in the United States by 2030. To achieve these objectives, the White House is calling for reforms to the Nuclear Regulatory Commission (“NRC”), the build-out of a domestic nuclear fuel supply chain, construction of reactors on military installations, and export promotion for U.S. nuclear technologies.
Reforming the NRC
The Ordering the Reform of the Nuclear Regulatory Commission executive order criticizes the NRC for “throttling nuclear power development” by implementing multi-year licensing processes characterized by excessive risk aversion. The order and an accompanying fact sheet build on recently-enacted legislation—the Accelerating Deployment of Versatile Advanced Nuclear Energy Act of 2024, P.L. L. 118-67 (the “ADVANCE Act”)—which directed the NRC to revise its mission statement to ensure that its regulations not only ensure safety but also account for the societal benefits of nuclear energy.
The White House directive calls for a reorganization of the NRC, including reductions in force; however, the order recognizes that certain functions, such as new reactor licensing, may increase in size. The White House also directs the NRC to streamline and expedite its licensing processes in various ways, including by adopting an 18-month deadline for a final agency decision on applications to construct and operate any type of new reactor, establishing a process for high-volume licensing of microreactors and modular reactors, and eliminating “non-essential or obsolete” rules.
Additionally, the order directs the NRC to reconsider its reliance on the linear no-threshold (“LNT”) model for radiation exposure, and the “as low as reasonably achievable” (“ALARA”) standard, which is predicated on the LNT model. According to the order, the LNT and ALARA policies exemplify the NRC’s extreme risk aversion and represent a major obstacle to licensing new reactors. As part of its reconsideration, the NRC must consider adopting “determinate radiation limits,” in consultation with the Environmental Protection Agency and other agencies. Such reconsideration might lead the NRC to align its standards with the quantified “ample margin of safety” hazardous air pollution standard codified by Congress in the 1990 Clean Air Act amendments, which applies to radiation exposure from reactors.
The NRC may face pressure to address these new directives in its ongoing rulemaking to establish a risk-informed, technology-inclusive regulatory framework for advanced reactors (the so-called “Part 53” rulemaking).
Building a Domestic Fuel Supply Chain
The Reinvigorating the Nuclear Industrial Base executive order addresses a vulnerability in the U.S. nuclear sector: its dependence on imports of foreign sources of enriched uranium, particularly from Russia.
To address this import dependence, the order directs the Department of Energy (“DOE”) and the Department of Defense to make excess uranium from federal stockpiles available for commercial use where feasible. It also calls for the immediate development of domestic capabilities for uranium conversion, enrichment, and fuel fabrication—including for advanced reactor fuels such as high-assay low-enriched uranium (“HALEU”). HALEU is essential for several next-generation types of reactors.
The order also directs the DOE to prioritize the facilitation of 5 GW of power uprates to existing reactors, have construction underway on 10 new large reactors by 2030, and make resources available for restarting closed nuclear power plants.
Additionally, the White House seeks to expand the industry workforce by instructing the Secretaries of Labor and Education to establish ways of increasing participation in nuclear energy-related education and career pathways.
Deploying Reactors for (and by) the National Security Apparatus
The Deploying Advanced Nuclear Reactor Technologies for National Security order focuses on utilizing nuclear energy for national security purposes. The order calls on the Departments of Defense and Energy to utilize government sites for the development of advanced reactors.
Under the order, the Secretary of the Army is tasked with commencing operation of a reactor on a domestic military base or installation no later than September 30, 2028.
The order also establishes a 90-day deadline for the Secretary of Energy to designate DOE sites for the use and deployment of advanced reactors—with a special emphasis on powering AI infrastructure.
Finally, the order instructs the Secretary of State to implement several policies to promote exports of U.S. nuclear technologies, including “aggressively” pursuing at least 20 new agreements with other countries by January 3, 2029.
Leveraging DOE Authorities to Build “Test Reactors”
The order titled Reforming Nuclear Reactor Testing at the Department of Energy instructs the DOE to accelerate development of new reactors through pilot programs and streamlining environmental reviews. The order specifically asserts that advanced reactors that are not used for commercial electricity generation are collectively for “research purposes” and can be licensed by DOE rather than the NRC. The DOE is required to set up an expedited licensing and permitting process that will enable these “qualified test reactors” to be safely operational within 2 years of application submission and is charged with approving at least three reactors with the goal of achieving criticality in each by mid-2026.
