Tag: legislation

Senator Manchin Announces That He Will Not Support the Build Back Better Act – Where Things Stand Now

Today, December 19, 2021, Senator Joe Manchin (D., W.Va.) said that he opposes the Build Back Better Act, which effectively prevents its passage.  While there are no immediate prospects for the Build Back Better Act to become law, future tax acts tend to draw upon earlier proposals.  With a view to future tax proposals, this blog summarizes the final draft that was released by the Senate Finance Committee on December 11, 2021 (the “Build Back Better Bill”), and compares it to the bill passed by the House of Representatives (the “House Bill”) and the prior bill that was released by the House Ways and Means Committee in September 2021 (the “Prior House Bill”), which the House Bill was based on.  In light of Senator Manchin’s announcement, this blog refers to the bills in the past tense.

Summary of Significant Changes to Current Law in the Build Back Better Bill

Individual taxation

  •  A 5% surtax would have been imposed on income in excess of $10 million ($5 million for a married individual filing a separate return) and a 3% additional surtax would have been imposed on income in excess of $25 million ($12.5 million for a married individual filing a separate return). The surtax would have also applied to non-grantor trusts but at significantly lower thresholds – the 5% surtax would apply to income in excess of $200,000 and the 3% surtax would apply to income in excess of $500,000.  The individual income tax rates would have otherwise remained the same as under current law.
  • The 3.8% net investment income tax would have been expanded to apply to the active trade or business income of taxpayers earning more than $400,000. As a result, active trade or business income allocated to a limited partner of a limited partnership or a shareholder of a subchapter S corporation would have been subject to the net investment income tax. Under current law, the tax applies only to certain portfolio and passive income.  Under current law, a limited partner of a limited partnership and a shareholder of a subchapter S corporation is otherwise not subject to self-employment taxes.  The Build Back Better Act would not have had otherwise imposed self-employment taxes on S corporation shareholders or limited partners.
  • The exemption of gains on the disposition of “qualified small business stock” would have been reduced from 100% to 50% for taxpayers earning more than $400,000/year, and all trusts and estates.
  • “Excess business losses” in excess of $250,000 ($500,000 in the case of a joint return) would have been carried forward as business losses (thus remaining still subject to the limitation) and would not have been converted to net operating losses, and the excess business loss provision would have been made permanent. It currently is scheduled to expire in 2026.
  • Losses recognized with respect to worthless partnership interests would have been treated as capital losses (rather than ordinary losses as is often the case under current law), and would have been taken when the event establishing worthlessness occurs (rather than at the end of the year under current law).
  • The wash sale rules would have been expanded to cover commodities, foreign currencies, and digital assets, like cryptocurrency, as well as dispositions by parties related to the taxpayer.
  • The constructive ownership rules would have been expanded to cover digital assets, like cryptocurrency.

Business taxation

  • A corporate minimum tax of 15% would have been imposed on “book income” of certain large corporations. But the corporate income tax rates would have remained unchanged at 21%.
  • 1% excise tax would have been imposed on the value of stock repurchased by a corporation.
  • The interest expense deduction of a domestic corporation that is part of an “international financial reporting group” and whose average annual net interest expense exceeds $12 million over a three-year period would have been disallowed to the extent its net interest expenses for financial reporting purposes exceeds 110% of its proportionate share (determined based on its share of either the group’s EBITDA or adjusted basis of assets) of the net interest expense for financial reporting purposes of the group. The disallowed interest deduction could be carried forward for subsequent years.
  • Losses recognized by a corporate shareholder in liquidation of its majority-owned corporate subsidiary would have been deferred until substantially all of property received in the liquidation is disposed of by the shareholder.
  • Corporations spinning off subsidiaries would have been limited in their ability to use debt of the subsidiary to receive tax-free cash.

International taxation

  • A foreign person who owns 10% or more of the total vote or value of the stock of a corporate issuer (as opposed to 10% or more of total vote under current law) would have been ineligible for the portfolio interest exemption.
  • The Build Back Better Bill would have substantially revise the various international tax rules enacted as part of the Tax Cuts and Jobs Act (“TCJA”), including “GILTI”, “FDII” and “BEAT” regimes.
  • Foreign tax credit limitation rules would have been applied on a country-by-country basis.
  • Section 871(m), which imposes U.S. withholding tax on U.S.-dividend equivalent payments on swaps and forward contracts, would have been expanded to require withholding on swaps and forwards with respect to, or by reference to, interests in publicly traded partnerships.[1]

Proposals Not Included in the Build Back Better Bill

The Build Back Better Bill would not have:

  • Increased individual and corporate income tax rates (other than the surtaxes);
  • Changed the tax treatment of carried interests;
  • Affected the “pass-through deduction” under section 199A;
  • Affected “like-kind” exchanges under section 1031;
  • Increased the cap on social security tax withholding;
  • Changed the $10,000 annual cap on state and local tax deductions;[2] or
  • Treated death as a realization event.

Discussion

Individual Tax Changes

Surtax on individuals

The Build Back Better Bill would have added new section 1A, which would have imposed a tax equal to 5% of a taxpayer’s “modified adjusted gross income” in excess of $10 million (or in excess of $5 million for a married individual filing a separate return).  Modified adjusted gross income would have been adjusted gross income reduced by any reduction allowed for investment interest expenses.  Modified adjusted gross income would not have been reduced by charitable deductions and credits would not have been allowed to offset this surtax.  An additional 3% tax would have been imposed on a taxpayer’s modified adjusted gross income over $25 million (or in excess of $12.5 mm for taxpayers filing as married filing separately).  The surtaxes would also have applied to non-grantor trusts at significantly lower thresholds – the 5% surtax would apply to modified adjusted gross income in excess of $200,000 and the 3% additional surtax would have applied to modified adjusted gross income in excess of $500,000.

As a result, the top marginal federal income tax rate on modified adjusted gross income in excess of $25 million would have been 45% for ordinary income and 31.8% for capital gains (including the net investment income tax).  Nevertheless, the Build Back Better Bill rate on capital gains would have remained meaningfully less than the 39.6% rate proposed by the Biden Administration.

The Build Back Better Bill did not include a change to the individual income tax rates, which was a major departure from the Prior House Bill.  The Prior House Bill included a similar surtax on individual taxpayers, but the threshold was lower at $5 million for taxpayers that file joint returns and the surtax rate was 3%.

The surtax would have been effective for taxable years beginning after December 31, 2021.

Application of net investment income tax to active business income; increased threshold

The Build Back Better Bill would have expanded the 3.8% net investment income tax to apply to net income derived in an active trade or business of the taxpayer, rather than only to certain portfolio income and passive income of the taxpayer under current law.

As a result, the 3.8% net investment income tax would have been imposed on limited partners who traditionally have not been subject to self-employment tax on their distributive share of income, and S corporation shareholders who have not been subject to self-employment tax on more than a reasonable salary. This proposed change was generally consistent with the Biden administration’s proposal to impose 3.8% Medicare tax (although the additional net investment income tax proposed in the Build Back Better Bill would not be used to fund Medicare).

The Build Back Better Bill also would have limited the 3.8% net investment income tax so that it applies only to taxpayers with taxable income greater than $400,000 (and $500,000 in the case of married individuals filing a joint return), rather than $250,000 under current law.

These changes were consistent with the proposals in the Prior House Bill and would have applied in taxable years beginning after 2021.

Limitation on “qualified small business stock” benefits

The Build Back Better Bill would have limited the exemption of eligible gain for disposition of “qualified small business stock” (“QSBS”) to 50% for taxpayers with adjusted gross income of $400,000 or more, as well as all trusts and estates, and would have subjected the gain to the alternative minimum tax.

Very generally, under current law, non-corporate taxpayers are entitled to exclude from tax up to 100% of gain from the disposition of QSBS that has been held for more than 5 years.[3]  In addition, gain from the sale of QSBS can potentially be deferred if proceeds are reinvested in other QSBS.

The same proposal was included in the House Bill and the Prior House Bill.  The Prior House Bill contained a proposal to increase corporate tax rates, which together with the proposed changes to the QSBS rules, would have further limited desirability of investing in QSBS. The Build Back Better Bill, the House Bill and the Prior House Bill only addressed the rules applicable to exclusion of gain from the sale of QSBS, and did not alter the rules allowing for deferral of gains for proceeds invested in other QSBS.   Although the benefits associated with ownership of QSBS would have remained significant, had the Build Back Better Bill passed, in light of the reduction in potential gain that would have been excluded, the Build Back Better Bill would have required a reevaluation of choice-of-entity decisions based on QSBS benefits.

