CLIENT ALERT / US POLICY
March 18, 2025
Read time: 3 min
On March 14, 2025, the US Court of Appeals for the Fourth Circuit issued a stay on the US District Court for the District of Maryland’s nationwide preliminary injunction of US President Donald Trump’s executive orders (EOs) that target diversity, equity, and inclusion (DEI) programs – namely, EO Nos. 14151 and 14173 – which allows the government to implement and enforce the EOs while litigation continues.
In granting the stay, each member of the three-judge panel issued a concurring opinion explaining their reasoning. Chief Judge Albert Diaz and Judge Pamela Harris agreed that the government showed a sufficient likelihood that it will succeed in demonstrating that the EOs are not unconstitutional, in part because the EOs are limited in scope. For example, the EOs do not state that all efforts to advance DEI are illegal; rather, the “certification” and “enforcement threat” provisions apply only to conduct that violates existing anti-discrimination laws. Additionally, the “termination” provision directs the termination of grants based on the nature of the grant-funded activity, not the grantee’s external speech or activities, which both judges noted might implicate First and Fifth Amendment concerns. Judge Diaz further hinted that the anti-DEI EOs may be unconstitutionally vague as they lack clear definitions of what types of programs the Trump administration seeks to eliminate. Judge Allison Jones Rushing considered the injunction overbroad and believes the government is likely to demonstrate that the anti-DEI EOs are constitutional directives by the president to his officers. Judge Rushing also noted that the case may not be ripe for review because there is no specific agency action being challenged.
The ruling is not a final decision on the legality of the EOs. It merely allows the government to administer the policy while litigation continues. The Fourth Circuit will retain jurisdiction to hear the case on the merits and has agreed to an expedited briefing.
A final ruling on the merits is expected in the next three to six months. In the meantime, employers should keep working with legal counsel to proactively audit their DEI policies to ensure compliance with existing laws while maintaining alignment with company values.
HHS OCR Investigates Medical Schools and Hospitals for Race- or Sex-Based Programs
CLIENT ALERT / US POLICY
March 11, 2025
Read time: 4 min
On March 7, 2025, the US Department of Health and Human Services (HHS) Office for Civil Rights (OCR) announced that it would begin investigating four medical schools and hospitals pursuant to President Donald Trump’s Executive Order (EO) 14173, Ending Illegal Discrimination and Restoring Merit-Based Opportunity. According to the press release, OCR received reports of violations of Title VI of the Civil Rights Act of 1964 and Section 1557 of the Affordable Care Act, alleging that the medical schools and hospitals offered medical education, training, or scholarship programs for prospective practitioners based on race, color, national origin, or sex.
Title VI prohibits discrimination based on race, color, or national origin, and governs programs and activities that receive federal financial assistance. Similarly, Section 1557 of the Affordable Care Act prohibits discrimination based on race, color, national origin, sex, age, or disability in healthcare programs and activities. The final rule for Section 1557, issued on July 5, 2024, extends its application to any health program or activity that receives funding from HHS, including hospitals accepting Medicare or doctors who receive Medicaid payments. Individuals may file complaints with the DOJ or file suit in federal court for alleged violations of Title VI.
There have been other recent challenges to minority healthcare initiatives under Title VI and Section 1557. In 2024, the Wisconsin Institute for Law and Liberty (WILL), a nonprofit organization whose stated mission is to advance conservative principles through litigation, education and public discourse, filed a complaint on behalf of Do No Harm with the OCR under Title VI and Section 1557 against an academic medical center claiming that the academic medical center’s minority stroke program and clinic were examples of racial discrimination because they specifically targeted Black and Latino populations. Notwithstanding the justification that these programs helped understand and address the increased risk of stroke for those populations and racial health disparities, Do No Harm claimed that the non-Black and Latino members of the community were harmed by the center’s focus on racial minorities when “stroke and diabetes are leading causes of death in the United States” and “mental health conditions plague more than one in five adults.” Do No Harm claimed the programs were improperly “infected” with a “racially motivated focus.” At the time of this alert, OCR’s investigation into this complaint is ongoing.
We expect these investigations to increase. The March 7, 2025, investigation announcement encourages those who “believe that you or someone else has been discriminated against” on the basis of protected characteristics to file a complaint with OCR. This coincides with President Trump’s EOs directing federal agency heads to identify other companies and educational institutions who this administration deems are operating unlawful programs focused on racial and gender minorities. However, this potential increase in investigations is not without legal uncertainty, especially given the varying state-level policies leading to inconsistent approaches across different medical schools, hospital and health systems, and regions.
For many medical schools and hospitals, the evaluation or outright removal of diversity, equity, and inclusion or health equity language and criteria from mission statements and public-facing materials from various programs and initiatives signals a significant departure from previous commitments to diversity and inclusion, potentially affecting how these institutions are perceived by staff and the communities they serve. As scrutiny increases, educational institutions and hospitals and health systems should carefully assess the eligibility criteria for their programs and initiatives based on race, sex, national origin, or color, as programs that are open to all may be less susceptible to scrutiny. Further, institutions should review marketing of their programs and initiatives to the public to ensure they are not making statements or representations implying that race or sex is a criterion for acceptance or participation.