Conclusions
The executive orders come at a time when the United States is grappling with increasing electricity demand driven by electrification, AI workloads, and the growing need for reliable, clean baseload energy. Nuclear reactors offer reliability and density, capable of supporting 24/7 operations with carbon-free power. Advanced reactors hold the promise of safer and more modular designs.
To achieve the ambitious capacity growth objectives, the executive orders seek to cut regulatory red tape and leverage various federal streamlining authorities. It remains to be seen whether simultaneous, mandatory cuts of experienced staff at the regulatory agencies will impede these goals. Furthermore, funding is a key part of the puzzle for the nuclear sector, particularly for advanced reactors. In this area, developers may have concerns about recent developments in Congress. The recently passed House budget reconciliation bill significantly diminishes the DOE Loan Programs Office, which has been a key source of financing. The House bill also limits the availability of clean electricity tax credits for advanced reactors. The bill would confine tax credit eligibility to reactors for which construction commences no later the end of 2028. This is a modest reprieve from earlier, far more restrictive versions of the bill. However, developers of advanced reactors may struggle to assemble the workforce, components, and financing to break ground by that date. In addition, the House bill does not spare owners of existing reactors; it would phase out the 45U tax credit at the end of 2031.
The Angel is in the Details: Grant Agreements that Matter
Philanthropy is designed to make the world a better place, but the angel is in the details.
The relationship between donors and organizations, whether it’s a major medical institution or a small local nonprofit, are never adversarial …until they are. One of the best ways to ensure satisfaction is to clarify expectations and build a tight and clearly written agreement around a grant.
There’s no central data-base tracking litigation between grant makers and grant receivers, but common knowledge is that lawsuits are few and far between. Even so, consequences for poorly-thought-through grant agreements can be pernicious and include family or community infighting, reputational disparagement, and disillusionment with the art and science of giving.
Many donors and tax advisors focus on minimum annual distributions and look to move money fast but there are multiple ways to meet distribution requirements. Structured agreements are a blueprint for the future that help both donors and grantees navigate expectations.
Using a corporate contract template for grants can be both off-putting and insufficient. But, yes, there needs to be a set of standard clauses like terms, termination, arbitration, and indemnification (which is typically mutual) but there’s much more needed.
Here are three scenarios (there are many more) about what can go wrong:
A donor family funds a lab at a university that costs $1 million. It’s a meaningful donation for the family and they visit it periodically and talk about it with pride. The director who led the lab retires and a new director comes in with different needs and purposes. Within five years of the gift the lab is gone, and the family name has been removed – and they found out when they brought their granddaughter to see it. No one ever called them.
A couple funded a new engineering center at a day school their daughter attended. They wanted to give back to the school that supported their child and made a $3 million dollar donation on the recommendation of the Head of School. After five years there isn’t a plan or budget, and the center isn’t built. Funding paid in full has been generating interest that is not designated to the project.
Through their foundation, a family funds a new program at a cost of $500 thousand dollars, designed to educate at-risk youth over a ten-year period in the community where they built their business. After three years the organization moves the program to another site because it was not sustainable where it was. The family wants their money back.
Engaging clients in building a detailed outline that includes:
The client’s understanding and goals for the near- and long-term expectations
The organization’s goals and capacity to carry out the grant
Terms that describe the triggers for distribution meaning time and accomplishments in advance of future payments
Metrics for evaluating the grant
Details about communications expectations both internally and publicly
Contingency specifications, especially in the case of capital projects, that might include right of first refusal
Consider developing a plain language template for private foundation clients that can be adjusted to meet the criteria and expectations, in terms of time, funding distributions, and short- and long-term expectations of the investment, and to support your clients in finding their better angels.
Syria-ous Changes for Middle East Business? The United States, UK, and Europe Relax Sanctions on Syria
In a significant shift in international policy, the United States, European Union, and United Kingdom have each taken steps to ease sanctions on Syria, aiming to support the country’s reconstruction and political transition following the fall of the Assad regime.