The proposal would have been effective retroactively and apply to sales or exchanges of stock on or after September 13, 2021, which is the date that the Prior House Bill was released.

Excess business losses

Under current law, for taxable years that begin before January 1, 2027, non-corporate taxpayers may not deduct excess business loss (generally, net business deductions over business income) if the loss is in excess of $250,000 ($500,000 in the case of a joint return), indexed for inflation.  The excess loss becomes a net operating loss in subsequent years and is available to offset 80% of taxable income each year.  The Build Back Better Bill would have made this limitation permanent and would treat the losses carried forward to the next taxable year as deduction attributable to trades or businesses, which would have been subject to the excess business losses limitation under section 461(l).  As a result, no more than $250,000/$500,000 in losses could be used in any year, and excess business losses would never have become net operating losses.  Unlike deductions that are suspended under the passive activity rules and at-risk rules that become deductible upon a disposition of the interest in the relevant trade or business, the excess business losses continue to be limited after the sale of the relevant trade or business.

This proposal is consistent with the Prior House Bill and would have been retroactive and apply for taxable years beginning after December 31, 2020.

Worthless partnership interest and limitation on loss recognition in corporate liquidations

Under current law, if a partner’s interest in a partnership becomes worthless, in the taxable year of worthlessness the partner may take an ordinary loss if the partner receives no consideration and a capital loss in all other cases.  As a practical matter, this rule allows for an ordinary loss if the partner has no share of any liabilities of the partnership immediately prior to the claim of worthlessness, or a capital loss if the partner has a share of any partnership liability immediately prior to the claim of worthlessness (because relief of partnership liabilities is treated as consideration received in a sale).  Under current law, if a security (not including an obligation issued by a partnership) that is held as a capital asset becomes worthless, the loss is treated as occurring on the last day of the taxable year in which the security became worthless.

Under the Build Back Better Bill, if a partnership interest becomes worthless, the resulting loss would have been treated as a capital loss (and not an ordinary loss).  Also, in the case of a partnership interest or a security that becomes worthless, the loss would have been recognized at the time of the identifiable event establishing worthlessness (and not at the end of the taxable year).  The proposal would also have expanded the scope of securities subject to worthless securities rules to included obligations (bond, debenture, note, or certificate, or other evidence of indebtedness, with interest coupons or in registered form) issued by partnerships.  These proposals were also included in the Prior House Bill and would apply to taxable years beginning after December 31, 2021.

The Build Back Better Bill would also have deferred the loss that is recognized by one corporate member of a controlled group[4] when a subsidiary merges into it in a taxable transaction under section 331 until substantially all of the property received in the liquidation is disposed to a third-party.  This proposal would effectively have eliminated taxpayers’ ability to enter into Granite Trust transactions to recognize capital losses by liquidating an insolvent subsidiary.[5]  A similar loss deferral rule would also have applied to dissolution of a corporation with worthless stock or issuance of debt in connection with which corporate stock becomes worthless.  This proposal would have applied to liquidations occurring on or after the date of enactment.

Expansion of wash sale and constructive sale rules

The Build Back Better Bill would have expanded the application of wash sale rules and constructive sale rules to cryptocurrencies and other digital assets.

The Build Back Better Bill would also have expanded the wash sale rules to include transactions made by related parties.  The wash sale rules disallow a loss from a sale or disposition of stock or securities if the taxpayer acquires or enters into a contract to acquire substantially similar stock or securities thirty days before or after the sale giving rise to the claimed loss.  The basis of the acquired assets in the wash sale is increased to include the disallowed loss.  Under the Build Back Better Bill, a wash sale would also have occurred when a “related party” to the taxpayer (other than a spouse) acquires the substantial similar stock or securities within the thirty-day period.[6]  More significantly, the disallowed loss in a wash sale triggered by a related party (other than a spouse) would have been permanently disallowed under the Build Back Better Bill. If the Build Back Better Bill had passed, it would have been challenging for certain taxpayers to comply with the related party provisions—and very difficult for the IRS to enforce it.  Under the provision, if a parent were to sell stock at a loss and, within 30 days, her child were to purchase the same stock, the parent’s loss would have been denied, even if neither parent nor child knew about each other’s trades.

The Build Back Better Bill would have exempted from the wash sale rules foreign currency and commodity trades that were directly related to the taxpayer’s business needs (other than the business of trading currency or commodities).  This exception would not have applied to digital assets.

Finally, the Build Back Better Bill would have provided that an appreciated short sale, short swap, short forward, or futures contract is constructively sold under section 1259 when the taxpayer enters into a contract to acquire the reference property (and not when the taxpayer actually acquires the reference property, as current law provides).

The changes were the same as those proposed in the Prior House Bill.  The proposal would have applied after 2021.

SALT deductions

The Build Back Better Bill has a “placeholder for compromise on deduction for state and local taxes”.  This is a key departure from the House Bill, which included an increase to the current annual $10,000 cap on SALT deductions to $80,000 until 2030, at which time the $10,000 annual limitation would apply again.

Business Tax Changes

Corporate alternative minimum tax

The Build Back Better Bill would impose a 15% minimum tax on “book income” of corporations with a 3-year average book income in excess of $1 billion.  A corporation’s book income would have been calculated based on the corporation’s audited financial statement (or if publicly traded, the financial statement shown on SEC Form 10-K), but adjusted to take into account certain U.S. income tax principles.[7]  Because this is a minimum tax, a corporation would have paid any excess amount of this minimum tax over its regular tax for the applicable tax year.  This minimum tax would also have applied to a foreign-parented U.S. corporation if the U.S. corporation has an average annual book income of $100 million or above.

The Prior House Bill did not include this corporate minimum tax based on book income, but the Biden administration’s tax reform proposals included a similar corporate minimum tax for large corporations.  The Build Back Better Bill does not otherwise provide for an increase in corporate income tax rates.

The corporate minimum tax would have been effective for tax years beginning after December 31, 2022.   

Limitation on business interest expense deductions

The Build Back Better Bill would have introduced an additional interest deduction limitation for a U.S. corporate member of an international group that has disproportionate interest expense as compared to the other members of the group.  New section 163(n) would generally have limited the interest deduction of a U.S. corporation that is part of an “international financial reporting group” and has net interest expense that exceeds $12 million (over a three-year period) if the ratio of its net interest expense to its EBITDA (or if an election is made, the aggregated bases of its assets)[8] exceeds by 110% of the similar ratio for the group.

Proposed section 163(n) was similar to what was included in the Prior House Bill, as well as a proposal that was included in the Senate and House bill for TCJA that was ultimately dropped in the conference agreement between the Senate and the House.  This limitation appears to target base erosion interest payments that may not be captured under the BEAT regime (which is further discussed in detail below).

The Build Back Better Bill would also have revised section 163(j) to treat partnerships as aggregates for purposes of applying the business interest expense limitation.  As a result, the section 163(j) limitation would have been applied at the partner level.  Under current law, the limitation, which very generally limits business interest expense deduction to 30% of EBITDA, is applied at the partnership level.   The interest deductions limited under section 163(j) or (n) (whichever imposes a lower limitation) would have continued to be allowed to be carried forward indefinitely (as opposed to 5 years under the Prior House Bill).

The proposals would have been effective for tax years beginning after December 31, 2022.

Limitation on using controlled corporation’s debt in a spin-off transaction

The Build Back Better Bill would have limited the ability of a U.S. “distributing corporation” to effectively receive cash tax-free from a spun-off “controlled corporation” subsidiary.  Under current law, a controlled corporation can issue debt securities to its parent distributing corporation that the distributing corporation can then use to redeem its own outstanding debt on a tax-free basis in connection with the spin-off of the controlled corporation.  The Build Back Better Bill would have required the parent distributing corporation to recognize gain in this transaction to the extent that the amount of controlled corporation debt it transfers to its creditors exceeds (x) the aggregate basis of any assets it transfers to its controlled corporation in connection with the spin-off less (y) the total amount of liabilities the controlled corporation assumes from it and (z) any payments that the controlled corporation makes to it. This effectively would have treated the debt securities issued by a controlled corporation as same as any other property distributed by the controlled corporation (which is commonly called as “boot”).

The proposal would have applied to reorganizations occurring on or after the date of enactment.