OIG Nursing Facility Compliance Program Guidance: Renewed Focus on Fraud and Abuse
CLIENT ALERT / US POLICY
March 11, 2025
Read time: 14 min
The US Department of Health and Human Services Office of Inspector General’s (OIG’s) release of Nursing Facility Industry Segment-Specific Compliance Program Guidance (ICPG) for the first time since 2008 reemphasizes the importance of billing and coding and fraud and abuse compliance for nursing facilities and skilled nursing facilities (SNFs). This On the Subject is the second in a two-part series summarizing highlights of the Nursing Facility ICPG. This installment focuses on OIG’s recommendation that nursing facilities comply with existing billing rules and analyze referral source arrangements for compliance with fraud and abuse laws. Part one of this series focused on safe, high-quality care for residents. Read the client alert: “HHS OIG Releases Updated Nursing Facility Compliance Program Guidance: Quality and Safety Lessons.”
Medicare and Medicaid Billing Requirements
The Nursing Facility ICPG recommends that nursing facilities take proactive measures to ensure compliance with federal healthcare program (FHCP) billing rules and verify the accuracy of claims.
OIG reports common claims preparation and submission risks under the SNF prospective payment system (PPS), including:
- Duplicate billing;
- Insufficient documentation;
- False or fraudulent cost reports; and
- Noncompliance with the SNF three-day rule, which requires a covered enrollee under a PPS to receive skilled nursing or rehabilitation services from a Medicare-certified SNF after a qualifying hospital stay of at least three days
- Noncompliance with consolidated billing rules, which requires SNFs to bill Medicare Part A for most of the services and SNF covered stays provided to Medicare enrollees, including items and services that outside practitioners and suppliers provide “under arrangement” with the SNF.
OIG recommends:
- Developing and maintaining policies that incorporate resident assessments, care planning, tracking of resident progress and outcomes, documentation of services provided, and appropriate coding.
- Implementing competency-based training to ensure understanding of billing requirements for Medicare under the SNF patient-driven payment model.
- Confirming that coding reflects residents’ characteristics and comorbidities, and that services provided are individualized, skilled, and medically necessary.
- Assessing therapy services to ensure therapy management does not result in underutilization.
Payments that include performance measures may increase the risk that nursing facilities modify data and claims to qualify for such payments. OIG suggests nursing facilities include an emphasis on the importance of data accuracy in auditing, monitoring, and training initiatives. OIG also mentions Medicare Advantage and Medicaid managed care payments, and states that nursing facilities must ensure the accuracy of claims they submit to managed care plans to avoid causing the plans to submit false claims to a FHCP. Facilities must not skimp on care provided to residents enrolled in the plan or discriminate against more costly residents enrolled in the plan. Lastly, because the Part A SNF PPS (or the Medicare Advantage plan that provides the Part A benefits) generally covers prescriptions when an individual is in a covered Part A stay, nursing facilities must not bill for prescriptions to be covered by Part D when an individual is in a covered Part A stay.
Medicare Health Plan Enrollment for Nursing Facility Residents
OIG states that nursing facilities that educate residents regarding various Medicare health plans or assist residents with plan enrollment decisions should mitigate the risk of inappropriately directing residents to a particular plan or enrollment decision by:
- Remaining neutral and providing objective information;
- Declining remuneration from any individuals or entities tied to enrollment decisions;
- Complying with health plan policies and Medicare regulations related to marketing and enrollment as described in the Nursing Facility ICPG Reimbursement Supplement; and
- Acting in the best interests of the resident.
Federal Anti-Kickback Statute Compliance
The Nursing Facility ICPG identifies arrangements that OIG believes warrant scrutiny under the federal Anti-Kickback Statute (AKS). These arrangements, while not exhaustive, add to those that OIG previously noted in its 2008 guidance for nursing facilities:
- Free goods and services;
- Services contracts (including nonphysician and physician services);
- Discounts;
- Hospices; and
- Reserved bed payments.
Long-Term Care Pharmacy and Consultant Pharmacist Arrangements
Nursing facilities should educate all staff and contractors involved in prescribing, administering, and managing pharmaceuticals about the federal AKS prohibition against knowing and willful solicitation or receipt of remuneration to influence the choice of a drug when the drug is payable under an FHCP.
OIG recommends that nursing facilities adopt policies clarifying that all prescribing decisions must be made in the best interests of the patient and that drug switches should only be made upon authorization of the attending physician, medical director, or other licensed prescriber. OIG recommends taking steps to minimize the potential for conflicts of interest that impact pharmaceutical prescribing decisions, particularly when a nursing facility’s consultant pharmacist is affiliated with a long-term care pharmacy, which may in turn mitigate AKS risk. Such steps include:
- Entering into separate contracts for consultant pharmacy services and long-term care pharmacy services;
- Encouraging or requiring consultant pharmacists and long-term care pharmacies to disclose affiliations that may present a conflict of interest;
- Aligning remuneration with fair market value and without regard to volume or value of drugs prescribed for or administered to residents; and
- Monitoring drug records for patterns of inappropriate steering, switching, or overprescribing.
Hospital and Hospice Arrangements
OIG specifically notes concerns about nursing facilities providing charity care to certain patients as a favor to the referring hospital and nursing facilities accepting payments from hospitals to accept a discharged patient. Such arrangements may include supplemental payments that the nursing facility receives from hospitals in exchange for expediting admission of the former hospital patient to free up the hospital bed for a different patient. OIG states that no safe harbor protection is available under the federal AKS and that such arrangements may lead to interference with clinical decision making, steering, and unfair competition. OIG acknowledges that some arrangements related to timely discharge of patients could be structured to meet the criteria of a value-based care safe harbor, however.