United States Actions
On May 23, 2025, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued General License No. 25 (GL 25), authorizing certain transactions otherwise prohibited under the Syrian Sanctions Regulations (31 C.F.R. Part 542). That move represents a major policy shift aimed at facilitating reconstruction and humanitarian efforts in Syria.[1] In parallel, the U.S. Department of State issued a waiver of sanctions under the Caesar Syria Civilian Protection Act. Together, those developments signal a coordinated effort to promote economic stabilization while maintaining leverage over the Syrian government’s conduct.
Scope of Authorized Transactions
GL 25 authorizes U.S. persons to engage in a broad range of transactions involving Syria that were previously prohibited. Specifically, the license allows transactions that involve the Government of Syria and certain blocked persons, including individuals and entities named in the annex to GL 25, as well as entities that are owned 50 percent or more by such persons. The license covers services, investment, and dealings involving Syrian-origin petroleum and petroleum products, among other activities. Notably, this license lifts longstanding restrictions on financial transactions and investment, which could enable U.S. companies to reenter the Syrian market under certain conditions.
Concurrently Issued Measures
The easing of OFAC sanctions is part of a wider package of measures. In coordination with GL 25, the U.S. Department of State issued a 180-day waiver of certain sanctions under the Caesar Act, providing additional relief intended to stimulate activity in key sectors such as infrastructure, agriculture, and healthcare.
The Financial Crimes Enforcement Network (FinCEN) issued guidance relaxing restrictions under Section 311 of the USA PATRIOT Act, allowing U.S. financial institutions to maintain correspondent accounts for the Commercial Bank of Syria. These measures are designed to operate in tandem and provide meaningful openings for financial and commercial reengagement, subject to oversight and compliance measures.
Limitations and Conditions
Despite the breadth of the new authorizations, the relief measures are not unconditional. The U.S. government has emphasized that continued implementation of GL 25 and related actions will depend on the Syrian government’s conduct going forward. Specifically, the U.S. has tied future sanctions relief to Syria’s demonstrated commitment to protecting ethnic and religious minorities and ceasing support to designated terrorist organizations. The U.S. intends to monitor these commitments closely, and the status of GL 25 may be revisited if conditions on the ground deteriorate or if the Syrian government fails to uphold its obligations.
Export Control Considerations
Importantly, while GL 25 eases certain economic sanctions, it does not affect the application of U.S. export control restrictions over the country. Items subject to the Export Administration Regulations (EAR) generally remain prohibited for export or reexport to Syria, unless specifically authorized by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS). This includes both items classified under specific Export Control Classification Numbers (ECCNs) and those designated as EAR99. Likewise, exports of U.S. Munitions List items and related defense services remain subject to the International Traffic in Arms Regulations (ITAR), administered by the U.S. Department of State’s Directorate of Defense Trade Controls (DDTC). Companies considering transactions involving Syria should therefore make sure that they obtain appropriate licenses from those agencies before exporting to Syria.
European Union Measures
On May 28, 2025, the Council of the European Union adopted a series of legal acts lifting all economic restrictive measures on Syria, with the exception of those based on security grounds.[2] This move formalizes the political decision announced on May 20, 2025, and aims to support the Syrian people in rebuilding a new, inclusive, pluralistic, and peaceful Syria.[3] As part of this approach, the Council removed 24 entities from the EU list of those subject to the freezing of funds and economic resources, including banks such as the Central Bank of Syria and companies operating in key sectors for Syria’s economic recovery. However, the EU has extended the listings of individuals and entities linked to the Assad regime until June 1, 2026, and introduced new restrictive measures under the EU Global Human Rights Sanctions Regime, targeting individuals and entities responsible for serious human rights abuses.
United Kingdom Developments
On April 24, 2025, the UK government published the Syria (Sanctions) (EU Exit) (Amendment) Regulations 2025,[4] which took effect on April 25, 2025. These regulations partially suspend a number of significant sanctions that have been in place for over a decade, reflecting developments in the political situation in Syria following the fall of the Assad regime in December 2024. The UK has lifted sanctions on several Syrian government agencies, including the Ministry of the Interior, the Ministry of Defense, and the General Intelligence Service, as well as the police, air force, military, and state-run media. Additionally, the UK has pledged up to £160 million in support for Syria in 2025, providing lifesaving assistance and supporting agriculture, livelihoods, and education programs to help Syrians rebuild their lives. The United Kingdom is expected to adopt additional legal measures to ease Syrian sanctions, mirroring recent actions by the U.S. and EU.