Excise tax on corporate stock buybacks

The Build Back Better Bill would have imposed a nondeductible 1% excise tax on publicly traded U.S. corporations engaging in stock buybacks. The tax was to be imposed on the value of the stock “repurchased” by the corporation during the tax year, reduced by value of stock issued by the corporation during the tax year (including those issued to the employees).  The term “repurchase” is defined as a redemption within the meaning of section 317(b), which is a transaction in which a corporation acquires its stock from a shareholder in exchange for property.  Repurchases that are (i) dividends for U.S. federal income tax purposes, (ii) part of tax-free reorganizations, (iii) made to contribute stock to an employee pension plan or ESOP, (iv) made by a dealer in securities in the ordinary course of business, or (v) made by a RIC or a REIT are not subject to the excise tax.  Also, repurchases that are less than $1 million in a year are excluded.

It was unclear how the value of repurchased stock was to be determined in calculating the excise tax amount.  The types of transactions that would have been covered under the proposed rule is also unclear.  The term “repurchase” was very broad and it could have had applied to different types of transactions, such as redemption of redeemable preferred stocks or redemption of stock in a company’s acquisition transaction.  The rule would also have had significant impact on de-SPAC transactions, which involve redemption rights for shareholders of the SPAC.  The Treasury would also have been provided with a broad authority to issue regulations to cover economically similar transactions.

The proposal would have applied to repurchases of stock after December 31, 2021.

International Tax Changes

Portfolio interest exemption

Under current law, a foreign person that owns 10% or more of the total voting power of a corporate issuer of debt is not eligible for the “portfolio interest” exemption, which provides for exemption from withholding on interest paid on certain debt.  Current law does not prohibit “de-control structures” under which the sponsor of a fund will typically invest a small percentage of the capital of a U.S. blocker in exchange for large percentage of its voting stock, thereby ensuring that no foreign investor will own 10% of the voting power of the U.S. blocker and permitting those foreign investors who own more than 10% of the value of the U.S. blocker to take the position that they may avoid U.S. withholding tax on interest received from the U.S. blocker.  The Build Back Better Bill would have revised this exception so that any person who owns 10% or more of the total vote or value of the stock of a corporate issuer would have been ineligible for the portfolio interest exemption.  This change would have prevented the de-control structures.

This proposal, which was also included in the Prior House Bill, would have applied to obligations issued after the date of enactment (i.e., all existing obligations would have been grandfathered).  However, if a grandfathered obligation was “significantly modified” for U.S. federal income tax purposes, it might have lost its grandfathered status.  Also, any subsequent draws on existing facilities that are made after the date of enactment would not have been grandfathered.

GILTI

The “global intangible low-taxed income” (“GILTI”) regime generally imposes a 10.5% minimum tax on 10-percent U.S. corporate shareholders of “controlled foreign corporations” (“CFCs”) based on the CFC’s “active” income in excess of a threshold equal to 10% of the CFC’s tax basis in certain depreciable tangible property (such basis, “qualified business asset investment”, or “QBAI”).  GILTI is not determined on a country-by-country basis, and, therefore, under current law a U.S. multinational corporation may be able to avoid the GILTI tax with respect to its subsidiaries operating in low-tax rate countries by “blending” income earned in the low tax-rate countries with income from high-tax rate countries.  Taxpayers are allowed 80% of the deemed paid foreign tax credit with respect to GILTI.

The Build Back Better Bill would have imposed GILTI on a country-by-country basis to prevent blending of income from a low tax-rate country with income from a high-tax rate country. This general approach would have been largely consistent with the prior proposals made by the Biden administration and the Senate Finance Committee.[9]

The Build Back Better Bill would have determined net CFC tested income and losses and QBAI on a country-by-country basis.  The Build Back Better Bill would have achieved this by using a “CFC taxable unit” – net CFC tested income and loss would have been determined separately for each country in which CFC taxable unit is a tax resident.  The Build Back Better Bill would have allowed a taxpayer to carryover country-specific net CFC tested loss to succeeding tax year to offset net CFC tested income of the same country.  In addition, taxpayers would no longer have been able to offset net CFC tested income from one jurisdiction with net CFC tested losses from another jurisdiction.  These proposed changes on determining net CFC tested income on a country-by-country basis were consistent with the Prior House Bill’s proposals.

The Build Back Better Bill would also have (i) reduced the exclusion amount from 10% to 5% of QBAI, (ii) increased the effective tax rate on GILTI for corporate taxpayers from 10.5% to 15%,[10] and (iii) helpfully reduced the “haircut” for deemed paid foreign tax credit for GILTI from 20% to 5% (i.e., 95% of GILTI amount would have been creditable as deemed paid credit).

The GILTI proposals would generally have been effective for taxable years beginning after December 31, 2022.

FDII

The “foreign-derived intangible income” (“FDII”) regime encourages U.S. multinational groups to keep intellectual property in the U.S. by providing a lower 13.125% effective tax rate for certain foreign sales and provision of certain services provided to unrelated foreign parties in excess of 10% of the taxpayer’s QBAI.  The lower effective tax rate is achieved by 37.5% deduction allowed for FDII under section 250.

The Build Back Better Bill would have reduced the section 250 deduction for FDII from 37.5% to 24.8%, which would have had the effect of increasing the effective rate for FDII from 13.125% to 15.8%.[11]  The Build Back Better Bill further provided that if a section 250 deduction actually exceeded the taxable income of the taxpayer, the deduction would have increased the net operating loss amount for the taxable year and could be used in subsequent years to offset up to 80% of taxable income.

This proposal generally would have been effective for taxable years beginning after December 31, 2021.

BEAT/SHIELD

The “base erosion and anti-abuse tax” (“BEAT”) generally provides for an add-on minimum tax, currently at 10%, on certain deductible payments that are made by very large U.S. corporations (generally, with at least $500 mm of average annual gross receipts) whose “base erosion percentage” (generally, the ratio of deductions for certain payments made to related foreign parties overall allowable deductions) is 3% or higher (or 2% for groups that include banks and securities dealers).

The Build Back Better Bill would have expanded the BEAT regime.  The proposal would have increased the BEAT tax rate gradually from 10% up to 18% by the taxable year starting after December 31, 2024.  The proposal would also have substantially revised the formula for calculating “modified taxable income”, which generally appeared to have increased the income amount that would have been subject to the BEAT regime.  Finally, the Build Back Better Bill would have eliminated the 3%/2% de minimis exception.  These proposals were generally consistent with the BEAT proposals in the Prior House Bill, but with different tax rates.

The Build Back Better Bill did not include the Biden administration’s “Stopping Harmful Inversions and Ending Low-Tax Developments” (“SHIELD”), which had been proposed to replace the BEAT regime.

Changes to Subpart F regime

The Build Back Better Bill would have significantly changed the subpart F regime.  The Build Back Better Bill would have helpfully reinstated section 958(b)(4) retroactively.  Section 958(b)(4) had prevented “downward” attribution of ownership of foreign person to a related U.S. person for purposes of applying subpart F regime.  Section 958(b)(4) was repealed in the TCJA, which allowed stock owned by a foreign person to be attributed downward to a U.S. person for purposes of determining a foreign corporation’s CFC status.

To address the situation that had prompted the repeal of downward attribution, the Build Back Better Bill would have introduced a new section to apply the GILTI and subpart F regimes to a foreign corporation that would have been a CFC if the downward attribution rule had applied, but only if the U.S. shareholder held at least 50% of vote or value of the foreign corporation’s stock.  This regime would have been effective for taxable years beginning after the date of the enactment.

The Build Back Better Bill would also have allowed a U.S. shareholder of a foreign corporation to elect to treat the foreign corporation as a CFC, which may have permitted a taxpayer to exclude foreign-source dividends received from the foreign corporation under the Build Back Better Bill’s amended section 245A (which is discussed below).  The Build Back Better Bill also would have limited the scope of foreign base company sales and services income, which is includible as subpart F income, to sales and services provided to U.S. residents and pass-through entities and branches in the United States, which effectively would have subjected foreign base company sales and services income for non-U.S. sales and services to the GILTI regime.  The Build Back Better Bill also would have amended section 951(a) so that a United States shareholder that receives a dividend from a CFC would have been subject to tax on its pro-rata share of the CFC’s subpart F income (generally negating any deduction under section 245A with respect to the dividend), regardless of whether the shareholder held shares in the CFC on the last day of the taxable year.  Current law requires a United States shareholder to include Subpart F income only if it owned shares of the CFC on the last day of the taxable year.

Foreign tax credits

The Build Back Better Bill would have imposed the foreign tax credit limitation on a country-by-country basis.  Currently, foreign tax credits are calculated on an aggregate global basis and divided into baskets for active income, passive income, GILTI income, and foreign branch income.  The revised rules would have calculated foreign tax credit limitations based on a country-by-country “taxable unit”, which is consistent with the “CFC taxable unit” used under the Build Back Better Bill’s GILTI rules.  Together with the proposed amendments to the GILTI regime, this revision to the foreign tax credit limitation rules would have sought to prohibit taxpayers from using foreign tax credits from taxes paid in a high-tax jurisdiction against taxable income from a low-tax jurisdiction.