Hospitals may enter into reserved bed arrangements with nursing facilities to receive guaranteed or priority placement for their discharged patients in accordance with Centers for Medicare and Medicaid Services (CMS) requirements (see, e.g., Provider Reimbursement Manual, Ch. 21, § 2105.3(D)). However, OIG cautions that these arrangements could violate the AKS if one purpose of the remuneration is to induce referrals of FHCP business from the nursing facility to the hospital. Examples of reserved bed payments that may give rise to an inference that the arrangement is connected to referrals include:
- Payments for beds that are occupied and for which the facility is already receiving reimbursement;
- Payments for more beds than the hospital legitimately needs; and
- Payments that exceed a nursing facility’s actual costs of holding a bed or the actual revenues a facility reasonably stands to forfeit by holding a bed given the facility’s occupancy rate and patient acuity mix.
Reserved bed arrangements should be entered into only when there is a bona fide need to have the arrangement in place for the limited purpose of securing needed beds, not future referrals. OIG reminds nursing facilities that conditioning the offer of reserved beds on referrals of FHCP enrollees by the hospital to the nursing facility would raise AKS concerns even if no payment was made.
OIG also provides examples of suspect arrangements between a nursing facility and a hospice whereby the nursing facility solicits or receives from the hospice goods or services for free (or below fair market value) or monetary payments for:
- Room and board for a resident in excess of what the facility would have received directly from Medicaid if the patient had not been enrolled in hospice (any additional payment must represent the fair market value of additional services actually provided to that patient that are not included in the Medicaid daily rate);
- Additional services for a resident that are included in the Medicaid room and board payment to the hospice;
- Additional services for a resident that are not included in the Medicaid room and board payment (at a rate that is above fair market value); and
- A nursing facility’s provision of hospice services to a hospice’s patients (at a rate that is above fair market value).
Facilities should carefully monitor their relationships with hospices to protect against the types of suspect arrangements flagged by OIG.
Care Coordination and Value-Based Care Arrangements
The care coordination and value-based care safe harbors were codified as part of the US Department of Health and Human Services Regulatory Sprint to Coordinated Care in 2020 and therefore were not available in 2008, when OIG released its previous nursing facility compliance program guidance. Because these arrangements inherently involve patient referrals between care settings, remuneration exchanged under these arrangements must be reviewed for AKS risk. Under the new safe harbors, nursing facilities that are part of a value-based enterprise or that participate in CMS-sponsored models may be able to protect arrangements that were previously unable to fit into a safe harbor.
Joint Ventures
OIG has long advised that joint ventures (through equity or contract) between nursing facilities and other healthcare entities, particularly ancillary service providers, must be carefully structured to ensure that the joint venture is entered into for a legitimate purpose and does not exhibit attributes of problematic joint ventures (see, e.g., OIG, Special Fraud Alert: Joint Venture Arrangements (1989), reprinted in 59 Fed. Reg. 65,372, 65,373 (Dec. 19, 1994); OIG, Special Advisory Bulletin: Contractual Joint Ventures (2003)). OIG describes a potential problematic joint venture formed by a nursing facility and contracted service provider whereby one purpose of the arrangement may be to permit the service provider to pay the facility a share of the profits from the facility’s referrals to the service provider for services reimbursable under a FHCP. OIG reminds providers of the small entity investments, care coordination arrangements, and value-based arrangements safe harbors that may be available for certain joint ventures.
Recommendations to Mitigate Fraud and Abuse Risks Under the AKS
OIG recommends the following practices to evaluate arrangements under the federal AKS.
- Structuring arrangements to meet all applicable AKS safe harbor criteria whenever possible and reviewing such arrangements periodically to ensure safe harbor criteria continue to be satisfied.
- Ensuring that:
- There is a legitimate need for the services and supplies covered by the proposed arrangement(s);
- There are not more providers engaged than necessary for legitimate business purposes;
- Service and/or supplies are actually provided;
- Compensation is commensurate with the skill level and experience required and is consistent with fair market value in an arm’s-length transaction; and
- The arrangement does not take into account the volume or value of FHCP business.
- Particularly when an arrangement does not meet a safe harbor, documenting factors that mitigate fraud and abuse risks prior to payment to the provider under the arrangement, and monitoring for consistency with these factors.
- Maintaining contemporaneous documentation, e.g., time logs.
- Implementing recommendations from the OIG’s General Compliance Program Guidance (GCPG) regarding financial arrangements tracking.
Related Party Transactions
OIG is concerned that nursing facility owners, operators, and private investors taking part in related-party transactions may participate in tunneling (i.e., the practice of misrepresenting or hiding profitability by overstating payments for operational expenses that are funneled to related parties). Tunneling typically manifests as:
- Real estate transactions in which a nursing facility sells its building and land to a commonly owned company or real estate investment trust, then leases the property back at higher than fair market rates; or
- Arrangements for the outsourcing of administrative or management services with commonly owned companies under which the nursing facility pays higher than fair market rates.
To mitigate this risk, nursing facilities should routinely audit financial data and verify that transactions are fair market value, of quality comparable to or greater than competing services provided by entities that are not commonly owned or controlled, and chosen based primarily on the wellbeing of residents.
Compliance, Quality, and Resident Safety Consierations
Expanding on OIG’s GCPG recommendations and 2008 guidance, nursing facilities implementing OIG’s seven elements of a compliance program should consider the following specific recommendations. The Nursing Facility ICPG is not exhaustive, however, so facilities should review it and the GCPG in light of their own organization’s risk profile as they work to implement, evaluate, and update compliance program operations.