Implications for U.S. and International Businesses
These coordinated actions by the U.S., EU, and UK signal a new phase in international engagement with Syria, potentially opening avenues for businesses and investors. However, companies considering entry into the Syrian market would be well advised to exercise caution and conduct thorough due diligence to ensure compliance with the remaining sanctions and export control laws. Despite the easing of certain sanctions, stringent export control restrictions remain in place, and the relief measures are contingent upon the Syrian government’s commitment to safeguarding human rights and not providing safe harbor to terrorist organizations.
FOOTNOTES
[1] See OFAC’s press release available here.
[2] See Council’s Press Release, available here.
[3] See Council’s Press Release, available here.
[4] Available here.
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US Provides Broad Sanctions Relief to Syria
On 23 May 2025, the United States provided broad sanctions relief to Syria and the new Government of Syria under President Ahmed al-Sharaa. While speaking at an investment forum in Riyadh, President Trump announced his intentions to lift sanctions on Syria, stating that sanctions relief will “give them a chance at greatness.”
To that end, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued General License (GL) 25, authorizing transactions prohibited by the Syrian Sanctions Regulations (SySR), as well as transactions prohibited under certain other statutes and executive orders. Alongside GL 25, the US Department of State issued a 180-day waiver of mandatory “Caesar Act” sanctions to permit certain investments in Syria and the Financial Crimes Enforcement Network permitted US banks to maintain correspondent accounts for the Commercial Bank of Syria.
Between 2004 and 2011, the United States imposed increasingly comprehensive sanctions on Syria, prohibiting most US investment in Syria, the export of goods and services to Syria, dealings in Syrian petroleum, and transactions involving Syrian blocked parties, including “secondary sanctions” for significant dealings with the blocked Government of Syria.
Under GL 25, US persons are authorized to engage in many transactions prohibited under the SySR, including:
Transactions with 28 Syrian parties on the Specially Designated Nationals and Blocked Persons List (SDN List), including certain financial institutions, ports, oil and gas companies, airlines, and ministries. These parties are named in the Annex to GL 25. Authorization to deal with these named parties extends to the blocked entities they own at least 50% or more (collectively “Annex Parties”).
Certain transactions in Syria, provided they do not involve blocked parties that are not Annex Parties, including: new investment in Syria, the export of services to Syria, US importation and other dealings in Syrian petroleum, dealings in the property and property interests of Annex Parties, and payment transfers involving such authorized activities.
It is important to note that GL 25 does not authorize:
Transactions involving blocked parties not specifically authorized under GL 25.
Unblocking any property blocked as of 22 May 2025.
Exports, reexports, and transfers to or within Syria that require authorization under the Export Administration Regulations or International Traffic in Arms Regulations. Accordingly, the export, reexport, or transfer of defense articles and dual-use items, software, and technology remain prohibited unless authorized.
Transactions involving the Governments of Russia, Iran, or North Korea.
Sanctions relief under GL 25 became effective on 23 May 2025 and is not subject to an expiration date. OFAC can revoke GL 25 at any time or replace it with a “GL 25A” requiring the “wind down” of existing transactions by a certain date. The Treasury Department has signaled that additional sanctions relief may be forthcoming, referring to GL 25 as a “first step.”
House-Passed Budget Bill – the One Big Beautiful Bill Act – Includes Major Changes to Medicaid
On Thursday, May 22,2025, the U.S. House of Representatives narrowly passed the One Big Beautiful Bill Act, a budget reconciliation bill introduced by House Republicans, by a 215-214 vote. The bill extends key provisions of the 2017 Tax Cuts and Jobs Act, currently set to expire at the end of 2025, and allocates additional funding for defense and other federal priorities. It also includes reductions in government spending and revised eligibility requirements for several federal aid programs.
Among the provisions, the bill includes over $700 billion in proposed changes to Medicaid, the joint federal-state program that provides health insurance to low-income individuals and families, as well as certain people with disabilities and limited financial resources. These changes are intended to reduce federal outlays and are projected to significantly impact both Medicaid beneficiaries and the healthcare providers who serve them.