The Build Back Better Bill would have made a number of other changes to the foreign tax credit rules, including and repealing the carryback period (which, under current law, is 1 year, but retaining the current 10-year carryforward period for excess foreign tax credit limitation).

This proposal would have been generally effective for taxable years beginning after December 31, 2022.

Dividends from foreign corporations

The Build Back Better Bill would have amended section 245A so that the foreign portions of dividends received only from a CFC (rather than any specified 10-percent owned foreign corporation) would have qualified for the participation exemption (and not have been subject to U.S. federal income tax) under section 245A.[12]  Currently, section 245A allows foreign-source dividends from any specified 10-percent owned foreign corporation (a broader concept than CFC) to be exempt from U.S. tax under section 245A.  Although the provision appeared to narrow the scope of section 245A, as noted above, the Build Back Better Bill would have permitted a taxpayer and a foreign corporation to make an election to treat the foreign corporation as a CFC, in which case the benefits of section 245A would have been available to all dividends paid by the electing foreign corporation (even if U.S. shareholders own less than 10%).  This provision was consistent with the proposal in the Prior House Bill and would have been effective for distributions made after the date of the enactment.

Anti-inversion rules

The Senate Finance Committee’s Build Back Better Bill would have significantly expanded the anti-inversion rules.  Generally, under current law, a foreign acquirer of an inverted U.S. corporation – typically, an existing U.S. corporation that is acquired by a foreign acquirer and whose shareholders continue own the U.S. corporation indirectly through their ownership in the foreign acquirer – is treated as a U.S. corporation for U.S. federal income tax purposes, if the continuing ownership stake of the shareholders of the inverted U.S. corporation is 80% or more.   If the continuing ownership stake of the shareholders of the inverted U.S. corporation is between 60% and 80%, certain rules designed to prevent “earnings stripping” – or deductible payments by the U.S. corporation to its foreign parent – apply.

The Build Back Better Bill would have lowered the 80% threshold in treating a foreign acquirer of an inverted U.S. corporation as a U.S. corporation for U.S. federal income tax purposes to 65%.  The Build Back Better Bill would also have lowered the 60% threshold in applying the earnings stripping rules to 50%.  Finally, the Build Back Better Bill would have expanded the scope of the anti-inversion rules to cover acquisitions of substantially all of the assets constituting (i) a trade or business of a U.S. corporation or partnership, or (ii) a U.S. trade or business of a non-U.S. partnership.

This provision was not included in the House Bill, but it did reflect some elements of an anti-inversion rule proposal by the Biden administration, such as the lowering of the 80% threshold to treat a foreign acquirer as a U.S. corporation for U.S. federal income tax purposes and the expansion of the scope of the rules to cover certain asset acquisitions.  This proposal would have applied for taxable years ending after December 31, 2021.

FOOTNOTES

[1] Unless otherwise noted, all section references are to the Internal Revenue Code of 1986, as amended.

[2] The House Bill contained a provision that would raise the $10,000 cap to $80,000 for 2021 through 2030.

[3] The amount of gain eligible to be taken into account for these purposes by any taxpayer and any corporation is subject to a cap generally equal to the greater of (i) $10 million cumulative exclusions of gain with respect to that corporation and (ii) 10 times the taxpayer’s aggregate adjusted tax bases of QSBS of the corporation disposed of in that year.

[4] Generally, corporations connected through stock ownership of more than 50%.  Section 267(f).

[5] In a Granite Trust transaction, a corporate parent that owns a depreciated subsidiary reduces its ownership in the subsidiary to below 80% before liquidating the subsidiary so that the liquidation is taxable and any built-in loss of the parent in the subsidiary’s stock would have been recognized.

[6] A related party for this purpose includes (i) the taxpayer’s spouse, dependent, (ii) any corporation, partnership, trust or estate that is controlled by the taxpayer, and (iii) the taxpayer’s retirement account and certain other tax-advantaged investment accounts for which the taxpayer is the beneficiary or the fiduciary.

[7] For example, if a corporation owned foreign corporations that are “controlled foreign corporations” for U.S. federal income tax purposes, the corporation would have had to take into account its pro-rata share of such foreign corporation’s book income.  Also, prior year’s net operating losses (calculated for book purposes) could have been used to reduce the book income, but could have only offset 80% of the book income for the subsequent year.

[8] The election to use the aggregated bases of assets in lieu of EBITDA was added in the Senate Finance draft of the Bill.

[9] The Senate Finance Committee’s prior proposal (which included a draft legislation and a section-by-section explanation) provided for mandatory exclusion of high-taxed income.  This approach was different than the Build Back Better Bill, but the general approach of disallowing “blending” of income between high-tax jurisdiction and low-tax jurisdiction was the same.

[10] This would have been achieved by reducing the deduction provided to corporate taxpayers under section 250 from the current 50% level to 28.5%.  The Build Back Better Bill would have not changed the tax rate to be applied to a non-corporate taxpayer’s GILTI amount.  This was a lower rate than what was proposed in the Prior House Bill (37.5%), but the effective tax rate under the Prior House Bill was higher due to the increased income tax rates.

[11] The FDII deduction was higher under the Prior House Bill (at 21.875%), with an effective tax rate of 20.7% (taking into account the increased corporate rate).  The Senate Finance Committee’s prior proposal also stated that the FDII deduction would have been reduced, but did not commit to a specific percentage.

[12] The Build Back Better Bill would have also amended section 1059 so that if a corporation received a dividend from a CFC that was attributable to earnings and profits of the foreign corporation before it was a CFC or before it was owned by the corporation, the non-taxed portion of that dividend would have reduced the basis of the CFC’s stock, regardless of whether the corporation had held the CFC’s stock for 2 years or less.  Therefore, CFC’s dividends that are exempt from tax under section 245A could have been subject to the proposed expanded section 1059.

Article By David S Miller, Muhyung (Aaron) Lee, Amanda H Nussbaum, Arnold P May, and Daniel J. Paulos of Proskauer Rose LLP

For more legislative legal news, click here to visit the National Law Review.

© 2021 Proskauer Rose LLP.

U.S. House and Senate Reach Agreement on Uyghur Forced Labor Prevention Act

On December 14, 2021, lawmakers in the House and Senate announced that they had reached an agreement on compromise language for a bill known as the Uyghur Forced Labor Prevention Act or “UFLPA.”  Different versions of this measure passed the House and the Senate earlier this year, but lawmakers and Congressional staff have been working to reconcile the parallel proposals. The compromise language paves the way for Congress to pass the bill and send it to President Biden’s desk as soon as this week.

The bill would establish a rebuttable presumption that all goods originating from China’s Xinjiang region violate existing US law prohibiting the importation of goods made with forced labor. The rebuttable presumption would go into effect 180 days after enactment.  The compromise bill would also require federal officials to solicit public comments and hold a public hearing to aid in developing a strategy for the enforcement of the import ban vis-à-vis goods alleged to have been made through forced labor in China.

This rebuttable presumption will present significant challenges to businesses with supply chains that might touch the Xinjiang region.  Many businesses do not have full visibility into their supply chains and will need to act quickly to map their suppliers and respond to identified risks.  Importers must present detailed documentaton in order to release any shipments that they think were improperly detained, a costly and time-consuming endeavor.  Notably, the public comment and hearing processes will guide the government’s enforcement strategy, providing business stakeholders an opportunity to contribute to an enforcement process that could have implications for implementation of the import ban more broadly.

China’s Xinjiang region is a part of several critical supply chains, lead among them global cotton and apparel trade, as well as solar module production.  According to the Peterson Institute:

Xinjiang accounts for nearly 20 percent of global cotton production, with annual production greater than that of the entire United States. Its position in refined polysilicon—the material from which solar panels are built—is even more dominant, accounting for nearly half of global production. Virtually all silicon-based solar panels are likely to contain some Xinjiang-sourced silicon, according to Jenny Chase, head of solar analysis at Bloomberg New Energy Finance. If signed into law, the bill will send apparel producers and the US solar industry scrambling to find alternative sources of supply and prices are bound to increase.

Article By Ludmilla L. Kasulke and Rory Murphy of Squire Patton Boggs (US) LLP

For more legal news and legislation updates, click here to visit the National Law Review.

© Copyright 2021 Squire Patton Boggs (US) LLP

Tribal Cannabis Tourism and Current Status of Federal Legislation Impacting the Cannabis Industry

As Tribes expand their economic endeavors into the cannabis industry, the growth of cannabis tourism is a natural development. Below, we offer details on how cannabis tourism could support Tribal governments’ economic development efforts. We also provide an update on the status of pending federal legislation that could bring positive impacts to the cannabis industry.