Oversight Role of Responsible Individuals
Nursing facilities’ governing bodies, members, owners, investors, operators, and executive leadership (defined as “responsible individuals” in the Nursing Facility ICPG) should communicate their commitment to making compliance, quality, and resident safety a priority over profit margins. The Nursing Facility ICPG stresses the importance of responsible individuals’ participation in compliance initiatives. Responsible individuals should conduct periodic meetings with facility leadership, the compliance officer, and the compliance committee to assess the nursing facility’s:
- Compliance program and system of internal controls;
- Response to state, federal, internal, and external reports of quality of care and resident safety problems; and
- Status of remedial efforts developed in response to identified problems.
OIG highlights that the inclusion of investors in the term “responsible individuals” is crucial, because investors should actively question whether the operating and management companies in their investment portfolios:
- Comply with FHCP requirements and fraud and abuse laws;
- Dedicate the necessary resources to the organization’s compliance and quality programs;
- Provide high-quality care; and
- Create a safe and comfortable living environments for all residents.
Responsible individuals should consider adopting a resolution or charter summarizing their review and oversight of the allocation of all necessary resources to support the nursing facility’s compliance initiatives. This may include increasing support for the nursing facility’s compliance officer and compliance programs to ensure that the nursing facility adheres to regulatory requirements and professionally recognized standards of care.
Role of the Compliance Committee in Supporting Collaboration and Alignment Between Compliance and Quality Functions
OIG advises that a compliance committee should be appointed at the corporate level, and that nursing facilities should consider including regional or facility-level staff to support the committee depending upon the size and structure of the enterprise. Nursing facilities should also consider coordinating the compliance committee’s work with the facility’s quality assurance and performance improvement program. OIG believes collaborative efforts may eliminate any redundancies in responsibilities across compliance and quality initiatives and may yield other efficiencies and cost savings for nursing facilities.
Nursing facility compliance committees, in addition to completing the duties described in the GCPG, should regularly review:
- Resident, family, guardian, and staff complaints;
- Internal surveys;
- Staffing turnover and exit interviews;
- State and federal surveys;
- Resident outcomes and care delivery;
- Events reporting;
- Staffing hours reports;
- Hotline calls and disclosure logs;
- CMS quality indicators measuring nursing facility performance; and
- Financial indicators.
Competency-Based Training
OIG recommends regularly assessing staff training needs and the delivery of such training. Current and exiting staff should be asked to provide feedback, and this information should be used to identify training gaps and make necessary modifications to the training plan. OIG recommends that nursing facilities provide training in response to all risks identified in the Nursing Facility ICPG.
Risk Assessment, Internal Review, and Monitoring Processes
Nursing facilities should have (and should regularly evaluate) an annual risk assessment, internal review, and monitoring process to identify and address risks associated with the nursing facility’s participation in FHCPs, including risk areas discussed in the Nursing Facility ICPG. Site visits should be conducted regularly and should include responsible individuals. Priority should be placed on high-risk areas as determined through facility data collection and the results of previous reviews.
Reporting Requirements
Responsible individuals should consider reporting obligations a priority and should demonstrate a heightened interest in all reporting being complete, accurate, and timely.
OIG recommends that nursing facility compliance and quality programs develop and establish:
- Clear and comprehensible procedures that guide staff involved in all relevant functions through appropriate reporting practices designed to achieve consistency and continuity.
- Direct communication channels for staff to request and obtain clarity from relevant facility leaders.
- Audits and systematic analyses of the root causes of errors in data.
Key Takeaways
- Nursing facility billing and coding practices and financial arrangements are under scrutiny by OIG, with joint ventures; “tunneling”; and pharmacy, hospice, and hospital arrangements specifically called into question.
- Nursing facilities should ensure that their corporate compliance efforts are sufficiently robust to support appropriate auditing and monitoring activities and evaluation of arrangements with actual or potential referral sources for compliance with the AKS and similar state fraud and abuse laws.
- Responsible individuals – including investors – should prioritize compliance and quality initiatives and communicate such focus throughout the organization.
Treasury Finalizes DPL Rules, Extends Transitional DCL Relief for Pillar Two Taxes
CLIENT ALERT / US POLICY
March 10, 2025
Read time: 9 min
Since the proposed dual consolidated loss (DCL) and disregarded payment loss (DPL) rules were released in August 2024, taxpayers have been wondering whether these controversial regulations would be finalized before the end of the Biden administration. Less than one week before the second inauguration of President Donald Trump, Treasury Decision 10026 was published in the Federal Register on January 14, 2025, finalizing the DPL rules and certain rules that apply to DCLs and DPLs. Although the overall structure of the DPL regulations was left intact, the US Department of the Treasury (Treasury) helpfully delayed their applicability date and made a few, generally taxpayer-friendly, modifications. Treasury also extended the transitional relief for rules addressing the treatment of Pillar Two taxes for DCL purposes and stated that it will finalize the DCL rules in upcoming guidance.
Background
The DCL regulations under section 1503(d) focus on preventing US corporations from using the same loss in both the United States and a foreign jurisdiction (or “double-dipping”). In August 2024, Treasury and the Internal Revenue Service (IRS) released proposed DCL regulations that addressed how the DCL rules interact with Pillar Two taxes and the intercompany transaction rules, and included an anti-avoidance rule. At the same time, they surprised taxpayers with an entirely new set of disregarded payment loss (DPL) rules. Under the proposed DPL rules, domestic corporations would have income inclusions with respect to certain disregarded payments. Read the client alert, “Proposed Disregarded Payment Loss Rules Create Traps for the Unwary,” for additional discussion of the proposed DCL/DPL rules.