Key Medicaid Measures
The One Big Beautiful Bill Act proposes to achieve these savings through several policy changes. The estimated budget impact of each change over the next decade, as calculated by the nonpartisan Congressional Budget Office (CBO) and published here, is listed in parentheses below.
Community Engagement Requirements. Beginning in 2026, able-bodied adults would be required to complete 80 hours per month of work, volunteering and/or attending school to maintain eligibility for Medicaid, with certain exemptions (e.g., pregnant women and the elderly) (~$280B, which estimate was based on these requirements going into effect in 2029).
Increased Frequency of Eligibility Redeterminations. States would be required reverify Medicaid eligibility for expansion populations every six months, rather than annually (~$53.2B).
Moratorium and Limits on Provider Taxes. The bill would prohibit states from creating new provider taxes or expanding existing ones, and would restrict how provider taxes can be used to finance Medicaid. (~$123.9B combined).
Enrollment Streamlining Moratoriums. The bill would pause implementation of certain rules designed to streamline enrollment in Medicaid, the Medicare Shared Savings Program, the Children’s Health Insurance Program (CHIP), and the Basic Health Program (~$167.3B combined).
Enhanced Verification Standards. New address and documentation verification requirements would apply for Medicaid enrollment (~$17.4B).
Cost Sharing Requirements. States would be required to implement new cost-sharing charges for low-income individuals just above the poverty line ($16,000 per year for an individual) when they seek care. (~$13B).
Anticipated Impact on Coverage and Providers
Medicaid and CHIP currently provide health coverage for nearly 80 million people, making them the largest source of insurance coverage in the United States. According to earlier CBO estimates of a previous version of the bill, approximately 7.6 million people could lose coverage. The House-passed version would likely result in additional losses, given that certain provisions, such as the work requirements, would take effect earlier than previously modeled.
These coverage reductions could also affect healthcare providers, particularly those that serve communities with high Medicaid enrollment, as they may see changes in patient volumes.
What’s Next?
The bill now moves to the U.S. Senate, where it is expected to undergo further debate and potential revisions. While some senators have called for additional spending reductions, others, across the political spectrum, have raised concerns about the scale of the Medicaid-related changes. Republican leadership has expressed an intent to move the bill forward with the goal of delivering it to President Trump’s desk by July 4th.
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EU Lifts Key Sanctions on Syria: Legal and Compliance Implications Amid Evolving Opportunities
Earlier this week, the Council of the EU adopted a series of legal instruments giving effect to what had been agreed on 20 May 2025, to significantly reduce sanctions on the Syrian Arab Republic. As a result, all EU economic restrictive measures targeting Syria have been lifted, except for those maintained on specific security-related grounds. This marks a substantial shift in the EU’s sanctions posture, intended to facilitate renewed economic engagement, support post-war reconstruction and encourage institutional re-integration, while preserving targeted measures where legal and strategic considerations continue to apply.
As part of this move, 24 entities have been removed from the EU’s list of designated persons and entities subject to asset freezes (vid. Annex II, EU Regulation Nº36/2012). These include financial institutions such as the Central Bank of Syria and commercial actors operating in strategic sectors for the country’s recovery, such as oil production and refining, cotton, telecommunications and media. The council characterises this lifting of sanctions as a principled response to a moment of historic transition, and a reaffirmation of the EU’s longstanding partnership with the Syrian people.
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CMS Proposes to Close Perceived Loophole in Medicaid Health Care-Related Tax Regulations
On May 12, 2025, the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule that would impose an additional requirement to federal Medicaid regulations in order for non-broad-based and uniform health care-related taxes to be allowed as a means of state financing of Medicaid services—a common strategy to increase provider reimbursement using primarily federal funds without a significant impact on state budgets.
According to CMS, the new requirement would disqualify eight current health care-related tax programs in seven states and would preclude additional tax programs that cannot meet the new requirement. The proposed rule represents just the latest action taken by the federal government to curtail funding mechanisms states use to maximize federal contributions it perceives as inappropriate and to curtail federal outlays for state Medicaid programs.