Cannabis Tourism

With the pandemic continuing to take a toll on the tourism industry, many U.S. states and territories are exploring ways to help that industry recover. One potential savior for tourism is cannabis. As states went into varying levels of lockdown in early 2020, businesses deemed “nonessential,” including recreational facilities, gyms, bars, restaurants, etc. were forced to shut down. However, early into lockdown, cannabis was deemed “essential” in California, a designation other states with functional cannabis markets quickly adopted. In total, nearly 30 states, along with the District of Columbia and Puerto Rico, deemed cannabis businesses essential. This triggered some major changes in the industry, including:

With all of these changes, cannabis tourism has developed into a potentially rewarding industry that Tribal governments might be able to cultivate as part of efforts to recover economic losses suffered by their tourism and other businesses

What is Cannabis Tourism?

Cannabis tourism is most generally characterized as a destination-based industry that attracts tourists because cannabis is legal in that location. But the industry can take many forms. For example, tourists might visit a dispensary to learn more about the development of cannabis crops, stay at a “bud and breakfast,” tour a cannabis farm or growing facility, or dine at a restaurant with cannabis-infused dishes. Cannabis tourism can also have a positive knock-on effect for many other Tribal businesses.

How can Tribes Participate?

Interested Tribes can create specific cannabis-centered tourist destinations. One example is opening a farm or growing facility that is similar to a wine vineyard, where consumers can tour the facility and sample the products. This concept would serve multiple functions in that the farm would supply dispensaries while providing a tourism destination that would benefit hotels, restaurants, and the local economy.

Another route is to add cannabis tourism into existing tourism infrastructure. Tribes can take advantage of their land base and natural resources by offering cannabis hikes or camping expeditions, where participants are able to experience nature while partaking. Tribes with resort properties can offer CBD-infused massages at their spa, include CBD and hemp products at their gift shops, or offer travel packages designed for cannabis tourists. The idea behind this approach is to utilize the Tribe’s existing tourism infrastructure to provide new cannabis tourism options.

Federal Cannabis Legislation Update

The following is an update on pending federal legislation that would impact the cannabis industry. Summaries of previous cannabis legislative developments are provided in past articles..

The Democrats control both the House and the Senate (with Vice President Harris acting as the tie-breaking vote in the 50-50 Senate) but passing any cannabis legislation in the current Congress might prove difficult. The filibuster rules require 60 votes for a bill to pass the Senate, so any cannabis legislation would need relatively strong bipartisan support.

The future of federal cannabis law remains unclear, but Tribes interested in the cannabis industry can start taking steps now to establish the necessary framework to support this new area of Tribal economic enterprise.

Article By Robert A. Conrad and Laura E. Jones of Van Ness Feldman LLP

For more biotech, food, and drug legal news, click here to visit the National Law Review.

© 2021 Van Ness Feldman LLP

Don’t Use “Build Back Better” to Sabotage the False Claims Act

Congress is on the verge of setting a dangerous precedent.  As part of the Build Back Better Act, it has added two provisions equivalent to a “get out of jail free card” for Big Banks that violate federal law when they hand out billions in federal mortgage-related benefits.   The two provisions create exemptions to False Claims Act liability by creating blanket immunity from liability when banks fail to exercise due diligence, violate FHA housing regulations, or even directly violate federal laws such as the Truth in Lending Act.

It is obvious why banks want to have their federally sponsored mortgage practices immunized from exposure to the False Claims Act (“FCA”).  The FCA works remarkably well and is widely recognized as “the most powerful tool the American people have to protect the government from fraud.”   The law has directly recovered over $64.450 billion in sanctions from fraudsters since Congress modernized it in 1986.  During the debates on the massive trillion-dollar infrastructure laws enacted or debated this year, corporate lobbyists have been extremely active in successfully preventing Congress from adding any new anti-fraud measures to protect taxpayers from fraud.  As part of these efforts, they targeted the False Claims Act as enemy #1 and already have blocked one key amendment needed to close some weaknesses in that law.

With the Build Back Better Act, these corporate lobbyists have taken their opposition to effective anti-fraud laws to a higher level.  Instead of trying to repeal the FCA, they are simply exempting Big Banks from liability under that law in two new programs.  It is obvious why the Big Banks want the exemption from FCA liability.  As a result of illegal or irresponsible lending and foreclosure practices, such as those that fueled the 2008 financial collapse, banks have had to pay billions in sanctions to the United States.

Two words explain why the FCA is “the most powerful tool” protecting taxpayers from fraud:  Whistleblowers and sanctions.  If you accept federal taxpayer monies, you are required to spend that money according to your contractual agreement or the law.  The FCA’s first secret weapon is whistleblowers.  The law encourages whistleblowers, known as qui tam “relators,” to report violations of the FCA.  Whistleblowers disclosures trigger the overwhelming majority of FCA cases, and the law incentivizes employees to risk their careers to serve the public interest. The second secret weapon is how you prove liability.  Second, when an institution accepts federal monies (such as banks that operate various federally sponsored loan programs), liability can attach if the institution acts in “deliberate ignorance of the truth” when spending federal dollars.  Similarly, if payments are made with “reckless disregard of the truth,” liability can attach.  In other words, corporations (including banks) that accept federal money must ensure that these monies are spent as required by law, regulation, or contract.  Safeguards must be in place to prevent fraud.  If a bank does not have adequate compliance programs to protect against fraud, it cannot plead ignorance when the law is broken and taxpayers are ripped off.

These two key elements of the False Claims Act are precisely what the banking lobby is attempting to undermine through the Build Back Better Act.  The tactics employed by the Big Banks are somewhat devious.  They are doing an end-run around the False Claims Act by exempting themselves from having to engage in any due diligence when spending billions in federal dollars.  The banks are seeking to add language to the Build Back Better Act that will immunize themselves from liability under the False Claims Act when they make payments in “reckless disregard” to the legality of those payments.  The immunities they are seeking legalize “deliberate ignorance” in the use of taxpayer money, in complete defiance of the False Claims Act. Thus, whistleblowers who report these frauds will be stripped of protections they have under the False Claims Act, and the federal government will have no effective way to recover damages from these frauds.

What language in the Build Back Better Act creates an exemption to False Claims Act liability?

Two highly technical provisions are deeply buried within the 2135 pages of the Build Back Better Act’s legislative text. The provisions are sections 40201 and 40202 of the Build Back Better Act.  These two sections establish helpful programs that will provide needed financial support to first-generation homebuyers.  Section 40201(d)(5) would provide $10 billion in down payment assistance. Section 40202(f) would give an interest rate reduction on new FHA 20-year mortgage products to first-time homeowners with a potential value of $60 billion.  But the banking lobby has corrupted these otherwise well-meaning programs. The exemptions obtained by the banks are incubators for massive fraud.  It permits the Big Banks to escape any liability when they abuse the generosity of taxpayers and dole out billions to unqualified individuals.

How do the exemptions work?  To qualify for these taxpayer-financed benefits, an applicant simply has to “attest” that they are first-time/first-generation homebuyers.  That would be the end of the inquiry a bank would need to approve making a payment from the billions allocated in these two programs. Anyone could simply stroll into a bank and “attest” to being such a first-time homebuyer and would thereafter qualify for the federal benefits.  The banks would not be required to do any diligence of their own to confirm the borrower’s eligibility.  Willful ignorance would be legalized.  Reckless disregard in the handling of taxpayer monies would be permitted under this law.  Safeguards, such as requiring banks to adhere to the Truth in Lending Act, which requires verification of a borrower’s statements, would not apply.

Under Sections 40201(d)(5) and 40202(f), banks will not be held liable once they are lied to, even if the bank has reason to know that the borrower is not eligible for the federal payout.  Banks can spend taxpayer money even if the information on an applicant’s loan application directly contradicts the borrower’s attestation that they are a first-time homeowner.  Given the lack of any compliance standards, the temptation to engage in fraud in these programs will be overwhelming.

Permitting banks to escape liability under the False Claims Act opens the door to paying billions of dollars in benefits to unqualified persons.  Such payments rip off the taxpayers and severely hurt all honest first-generation homebuyers denied benefits.  For every fraudster who benefits from this program, an honest homebuyer will be left in the cold due to the reckless disregard of the banks.