Validity
Many taxpayers submitted comments challenging the authority of Treasury and the IRS to issue the DPL rules. Unsurprisingly, Treasury and the IRS vehemently defend their authority to issue the DPL regulations. The preamble to the final regulations notes that the DPL rules are intended to prevent taxpayers from circumventing the DCL rules through an inappropriate use of check-the-box elections and asserts that the rules are consistent with other provisions that “regard” disregarded entities for certain purposes. In contrast, the proposed regulations emphasized that the DPL rules were intended to prevent “deduction/no-inclusion” outcomes. The preamble notes this change in emphasis as a “clarification.”
Delayed DPL Applicability Date
The applicability date of the DPL regulations is delayed to taxable years of disregarded payment entity (DPE) owners (i.e., domestic corporations that directly or indirectly own disregarded entities) beginning on or after January 1, 2026. Calendar-year taxpayers now have almost one year to assess the risk of being subject to the DPL rules and take any remedial steps before the rules apply. The final regulations further simplify the applicability date by removing the proposed regulations’ references to “consent” and “deemed consent” in the DPL regime. Also, effective August 6, 2024, the 60-month limitation on changing an entity classification election is turned off for disregarded entities that elect to be treated as corporations before the DPE owner’s 2026 tax year. As a result, taxpayers can currently elect to treat first-tier disregarded entities as corporations without regard to the 60-month limitation.
Calculation of Disregarded Payment Income (DPI) and DPL
The final regulations clarify that items incurred in the portion of a foreign taxable year that an entity or foreign branch is not a DPE are not taken into account for purposes of calculating DPI or DPL. This means that if a DPE inbounds by migrating to become a US entity on, say, February 15, 2026, then only interest and royalties accrued through February 15 will be included in calculating DPI and DPL. In other words, there is no cliff effect in case an entity is a DPE for part, but not all, of a taxable year.
Deduction for DPL Inclusions
Under the proposed regulations, a taxpayer could suffer a DPL income inclusion without any offsetting deduction. This treatment differs from the treatment of DCLs, which are allowable as deductions to the extent that the relevant separate unit recognizes income from a US tax perspective.
In response to comments, and perhaps to better align the DPL rules with the structure of the DCL rules, the final regulations provide the DPE owner a deduction (not to exceed the DPL inclusion) to the extent that the DPE derives DPI in a year following the year of the DPL inclusion. This deduction has the same character and source as the DPL inclusion to which it relates.
Deemed Ordering Rule
A DPE that has a DPL may also earn income that is regarded from a US tax perspective, or disregarded income that is excluded from the calculation of DPI. The proposed regulations provided that “foreign use” of the DPL was determined under the principles of the DCL rules for foreign use in Treas. Reg. § 1.1503(d)-3. Under these rules, a DCL is presumed to first offset income that does not give rise to a foreign use before giving rise to a foreign use (the “Deemed Ordering Rule”). Applying the Deemed Ordering Rule, taxpayers could reasonably treat DCLs as first offsetting foreign law income that is disregarded for US tax purposes, therefore preventing a foreign use. Comments requested clarification on how the Deemed Ordering Rule applied in the DPL context.
The final regulations modify the Deemed Ordering Rule for DPLs and, notably, also for DCLs. Under the final regulations, the Deemed Ordering Rule is applied separately for each regime, with items of income or gain taken into account only to the extent such items are or would be taken into account in determining the amount of income or loss under the relevant regime. Thus, in determining foreign use for a DCL, only regarded income of the separate unit is taken into account, and in determining foreign use for a DPL, only DPI is taken into account. This change applies for DCLs and DPLs arising in tax years beginning on or after January 1, 2026.
Anti-Avoidance Rule
The final regulations retain the DCL and DPL anti-avoidance rule for transactions engaged in “with a view” to avoiding the purposes of section 1503(d) and the regulations thereunder. The final regulations clarify that the purpose of section 1503(d) and the regulations thereunder is to prevent double deductions and similar outcomes. This means that the rule does not apply if the arrangement does not give rise to the potential for both a US and a foreign tax deduction. The final regulations identify specific exceptions to the anti-avoidance rule.
For example, the final regulations state that the anti-avoidance rule “does not apply to a reduction or elimination of a DCL solely by reason of … items of income arising from the ownership of stock…” This is a particularly welcome clarification for taxpayers who were caught off-guard by the provision in the proposed DCL regulations that removes taxpayers’ ability to include income from the ownership of stock – including dividends and global intangible low-taxed income (GILTI) and subpart F inclusions – in their DCL calculations. However, the preamble notes that these exceptions would be removed or modified if the proposed DCL regulations are finalized.
The final regulations also retain from the proposed regulations an example (Example 43) that shows that the anti-avoidance rule would apply where a taxpayer avoids having a DCL by contributing US branch assets to a disregarded entity. The final regulations add two further examples illustrating the anti-avoidance rule.
Partnerships and DPEs
The final rules “clarify” that a foreign branch owned indirectly through a partnership can be a DPE. Additionally, in certain circumstances an entity that is a foreign tax resident and is treated as a partnership for US tax purposes can be a DPE.