Background on Health Care-Related Taxes
State-administered Medicaid programs are jointly financed by the federal and state governments. States make payments for services, and the federal government then provides matching funds based on a specific formula that varies by state, eligibility group, and expenditure category. The federal government’s share, known as the federal financial participation (FFP) of a state’s Medicaid expenditures for services used by people other than non-disabled adults is at least 50 percent but can be higher for states with lower average per capita income (as high as 77 percent for one state in federal Fiscal Year 2026). Federal law similarly sets a minimum state contribution of 40 percent to the non-federal share for health care services, with states allowed to use other funds, including health care-related taxes, to raise the remaining 60 percent of the non-federal share. CMS had emphasized that a state’s responsibility for a substantial portion of the non-federal Medicaid program expenditures incentivizes the state to monitor and operate its program competently and efficiently.
States may finance their non-federal share through their general funds, revenue from health care-related taxes, provider-related donations, intergovernmental transfers from units of state or local governments, and certified public expenditures. Health care-related taxes are frequently used to fund the non-federal share of Medicaid expenditures to hospitals, nursing homes, and other providers under supplemental payment and directed payment programs that offset low Medicaid base rates or address federal and state policy goals, such as offsetting uncompensated care costs. In order to qualify for a matching FFP, health care-related taxes must meet certain regulatory requirements. These requirements are largely aimed at ensuring that such taxes are not derived to an inappropriate extent from the very taxpayers—such as health care providers with high Medicaid volumes—that benefit from the increased Medicaid reimbursement financed by those taxes. To the extent that nearly all impacted taxpayers receive Medicaid reimbursement that exceeds the taxes they pay to fund the non-federal share, the federal government is effectively financing as much as 100 percent of the Medicaid expenditures supported by the tax program, with little or no state contribution.
Under current regulations, health care-related taxes may be imposed on certain permissible classes of items or services, such as inpatient hospital services, outpatient hospital services, and nursing facility services. The taxes must be broad-based (i.e., imposed on all non-governmental providers in the permissible class) and uniform (i.e., the same amount or rate of tax must be applied across the permissible class), and may not have provisions that directly or indirectly guarantee to hold taxpayers harmless for all or any portion of the tax amount through increased reimbursement. For state tax programs that are not broad-based and uniform under these requirements, states may obtain a waiver from those two requirements if the net impact of the tax is nevertheless “generally redistributive.” CMS has historically interpreted “generally redistributive” to mean “the tendency of a State’s tax and payment program to derive revenues from taxes imposed on non-Medicaid services in a class and to use these revenues as the State’s share of Medicaid payments.”
Current Statistical Tests to Determine Whether a Tax Is “Generally Redistributive”
Federal regulations currently use statistical tests to determine whether a non-broad-based or non-uniform state tax program is “generally redistributive.” The so-called “P1/P2 test” is used to evaluate a tax that is not broad-based because it excludes certain providers in the permissible class, and the so-called “B1/B2” test is used to evaluate a tax that is non-uniform because it applies different rates to different tax rate groups of providers within the permissible class.
Under the P1/P2 test, the proportion of tax revenue applicable to Medicaid if the tax were broad-based and applied to all providers or activities within the class (P1) is divided by the proportion of the tax revenue applicable to Medicaid under the tax program for which the state seeks a waiver (P2). Although there are some exceptions, generally, this quotient must be at least 1 in order for a non-broad-based tax to be regarded as “generally redistributive.”
The B1/B2 test compares the slope of two linear regressions that measure the relationship between providers’ additional Medicaid units (i.e., the units that are subject to the tax, such as Medicaid bed-days, charges, or revenue) and the taxes they pay. The slope derived from the first linear regression (B1) shows the rate at which taxes increase with each additional Medicaid unit if the tax were broad-based and uniform. The slope derived from the second linear regression (B2) shows the rate at which taxes increase for each additional Medicaid unit for the tax program for which a waiver is sought. With certain exceptions, generally, if the B1/B2 quotient is at least 1, the non-uniform tax will be regarded as “generally redistributive.”