Congress should never use a back-door procedure to undermine the False Claim Act, as it sets a dangerous precedent.  It is a devious way to undermine America’s “most effective” anti-fraud law.  Instead of undermining the False Claims Act by granting immunities to Big Banks, Congress should be strengthening anti-fraud laws to protect the taxpayers and ensure that the trillions of dollars spent on COVID-19 relief programs and infrastructure improvement are lawfully spent in the public interest.

Copyright Kohn, Kohn & Colapinto, LLP 2021. All Rights Reserved.
For more articles about banking and finance, visit the NLR Financial, Securities & Banking section.

H.R. 3684: Infrastructure Investment and Jobs Act

On November 5, the U.S. House of Representatives approved a $1.2 trillion infrastructure spending bill that will make historic investments in core infrastructure priorities including roads and bridges, rail, transit, ports, airports, the electric grid, and broadband.

The legislation, titled the Infrastructure Investment and Jobs Act (“IIJA”), will have major implications for states and municipalities of all sizes, as well as the entities involved in responding to governments’ needs for hard and cyber infrastructure.

Improvements to roadways, ports and mass transit are the focus of the legislation and the majority of the funding is targeted at these traditional hard infrastructure projects. U.S. Senator Rob Portman (R-OH) has championed the massive infrastructure bill and pushed for its passage.

This weekend, Senator Portman noted the massive impact the IIJA will have on Ohio, highlighting the bill’s bridge investment program which will award competitive grants to certain governmental entities to improve the condition of bridges. “This additional federal funding means we are one step closer to a solution for the Brent Spence Bridge,” Portman said.

The Brent Spence Bridge, which connects Cincinnati, Ohio with Covington, Kentucky has one of the busiest trucking routes in the nation. Questions about its safety and long shutdowns for repair have long concerned area residents as well as the business owners responsible for the more than $400 billion of freight which passes over the bridge every year.

While hard infrastructure priorities like bridge maintenance, port modernization, freight rail, and highway improvements account for a majority of the new spending appropriated by the bill (which totals $550 billion over five years), a sizable portion is dedicated to the expansion of broadband networks and the improvement of cybersecurity.

The new cybersecurity grant program and record-setting investments in broadband development could be game changing for state and local leaders wishing to modernize and protect their communities in these ways.

The U.S. Senate approved the IIJA in August 2020. Friday’s vote means the infrastructure bill will now move to the desk of President Joe Biden, who has indicated a bill signing ceremony will happen soon. Answers to questions about the billions of dollars in new infrastructure grants and programming are below.

Question: How will the money be distributed? 

Answer: The IIJA contains formulaic allocations of funds as well as earmarks and competitive grants. Some categories and sub-categories contain both non-competitive and competitive grants.

  • NON-COMPETITIVE FUNDING ALLOCATION PROCESSES
    • Formulas dictated by the bill are based on criteria like state population, or, potentially for specific items, users (ex: transit funds potentially determined by ridership)
    • Once the money is directed to the states, the local bureaucrats are able to make the important decisions about which projects deserve the funding.
    • States can also decide to allocate some of the funding to the county or city governments within their state
  • EARMARKS AND COMPETITIVE GRANT PROCESSES
    • Earmarks override state plans for how infrastructure funds should be spent. “Earmarks come out of the money that the state was going to get anyway.”
    • Localities must compete for Competitive Grants via an application process. The U.S. Department of Transportation’s Discretionary Grant Process is officially outlined on their website.
    • Generally, the award of competitive grants can be influenced by advocates who confer with decisionmakers in the Executive Branch about the merits of certain proposals.

Question: Which projects will qualify for funding?

Answer: The bill details specific funding streams for the specific projects included in its provisions. Categories of projects included in the $550 billion in new spending are below.

  • Roads, Bridges, & Major Projects: $110B — Funds new, dedicated grant program to replace and repair bridges and increases funding for the major project competitive grant programs. Preserves the 90/10 split of federal highway aid to states.
  • Passenger and Freight Rail: $66B — Provides targeted funding for the Amtrak National Network for new service and dedicated funding to address repair backlogs. Increases funding for freight rail and safety.
  • Safety and Research: $11B — Addresses highway, pedestrian, pipeline, and other safety areas (highway safety accounts for the bulk of this funding).
  • Public Transit: $39.2B — Funds nation’s transit system repair backlog, which includes buses, rail cars, transit stations, track, signals, and power systems. This allocation also includes money to create new bus routes and increase accessibility to public transit for those with physical mobility challenges.
  • Broadband: $65B — Funds grants to states for broadband deployment and other efforts to address access issues in rural areas and low-income communities. Expands eligible private activity bond projects to include broadband infrastructure.
  • Airports: $25B — Increases Airport Improvement grant amounts for runways, gates, & taxiways and authorizes a new Airport Terminal Improvement program.
  • Ports and Waterways: $17.4B — Provides funding for waterway and coastal infrastructure, inland waterway improvements, port infrastructure, and land ports of entry through the Army Corps, DOT, Coast Guard, the GSA, and DHS.
  • Water Infrastructure: $54B — Provides a $15 billion for lead service line replacement and $10 billion to address PFAS in water, in addition to other items.
  • Power and Grid: $65B — Funds grid reliability and resiliency projects and support for a Grid Development Authority; critical minerals and supply chains for clean energy technology; key technologies like carbon capture, hydrogen, direct air capture, and energy efficiency; and energy demonstration projects from the bipartisan Energy Act of 2020.
  • Resiliency: $46B — Funds cybersecurity projects to address critical infrastructure needs, flood mitigation, wildfire, drought, coastal resiliency, waste management, ecosystem restoration, and weatherization.
  • Low-Carbon and Zero-Emission School Buses & Ferries: $7.5B — Funds and authorizes the adoption of low-carbon and zero-emission school buses, including through hydrogen, propane, LNG, compressed natural gas, biofuel, and electric technologies. Provides support for a pilot program for low emission ferries and rural ferry systems.
  • Electric Vehicle Charging: $7.5B — Funds alternative fuel corridors and a national build out of electric vehicle charging infrastructure. The federal funding will have a particular focus on rural and/or disadvantaged communities.
  • Reconnecting Communities: $1B — Provides dedicated funding for planning, design, demolition, and reconstruction of street grids, parks, or other infrastructure (funding is especially targeted at infrastructure which is deteriorating due to age).
  • Addressing Legacy Pollution: $21B — Funds to clean up brownfield and superfund sites, reclaim abandoned mine lands, and plug orphan oil and gas wells, improving public health and creating good-paying jobs.

Article By Katherine M. Caprez of Roetzel & Andress LPA

For more legislative and legal news, read more from the National Law Review.

©2021 Roetzel & Andress

Is a Moratorium on Mergers During the Pandemic a Bridge Too Far?

In an interview with Politico’s Leah Nylen and Betsy Woodruff Swan, Rep. David Cicilline (D-R.I.) explained that he wants the next coronavirus relief package to include a moratorium on mergers while the U.S. economy struggles to face the pandemic. According to the report, the Rhode Island Congressman’s proposal would allow deals “only if a company is already in a bankruptcy or is otherwise about to fail.” Any other deals would be on hold at least until the national pandemic declaration is lifted.

In prepared remarks, Rep. Cicilline’s stated: “As millions of businesses struggle to stay afloat, private equity firms and dominant corporations are positioned to swoop in for a buying spree.” The remarks continued: “This is not complicated. Our country can leave room for merger activity that is necessary to ensuring that distressed firms have a fresh start through the bankruptcy process or through necessary divestitures while also ensuring that we do not undergo another period of rampant consolidation.”

These comments were part of the Congressman’s presentation for an event run by the Open Markets Institute (OMI), which recently said that it favors “an immediate ban on all mergers and acquisitions by any corporation with more than $100 million in annual revenue, and by any financial institution or equity fund with more than $100 million in capitalization.” The OMI claims the ban should remain in place during the current economic and health crisis.

According to the OMI, the ban is necessary because enforcement agencies are partially shut down and unable to effectively evaluate mergers. The OMI believes the ban will help “prevent a wholesale concentration of additional power by corporations that already dominate or largely dominate their industries, especially in ways that may significantly worsen the crisis that now threatens America’s health, social, and economic systems. The history of the Panic of 2008 and the subsequent Great Recession instructs us that such a massive, uncontrolled consolidation will result in the unnecessary firing of millions of employees, the unnecessary bankrupting of innumerable independent businesses, a dramatic slowing of innovation in vital industries such as pharmaceuticals, and a further concentration of power and control dangerous both to our democracy and our open commercial systems.”

Piles of Cash

The organization says that private equity firms and corporations “sit today atop vast piles of cash” and can readily swallow up distressed companies.