Other Comments
The general structure of the rules, including the “all or nothing” rule for foreign use of a DPL, has not changed. However, a few helpful provisions were added. A new de minimis rule creates an exception for a DPL if it is less than the lesser of $3 million or 10% of the aggregate amount of the DPE’s deductible items under foreign law. A grandfathering rule applies to royalties paid on license arrangements in existence before August 6, 2024, provided that the license arrangement has not be significantly modified within the meaning of the final regulations. Finally, a mirror legislation rule provides that the denial of a deduction for a disregarded payment under foreign hybrid mismatch rules does not give rise to a DPL or a foreign use of a DPL.
Transitional Relief for Pillar Two Taxes Extended
Significantly, the transitional relief for Pillar Two taxes for the DCL rules was extended further. The regulations state that the DCL rules, when finalized, will provide that the DCL rules will apply without taking into account qualified domestic minimum top-up taxes (QDMTTs) and top-up taxes collected under an income inclusion rule (IIR) or undertaxed profits rule (UTPR) incurred in taxable years beginning before August 31, 2025.
Proposed DCL Rules Not Finalized
Treasury notes its intention to finalize the other proposed DCL rules at some point in the future. These rules include:
- Modifications to the intercompany transaction rules in Treas. Reg. § 1.1502-13.
- The Pillar 2 and DCL foreign use rules and related updates to the separate unit definition.
- Removal of items of income arising from stock, such as subpart F and GILTI inclusions, from the computation of a DCL or cumulative register.
- Clarification of separate unit books and records adjustments to “conform to U.S. tax principles”
- Modification of “certification period” and “foreign use” definition to include prior taxable years.
It remains to be seen whether the new administration will continue to focus on finalizing these rules, or whether it will shift to other priorities; we will know more once the priority guidance plan is released.
Conclusion
Taxpayers now have more time to consider whether to modify structures that may give rise to income inclusions under the DPL rules, or whether they are interested in challenging the validity of the final regulations.
Will it (puff, puff) pass? Cannabis reform under the Trump administration
CLIENT ALERT / US POLICY
March 7, 2025
Read time: 6 min
The Trump administration’s approach to cannabis reform will significantly impact the industry. As the proposed rulemaking to reschedule cannabis unfolds and nominees to critical agencies are confirmed, it is crucial for stakeholders to stay informed about these pivotal changes. This article provides an in-depth analysis of the implications of these developments.
On May 21, 2024, the US Department of Justice (DOJ) published a notice of proposed rulemaking to reschedule marijuana (cannabis) as a Schedule III controlled substance under the Controlled Substances Act, loosening federal restrictions on its medical use. A hearing to assess the Biden administration’s rescheduling proposal was initially scheduled for January 21, 2025. However, only eight days before the hearing was set to take place, a US Drug Enforcement Administration (DEA) administrative law judge cancelled the hearing, pending appeal. This delay means that the issue of marijuana rescheduling will be addressed by a DOJ and DEA helmed by the Trump administration.
The hearing’s cancellation resulted from the denial of a motion to reconsider, which was filed by Village Farms International, Hemp for Victory, and the Connecticut Office of the Cannabis Ombudsman (the movants) in late November 2024 in response to an order regarding alleged ex parte communications. The DEA administrative law judge granted the movants leave to file an interlocutory appeal to the DEA administrator. Because of the pending appeal, the January 21 hearing on the merits was cancelled, and the movants and the government were ordered to provide the tribunal with a joint status update every 90 days from the issuance of the order.
On February 6, 2025, the Connecticut Office of the Cannabis Ombudsman and The Doc App filed a notice with the tribunal indicating their intent to withdraw from these administrative proceedings. On February 7, 2025, the withdrawal request was granted. This leaves Hemp for Victory and Village Farms International as the only remaining designated participants serving as proponents of the interlocutory appeal.
See our previous On the Subject for more information about the implications of the rescheduling proposal.
Legal Background
As the US government has removed certain restrictions on the use and distribution of specific aspects of the cannabis plant, the cannabis-derived products marketplace has expanded.
The Agricultural Act of 2014 defined “industrial hemp” as any part of the Cannabis sativa L. plant with a delta-9 tetrahydrocannabinol concentration of not more than 0.3% on a dry weight basis. This allowed it to be used for research purposes only in limited situations. The Agricultural Improvement Act of 2018 (also known as the 2018 Farm Bill) again relaxed federal restrictions on hemp by removing hemp from the Controlled Substances Act statutory definition of marijuana, resulting in interstate commerce of hemp. The 2018 Farm Bill also preserved the US Food and Drug Administration’s (FDA’s) authority to regulate products containing cannabis and cannabis-derived products under the Federal Food, Drug, and Cosmetic Act and § 351 of the Public Health Service Act.
To this point, the FDA has approved one cannabis-derived drug product and three synthetic cannabis-related drug products for humans. There are currently no FDA-approved, conditionally approved, or indexed animal drugs that contain cannabidiol (CBD). Under the Animal Medicinal Drug Use Clarification Act of 1994 and its implementing regulations, however, veterinarians can prescribe approved human drugs for use in animals in an extralabel manner under certain conditions.
The FDA may be trying to change this. On January 16, 2025, the FDA’s Center for Veterinary Medicine (CVM) under the Biden administration released a request for information (RFI) soliciting comments from the public, with a focus on practicing veterinarians, related to the use of cannabis-derived products in veterinary medicine. The RFI is focused primarily on CBD products and other hemp-derived products. The FDA also stated in the RFI that regulation of the CBD market is a priority and thus the information gathered will guide the FDA in its future regulatory action. Stakeholders have until April 16, 2025, to submit comments to CVM. However, as discussed below, the change in administration may result in updated priorities.