Perceived Loophole in Statistical Tests
In the proposed rule, CMS expresses concern that some states have been utilizing tax structures that are not sufficiently redistributive, even though they pass the B1/B2 test. In particular, CMS says that states have been able to manipulate B2 by selectively excluding a few large providers with high Medicaid utilization from a health care-related tax, but including them in the regression calculation, which then alters the slope of the line of the regression in a way that allows the state to pass the statistical test while simultaneously imposing outsized burden on the Medicaid program. CMS also identifies other means by which states have undermined the B1/B2 test, such as by imposing tax rates on Medicaid-taxable units that are much higher than comparable commercial taxable units.
CMS indicates that it is aware of seven states with eight tax programs that exploit the statistical loophole under the B1/B2 test. CMS reports that, in connection with some of the recently approved waivers for tax programs that exploit the statistical loophole, it has advised states of its concern, including through “companion letters” explaining why CMS believed that the tax programs did not meet the spirit of the law, and warning the states that it was contemplating rulemaking to address its concerns. CMS estimates that the current total annual tax collection by the programs that exploit the statistical loophole is approximately $23.6 billion, but also expresses concern about the potential proliferation of additional programs.
In a press release announcing the proposed rule, CMS identified California, Michigan, Massachusetts, and New York as among the seven states with tax programs it regards as problematic. In a fact sheet it released, CMS asserts that these seven states impose higher taxes primarily on the Medicaid business of managed care organizations (MCOs), although one such tax is on hospitals. CMS also claims in its fact sheet that these tax programs free up state money that is used for other purposes, pointing specifically to California’s funding to expand health care coverage for illegal immigrants.
Proposed Regulatory Changes
To address the statistical loophole, CMS proposes to add an additional requirement to demonstrate that a health care-related tax is generally redistributive. To obtain a waiver from the broad-based or uniform requirements, the tax would still have to meet the applicable statistical test described above, but under the proposed rule, it would also have to meet the additional requirement.
The additional requirement is applied to each permissible class and includes provisions that test both those taxes that refer to Medicaid explicitly and those that do not refer to Medicaid explicitly, furnishing examples illustrating the application of the new requirement. For taxes that refer to Medicaid explicitly, CMS proposes that a tax would not be generally redistributive if the tax rate imposed on any taxpayer or tax rate group based upon its Medicaid taxable units is higher than the tax rate imposed on any taxpayer or tax rate group based upon its non-Medicaid taxable units.
CMS’s example of a non-redistributive tax that would violate this requirement is an MCO tax where Medicaid member-months are taxed $200 per member-month and non-Medicaid member-months are taxed $20 per member-month. In addition, for taxes that do not refer to Medicaid explicitly, CMS proposes that a tax would not be generally redistributive if the tax rate imposed on any taxpayer or tax rate group explicitly defined by its relatively lower volume or percentage of Medicaid taxable units is lower than the tax rate imposed on any other taxpayer or tax rate group defined by its relatively higher volume or percentage of Medicaid taxable units.
One example of a program not meeting this requirement is a tax on nursing facilities with more than 40 Medicaid-paid bed-days of $200 per bed-day, while nursing facilities with 40 or fewer Medicaid-paid bed-days are taxed $20 per bed-day. A second example describes a tax on hospitals with less than 5 percent Medicaid utilization at 2 percent of net patient service revenue for inpatient hospital services, while all other hospitals are taxed at 4 percent of net patient service revenue for inpatient hospital services.
For taxes that do not refer to Medicaid explicitly, CMS proposes that if the state tax program uses a substitute definition, measure, attribute, or the like as a proxy for Medicaid in order to impose a higher tax rate on Medicaid taxable units than on non-Medicaid taxable units, then the program would not be generally redistributive.
CMS articulates two examples of such non-compliant programs. The first example describes a tax on inpatient hospital service discharges that imposes a $10 rate per discharge associated with beneficiaries covered by a joint federal and state health care program and a $5 rate per discharge associated with individuals not covered by a joint federal and state health care program—without using the term Medicaid. The second example specifies that a tax on hospitals located in counties with an average income less than 230 percent of the federal poverty level of $10 per inpatient hospital discharge, while hospitals in all other counties are taxed at $5 per inpatient hospital discharge—which CMS says would be redistributive because a higher tax rate would be imposed on the tax rate group that is likely to involve more Medicaid taxable units, due to the use of a Medicaid eligibility criterion (income) to distinguish the tax rate groups.