Rep. Cicilline and the OMI are rightfully concerned about an uptick in unlawful mergers stemming from the pandemic and should be commended for proactively raising the issue. History has demonstrated that well-capitalized firms will use economic downturns and the consequent drop in company valuations to acquire struggling rivals. And antitrust enforcers are certainly not operating at full capacity given current health and safety guidelines.

Even so, a moratorium on mergers seems like an overcorrection. Most mergers are lawful. While we can debate their overall effectiveness, since 2015, federal antitrust authorities have made second requests in less than 3% of qualifying transactions. And lawful mergers can lead to lower prices, higher quality, and increased innovation, as well as providing liquidity events.

Given these realities, lawmakers should craft legislation that aims to preserve the integrity of the pre-pandemic oversight process. This presumably can be achieved by giving regulators the power to slow down the merger review process when necessary. A resolution along these lines would seem to strike a better balance between protecting against rampant, unlawful consolidation and permitting lawful mergers to proceed.

© MoginRubin LLP

ARTICLE BY Timothy Z. LaComb of MoginRubin.
For more on COVID-19 related legislation, see the National Law Review Coronavirus News section.

Sticks and Stones May Break Bones, But Words May Constitute Unlawful Discrimination

In recent months, there have been several news stories about the legal implications of inappropriate and/or offensive language in our society, generating discussion about whether such language is, or should be, unlawful in certain circumstances.  This past fall, the Massachusetts Legislature held a committee hearing on a widely-publicized bill which sought to penalize the use of “bitch,” by imposing a fine of up to $200 for any person who “uses the word ‘bitch’ directed at another person to accost, annoy, degrade or demean” another person.

While this proposed legislation, fraught with Constitutional issues involving the exercise of free speech, was largely decried and gained no traction, it does highlight an important question: In what circumstances may offensive and demeaning comments constitute unlawful discrimination?  In fact, in January, Chief Justice John Roberts, during oral arguments in Babbe v. Wilkie, asked the hypothetical question whether the phrase “OK Boomer” would qualify as age discrimination.

The answer to Chief Justice Robert’s question is not a bright-line “yes” or “no.” Context matters. For example, in connection with a hostile work environment claim, one of the central legal issues is whether the conduct in question was severe or pervasive. As a general rule, a single, isolated comment will not be actionable as creating a hostile work environment, but in some instances, it may. See Augis Corp. v. Massachusetts Comm’n Against Discrimination, 75 Mass. App. Ct. 398, 408-409 (2009) (noting that a supervisor who calls a black subordinate a f***ing n***** “has engaged in conduct so powerfully offensive that the MCAD can properly base liability on a single instance”).

Courts do not impose a numerosity test. Rather, the legal analysis is focused on whether the discriminatory comments “intimidated, humiliated, and stigmatized” the employee in such a way as to pose a “formidable barrier to the full participation of an individual in the workplace.” See Thomas O’Connor Constructors, Inc. v. Massachusetts Comm’n Against Discrimination, 72 Mass. App. Ct. 549, 560–61(2008); Chery v. Sears, Roebuck & Co., 98 F. Supp. 3d 179, 193 (D. Mass. 2015) (noting that, in the context of a hostile work environment based upon race, “[i]t is beyond question that the use of the [“N” word] is highly offensive and demeaning, evoking a history of racial violence, brutality, and subordination”).

Similarly, in the context of a disparate treatment claim (e.g., allegations that employee was terminated based on unlawful age bias), evidence that the decision-maker referred to the employee as a “Boomer” should not be evaluated in a legal vacuum. Rather, this evidence may be presented to the jury as just one piece of a “convincing mosaic of circumstantial evidence” from which a fact-finder could properly determine that the termination decision was driven by discriminatory animus based upon age. See Burns v. Johnson, 829 F.3d 1, 16 (1st Cir. 2016).

So, while sticks and stones may break bones, words also do harm and depending upon the circumstances, may result in legal claims and liability.

© 2020 SHERIN AND LODGEN LLP

For more on Free Speech, see the National Law Review Constitutional Law section.

Growing Number of States Enact Drug Pricing Transparency Laws

Drug prices continue to be a hot button issue in American politics.  While many of the Trump Administration’s efforts to curb increasing drug prices stalled in 2019, a number of state legislatures have adopted drug price transparency laws in recent years.  Since 2015, Vermont, Nevada, California, Maryland, Louisiana, New York, Oregon, Colorado, Connecticut, Maine, Texas, and Washington have all adopted drug pricing transparency laws.  These laws are designed to incentivize manufactures to lower drug prices by requiring them to report information about drug price increases and their justification for how drug prices are set.  We have been tracking and summarizing these laws, and you can find our summary here.

Below is a brief overview of the trends that we’re seeing in state drug price transparency laws.

  • State Laws Requiring Manufacturer Reporting on Drug Price Increases.  The most prevalent type of drug price transparency laws requires manufacturers to report an extensive amount of information about drug price increases.  Generally, states require manufacturers to report the information to a state government agency (e.g., Oregon), but other states (e.g., California) require manufacturers to provide advance notice of drug price increases to purchasers.  Generally, reporting requirements are triggered when the wholesale acquisition cost (WAC) increases over a certain dollar threshold or when the net increase of the WAC increases a certain percentage over the course of a year.
  • State Laws Requiring Manufacturer Reporting for Specific Drugs Identified by the State or Certain Types of Drugs. Several states (e.g., Connecticut and Vermont) authorize an independent board to compile a list of drugs on which the state spends significant dollars and/or for which the WAC has increased significantly over the past year or past five years.  Manufacturers of the drugs identified by the board are required to report certain information about the drugs’ costs and pricing.  The reporting requirements in other state laws are specific to certain types of drugs.  For example, Nevada’s drug price transparency law initially applied only to forms of insulin and biguanides, which are essential for diabetes treatment.  In 2019, Nevada expanded the law to apply to prescription drugs essential for asthma treatment as well.
  • State Laws Requiring Pharmacy Benefit Managers (PBMs) to Disclose Manufacturer Rebates.  These laws place accountability for drug price increases on PBMs by requiring them to disclose the amount of rebates they negotiate and retain from manufacturers.

©1994-2020 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

ARTICLE BY Rachel E. Yount of Mintz.
For more drug pricing transparency developments see the National Law Review Biotech, Food & Drug law page.

Proposed Washington State Law Would Create 32-Hour Workweek

New legislation recently introduced in the Washington State Legislature seeks to implement a 32-hour workweek for nonexempt Washington-based workers. If the proposal were to become law, employers would be required to pay overtime compensation to nonexempt employees whose workweeks exceed 32 hours.

Senate Bill (SB) 6516 proposes to amend RCW 49.46.130, the Washington law that establishes a 40-hour workweek in the state. Because the proposal would amend but not replace the existing law, the current exemptions would remain applicable—and none have been amended by the proposed bill. Instead, the bill’s proposed changes merely—but monumentally—revise the references in RCW 49.46.130 from a 40-hour workweek to a 32-hour workweek.

The lead cosponsor of SB 6516 is Washington State Senator Joe Nguyen. In several interviews, Senator Nguyen seems to view the proposal as a “conversation” starter and a “concept” to begin discussing. Because it appears to be a preliminary measure, we do not expect the proposal to pass, but, we will continue to follow SB 6516 closely and provide legislative updates as necessary.

© 2020, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.

For more on workweek hour legislation, see the National Law Review Labor & Employment law page.

House Committee Releases Framework for Comprehensive Climate Legislation

In early 2019, House of Representatives leadership directed each House committee to examine policies within its legislative jurisdiction to address the complex challenges of global climate change. In addition, House leadership created a Select Committee on the Climate Crisis, which would work with standing committees who have jurisdiction, such as the Energy and Commerce Committee, to deliver climate policy recommendations. Standing committees with jurisdiction, as well as the Select Committee, have been holding hearings, moving legislation, and asking the public for ideas and input since the 116th Congress convened in January of 2019.

As a result of these efforts, last week Democratic leadership of the House Energy & Commerce Committee announced their intention to release comprehensive climate change legislation—the Climate Leadership and Environmental Action for our Nation’s (CLEAN) Future Act. The Committee Democrats released a 15-page memorandum outlining the parameters, goals, and timeline for the Committee’s work on the forthcoming bill (the “Legislative Framework”). Comprehensive draft legislative text is expected to be released by the end of January. The Committee also announced its intentions to proceed with legislative action on some bills already introduced. The Committee’s Energy Subcommittee marked up nine such bills on January 9 and reported them for consideration by the full Committee.