Implications of Administration Change
The recent change in presidential administration has created some uncertainty regarding agencies’ current cannabis-related positions and priorities.
President Donald Trump became the first major-party presidential nominee to endorse a state adult-use legalization campaign when he voiced his support for Amendment 3 to Florida’s constitution in September 2024. President Trump also stated his intention to “focus on research to unlock medical uses of marijuana to a Schedule 3 drug, and work with Congress to pass common sense laws.” However, President Trump has not addressed the issue since his September 2024 statement.
Trump’s selections to lead relevant agencies such as the DOJ and DEA will likely have a sizable impact on the future of marijuana rescheduling. Cannabis was not a topic of discussion at the confirmation hearings for Attorney General Pam Bondi. On February 11, 2025, Trump announced his nomination of Terrance C. Cole for DEA administrator. Cole has expressed opposition to cannabis reform. The current acting administrator of the DEA, Derek Maltz, has similarly voiced opposition to cannabis reform.
The topic received little attention at newly confirmed US Department of Health and Human Services Secretary Robert F. Kennedy Jr. (RFK)’s nomination hearings, with RFK Jr. stating that he would defer to the DEA on marijuana rescheduling. Although RFK has previously called for cannabis decriminalization, he has recently been silent on rescheduling efforts and instead has said that he will defer to the DOJ and DEA in the allocation of their resources and development of their priorities.
Next Steps
Given the mixed signals offered by current and future members of the Trump administration, it remains difficult to predict exactly where cannabis-related reform is headed in the near future. However, as federal cannabis regulations undergo significant changes, stakeholders should stay informed and involved in the rulemaking process, and businesses should continue to adapt to the evolving landscape to remain competitive and compliant.
If you would like to submit comments to the CVM or require guidance on navigating cannabis regulation, please contact one of the authors or any other member of McDermott’s Cannabis Regulatory Practice Group and Food, Drug & Medical Device Regulatory Practice Group. McDermott will continue to monitor cannabis regulation as it develops.
HHS Signals Action on Gender-Affirming Care
CLIENT ALERT / US POLICY
March 7, 2025
Read time: 4 min
On March 5, 2025, the Center for Clinical Standards and Quality (CCSQ) within the Centers for Medicare & Medicaid Services (CMS) released a Quality & Safety Special Alert Memo for hospitals related to President Trump’s executive order (EO) “Protecting Children from Chemical and Surgical Mutilation.”
In the memo, CMS notes that it “may begin taking steps in the future to align policy, including CMS-regulated provider requirements and agreements, with the highest-quality medical evidence in the treatment of the nation’s children in order to protect children from harmful, often irreversible mutilation, including sterilization practices.” CMS says that it will “follow any applicable substantive and procedural requirements in taking any future action.”
The memo does not call for any immediate change in action, but it strongly suggests that hospitals will see future action from CMS on this topic to enforce the terms of the EO.
The next day, the Health Resources and Services Administration (HRSA) sent a letter to hospital administrators and others noting the CCSQ memo and stating that HRSA would review its policies, grants, and programs in light of the concerns CMS identified in the CCSQ Memo and may take steps in the future to update its policies to comply with the EO. HRSA also stated that it would review its Children’s Hospitals Graduate Medical Education (CHGME) Payment Program that awarded $367.2 million in fiscal year (FY) 2024 to 59 free-standing children’s hospitals nationwide and that it may consider re-scoping, delaying, or potentially canceling new grants in the future depending on the nature of the work and any future policy change(s) HRSA may make.
The gender-affirming care EO has been subject to litigation, and federal judges in PFLAG v. Trump and Washington v. Trump have issued preliminary injunctions against Section 4, which directs agencies that provide grants to medical institutions to “immediately take appropriate steps to ensure that institutions receiving Federal research or education grants end the chemical and surgical mutilation of children.” It is questionable whether these actions – particularly the HRSA letter – comply with the terms of the preliminary injunctions insofar as they may be viewed to threaten federal research and education grants. However, Section 5 of the EO remains in effect and may be the section upon which the US Department of Health and Human Services (HHS) would claim to be acting. Section 5 directs HHS to take actions to “end the chemical and surgical mutilation of children, including regulatory and sub-regulatory actions,” including “Medicare or Medicaid conditions of participation or conditions for coverage, clinical-abuse or inappropriate-use assessments relevant to State Medicaid programs, and quality, safety, and oversight memoranda.”
CCSQ serves as the focal point for all quality, clinical, and medical science issues and policies for CMS programs. It oversees the planning, policy, coordination, and implementation of the survey, certification, and enforcement programs for all Medicare and Medicaid providers and suppliers, and develops requirements of participation for providers and plans in Medicare and Medicaid. HRSA is a separate agency within HHS that administers an extensive federal grant program. In FY 2024, HRSA awarded more than $12.2 billion in grants, making more than 6,000 grant awards focused on improving healthcare services.
McDermott continues to monitor developments surrounding the EO, including the ongoing litigation. We are in the process of updating our FAQs to provide additional analysis of the issues the EO presents. If you have any questions, please contact the authors of this article or your regular McDermott lawyer.