Given that the new requirement would disqualify some existing health care-related tax programs, CMS proposes a transition period, but only for those states that did not obtain their health care-related tax waiver within a two-year cutoff period. States that did obtain the waiver within the last two years of the effective date of the final rule would not be eligible for the transition period, and any tax collections made under the applicable waiver after the effective date of the final regulations would not count toward the FFP match. States that obtained a waiver more than two years before the effective date would need to submit a new waiver proposal for a tax that meets the new requirement, with an effective date no later than the start of the first state fiscal year beginning at least one year from the effective date of the final regulations. CMS explains that states with more recently approved waivers are not entitled to a transition period because they were on notice regarding CMS’s concerns about the statistical loophole and therefore assumed the risk that CMS would issue corrective regulations. Despite the specifics of its transition proposal, CMS solicits comments on several aspects, including the length of the transition period, whether the two-year cutoff for transition period eligibility should be altered, and whether the transition period lengths should vary by permissible class.
Analysis and Recommendations
Although the proposed rule would affect health care-related tax programs in only seven states, it would also limit the flexibility of all states to design new programs to fund the non-federal share of Medicaid expenditures. The inability to design programs that comply with federal regulatory requirements may prevent states from adequately reimbursing health care providers for their services and jeopardize some health care providers’ sustainability.
Health care providers, individually or in concert with their trade associations, should consider providing input on the proposed rule. This is particularly true for providers in the seven states with health care-related tax programs that would be disqualified, although providers in other states could also be affected by their states’ inability to design new health care-related taxes that are permissible under current regulations. CMS will accept public comments until July 14, 2025.
Health care providers in the seven states with health care-related tax programs that would be disqualified by the proposed rule should also begin working with their state Medicaid agencies in designing adjustments to the tax programs that would enable them to meet the new requirement. Health care providers in other states should be cognizant of the proposed new requirement as they evaluate future health care-related tax proposals in their states.
Further, the proposed rule comes at a time when Congress is considering, through a budget reconciliation bill, significant cuts in Medicaid spending through work requirements, eligibility testing, a moratorium on all new health care-related taxes, and other means. The budget reconciliation bill that passed the House of Representatives on May 22, 2025, also includes provisions aimed at closing the statistical loophole that is the subject of the proposed rule. At a time when states and Medicaid providers face the possibility of severe reductions in Medicaid funding, closing the loophole, whether by statute or regulation, will make it more difficult for states to maintain or initiate certain tax programs needed to support their Medicaid programs and could therefore jeopardize funding for Medicaid services in those states. Medicaid providers will need to plan for the potential reductions in Medicaid funding, not only from those that may arise from the proposed rule, but also from Congressional action.
Medicaid providers should also continue to be vigilant in evaluating the financing mechanisms used to fund the non-federal share of expenditures under Medicaid programs in which they participate. The proposed rule represents just the latest action in CMS’s attempts to suppress arrangements used to finance the non-federal share of Medicaid expenditures that CMS considers inappropriate cost-shifting to the federal government.
For example, in February 2023, CMS issued an Informational Bulletin asserting that private redistribution arrangements among taxpayers violate the “hold harmless” restriction in the health care-related tax regulations and stating that CMS intends to investigate potential redistribution arrangements. (In a March 2024 Informational Bulletin, CMS said that, until January 1, 2028, it will not take enforcement action against states that have such arrangements in place as of the date of the Informational Bulletin.) Previously, in 2019, CMS issued a proposed Medicaid Fiscal Accountability Regulation (MFAR) that would have significantly tightened regulations concerning health care-related taxes (including addressing the statistical loophole), bona fide provider donations, intergovernmental transfers, and certified public expenditures. The MFAR was withdrawn in 2021, but CMS’s concern about inappropriate state financing arrangements has continued. In 2016, CMS disallowed the FFP for supplemental Medicaid payments made to certain private hospitals in Texas based on the state’s use of allegedly improper provider donations to fund the non-federal share of those expenditures. The state is challenging that disallowance in a federal court case that is still pending. Because a disallowance could lead to a recoupment of Medicaid reimbursement by the state, and because involvement in an improper arrangement to fund the non-federal share of a state’s Medicaid expenditure could lead to False Claims Act allegations, providers need to carefully evaluate the financing mechanisms used to fund such expenditures.