Committee Democrats intend the forthcoming bill to create a process to vet and deliberate policies that would address the climate challenge.  It will provide an opportunity to analyze, debate, and refine policies proposed in the Legislative Framework.  At the press announcement, Committee Chair Frank Pallone (D-NJ) stated he intends to engage in the process on a bipartisan basis and hopes that Republicans will participate in the Committee’s forthcoming legislative efforts.

This alert examines the potential implications of the proposed legislation and provides a comprehensive breakdown by industry sector of the first major set of climate-related policy recommendations from the House Energy & Commerce Committee that could result in formal legislative action in over a decade.

Policy Recommendations

According to the Legislative Framework, the CLEAN Future Act would establish programs and policies aimed at achieving net-zero, economy-wide greenhouse gas (GHG) emissions by 2050. The legislation will be the product of a months-long fact-finding effort by the Committee, which has held fifteen climate-related hearings since the beginning of the 116th Congress and has solicited stakeholder input from the environmental community, environmental justice advocates, labor advocates, industry representatives, and the public. In addition, the legislation will incorporate numerous bills previously introduced by Democrats during this Congress.

The CLEAN Future Act is also notable for what it is not expected to include – a carbon tax or a cap-and-trade program. Committee Chairman Frank Pallone has stated that the CLEAN Future Act can achieve its goals without a carbon tax and that such a policy is outside the Committee’s jurisdiction in any event (the House Ways and Means Committee maintains jurisdiction over all tax-related matters). Jurisdictional boundaries also mean that the CLEAN Future Act does not include some additional provisions under the jurisdiction of other committees, such as energy technology research and development, agriculture, or potential tax-related policies.

Finally, the CLEAN Future Act would not remove any of the Environmental Protection Agency’s (EPA) existing authorities under the Clean Air Act to regulate GHG emissions, but rather would augment those authorities as discussed in the summary of the Legislative Framework, below.

Next Steps

The House Energy & Commerce Committee Leadership said they expect to release draft legislative text for the CLEAN Future Act by the end of January. In the interim, the Committee will continue to hold hearings and markups on smaller, sector-specific legislation that may be included in the broader CLEAN Future Act.

Other House committees are also working on climate policy. The House Select Committee on the Climate Crisis is set to release a suite of legislative recommendations in March to inform the development of climate change legislation considered by other Committees that have authority to legislate as well as conduct oversight. Last year, the House Science, Space, and Technology Committee, which has jurisdiction over the Department of Energy (DOE) research programs, approved a series of bills aimed at increasing and improving energy technology innovation. The House Natural Resources Committee introduced legislation in December 2019 that aims to achieve net-zero GHG emissions from public lands and waters by 2040. In addition, the House Ways and Means Committee released a discussion draft in November 2019 for the Growing Renewable Energy and Efficiency Now (GREEN) Act. The GREEN Act would extend and expand existing tax incentives that promote renewable energy and increase energy efficiency. If a carbon tax proposal emerges for Congressional consideration, it would come from that Committee as well.

Congressional Republicans and the White House have thus far opposed the kind of legislative and regulatory mandates contemplated for the CLEAN Future Act, instead offering support for policies that promote energy innovation through funding of research and development programs at DOE. In the Senate, the Energy and Natural Resources Committee, led by Chairman Lisa Murkowski (R-AK), is currently developing a comprehensive legislative package focused on energy innovation that could be voted on and readied for full Senate consideration in the first half of 2020.

It is possible that a set of climate-related bills that have been approved by other Committees could receive a House vote as a smaller legislative package this year, particularly as Speaker of the House Nancy Pelosi (D-CA) has committed to bringing climate change legislation for a vote on the House floor in 2020. Some candidates for inclusion in such a package are bills that were reported out of the House Science, Space, and Technology Committee that would reauthorize DOE research programs for wind, solar, geothermal, battery storage, and carbon capture and storage.

Even if the entirety of the CLEAN Future Act does not receive a vote in this Congress, entities in affected industries, states, and localities should consider participating in the public process to shape the bill because it is intended to lay down a marker for policies that Democrats are likely to pursue if they prevail in the Presidential election and gain additional seats in Congress.

Specific Elements of the CLEAN Future Act Described in the Legislative Framework

     Title I: National Climate Target for Federal Agencies

The CLEAN Future Act would direct all federal agencies to use existing authorities to achieve economy-wide net-zero GHG emissions by 2050. The bill would take a technology-neutral approach and direct the EPA to evaluate each agency’s plans, make recommendations, and report on progress each year.

     Title II: Power Sector

The CLEAN Future Act would establish a Clean Electricity Standard (CES) requiring all retail electricity suppliers to supply 100 percent clean energy by 2050. The Legislative Framework states that the CLEAN Future Act would incorporate elements of two separate CES bills, one introduced by Senator Tina Smith (D-MN) (S. 1359) and Congressman Ben Ray Lujan (D-NM) (H.R. 2597) and another currently being developed by Energy & Commerce Committee member Diana DeGette (D-CO). The CES under the CLEAN Future Act would allow suppliers to buy and trade clean energy credits, purchase them via auction, or pay an “alternative compliance payment.” As outlined, the CES would provide a limited pathway for continued use of coal and natural gas-fired power by authorizing fossil fuel generators with carbon intensities lower than 0.82 metric tons of CO2 (after any carbon capture) to receive partial credit. An outstanding issue is whether and how existing hydropower would be credited in the CES.

The bill would also direct the Federal Energy Regulatory Commission (FERC) to: (1) reform energy markets to reduce barriers to integration of clean resources—including energy storage systems and distributed energy resources—and (2) consider climate impacts in reviewing proposed new natural gas pipelines. It also mandates RTO and ISO membership for all electric providers and proposes reforms to the Public Utility Regulatory Policy Act of 1978 (PURPA) to promote energy storage deployment and “non-wires solutions,” as well as protecting qualifying facilities’ right-to-contract. Transmission, demand response, transformer reserves, and many other policies affecting the power sector are also addressed in the summary of the legislation.

     Title III: Buildings and Efficiency

According to the Legislative Framework, the CLEAN Future Act would establish targets for model building energy codes for use by states and localities, leading to a requirement of zero-energy-ready buildings by 2030.

     Title IV: Transportation

The CLEAN Future Act would direct EPA to set increasingly stringent GHG emission standards for light-, medium-, and heavy-duty vehicles. The bill would also provide support for the development of electric vehicles (EVs) and EV-charging infrastructure, a top priority for House Democrats. The Legislative Framework anticipates provisions for shifting to lower carbon transportation fuels, including for aviation and shipping.

     Title V: Industry

The CLEAN Future Act would establish a “Buy Clean Program” that sets carbon intensity performance targets for construction materials and other products used in federally-funded projects. The legislation would also extend eligibility of DOE’s Section 1703 Loan Guarantee Program to industrial decarbonization projects. Finally, the bill would establish a technology commercialization program for carbon capture and utilization and a prize for direct air capture technologies.

     Title VI: Environmental Justice

The CLEAN Future Act would codify Executive Order 12898 established by President Clinton, which requires federal agencies to integrate environmental justice into their missions. The bill would also introduce environmental justice considerations into the approval of state plans for air pollution regulation and disposal of hazardous waste.

     Title VII: Super Pollutants (Short-Lived Pollutants)

The Legislative Framework also describes provisions that would address short-lived climate pollutants, which account for 20 percent of U.S. GHG emissions on a carbon dioxide-equivalent basis. For example, the legislation would direct the oil and gas sector to reduce methane emissions 65 percent below 2012 levels by 2025, and 90 percent below 2012 levels by 2030. The bill would also prohibit routine flaring for new sources and limit routine flaring for existing sources to 80 percent below 2017 levels by 2025—with a complete phase-out of the practice by 2028. The bill would further direct EPA to regulate emissions from liquefied natural gas facilities and offshore oil and gas operations.

     Title VIII: Economy-wide Policies

Other provisions planned for the bill include energy efficiency programs, State Climate Plans, a National Climate Bank, and workforce training programs.

Regarding State Climate Plans, the bill would set a national climate standard of net-zero GHG emissions in each state by 2050 and grant states flexibility in developing policy plans to meet the standard. Each state plan would be subject to EPA approval. Funding for existing climate-related grant programs and funding for state initiatives are expected to be a significant part of this section of the legislation.

Regarding the National Climate Bank, the bill would incorporate previously introduced legislation, the National Climate Bank Act (H.R. 5416), aimed at mobilizing public and private capital to provide financing for low- and zero-emissions energy technologies, climate resiliency, building efficiency and electrification, industrial decarbonization, grid modernization, agriculture projects, and clean transportation. The bill would require the Bank to prioritize investments in communities that are disproportionately affected by the impacts of climate change.

© 2020 Van Ness Feldman LLP

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