Antitrust Under Trump: Initial Policies and Actions
ARTICLE / CLIENT ALERT / US POLICY
March 6, 2025
Read time: 7 min
As the Trump administration’s approach to antitrust takes shape through political appointments, policy statements, speeches, and enforcement actions, our team is tracking new developments and will provide important updates on issues pertinent to clients. This client alert is not intended to be a comprehensive review of specific actions or cases, but rather an at-a-glance review of relevant policies as they are being created.
Nominations and Confirmations
Appointment of Federal Trade Commission (FTC) Chairman
- President Donald Trump appointed FTC Commissioner Andrew Ferguson as the new chairman of the FTC on January 20, 2025.
- Ferguson views antitrust enforcement as a facilitator of innovation and believes that because markets are not self-correcting, government intervention on behalf of human flourishing and the protection of workers is necessary.
- Despite his intention to “reverse” former Chair Lina Khan’s war on mergers and anti-business agenda, Ferguson has expressed concern with the market power of Big Tech and other large companies being leveraged to gain social or political control.
Confirmation Hearing for AAG Nominee Gail Slater
- President Donald Trump nominated Gail Slater as the Assistant Attorney General (AAG) of the US Department of Justice’s (DOJ) Antitrust Division on December 4, 2024.
- On February 12, 2025, Slater appeared before the Senate Judiciary Committee for her nomination hearing. The committee advanced her nomination on February 27 with a vote of 20-2.
- Slater has expressed a desire to continue enforcement actions against Big Tech and to return to using merger remedies in the form of consent decrees and settlements to address competitive harm.
Confirmation Hearing for FTC Commissioner Nominee Mark Meador
- President Trump appointed Mark Meador to the FTC on December 10, 2024.
- On February 25, 2025, Meador appeared before the Senate Committee on Commerce, Science, and Transportation for his confirmation hearing.
- He echoes Slater’s view that pursuit of Big Tech should remain a priority for the agencies, as should combatting noncompete agreements that overly burden workers and prevent employees from leaving to work for a competitor.
General Updates
Musk Supports Consolidating Antitrust Enforcement Agencies
- Responding to a comment by Sen. Mike Lee (R-Utah), who expressed hope that the new administration would consider consolidating the FTC and DOJ, Elon Musk said, “Sounds logical,” appearing to agree with the idea.
- Lee referenced the One Agency Act, a bill he proposed in 2021 that would strip the FTC of its antitrust authority and transfer it to the DOJ. When discussing the bill, Lee has compared the current two-agency system to having two presidents.
Agencies Keep 2023 Merger Guidelines
- FTC Chairman Ferguson and Omeed Assefi, Acting Assistant Attorney General of the DOJ’s Antitrust Division, announced on February 18, 2025, that the FTC and DOJ will continue to use the 2023 Merger Guidelines as the framework for their merger review process.
- Ferguson cited the time and expense associated with creating new guidelines, as well as his desire to create stability for the parties and the agencies, as the rationale for adhering to the 2023 Guidelines. He did note that “no Guidelines are perfect” and indicated portions could be revisited later.
Ferguson Supports New Hart-Scott-Rodino (HSR) Rules
- FTC Chairman Ferguson expressed his support for the new HSR rules, stating that “updates were long overdue” and would “prevent unlawful deals from slipping through the cracks.”
- He has previously stated his approval of the new rules, calling them a “lawful improvement over the status quo” in his concurring statement accompanying the rules’ announcement.
Holyoak Sets Out FTC Goals for New Administration
- In remarks at the GCR Live conference on January 30, 2025, FTC Commissioner Melissa Holyoak outlined three areas of focus for antitrust under the Trump administration. She explained that the FTC will focus on (i) making the merger review process better and more predictable, (ii) ensuring that antitrust concerns will not impede artificial intelligence innovation, and (iii) fighting against Big Tech censorship.
- In later remarks, Holyoak said that she expects the return of early termination, improving staff communication and transparency with the parties in the merger review process, bringing back remedies as a method of resolving merger issues – as well as continuing enforcement actions against Big Tech – and abandoning FTC rulemaking authority.
Meador Targets Anticompetitive Effects of Vertical Mergers
- At his confirmation hearing on February 25, 2025, FTC Commissioner nominee Meador indicated that he would address the consumer welfare issues raised by vertical mergers. He noted that vertical integration can allow for increased prices, a reduction in quality, and market foreclosure. He went onto say that he would address these concerns where they arise.
FTC Will Continue to Fight Anticompetitive Behavior in Labor Markets
- FTC Chairman Ferguson has emphasized a continuing priority of protecting workers using antitrust laws.
- He cited no-poach, wage-fixing, and noncompete agreements, as well as deceptive or misleading hiring practices, as examples of conduct the FTC will fight against to combat labor monopsonies and general harm to workers.
- The FTC will approach these issues based on individual cases, not rulemaking (like the Biden administration’s noncompete ban).
Agencies Indicate Return of Merger Remedies
- Statements from FTC Commissioner Holyoak and AAG nominee Slater indicate that both the FTC and DOJ will become more open to evaluating merger remedies under the new administration.
- Holyoak has stated that the agencies should consider remedies like divestitures when such remedies can successfully preserve competition lost by a merger. Similarly, Slater has stated that when merger remedies are “done right,” they can remove competitive harm from a merger.
FTC Issues Policy to Avoid Staff Participation in the American Bar Association (ABA) Antitrust Section Activities
- In response to the ABA’s criticism of the new Trump administration’s recent actions, on February 14, 2025, FTC Chairman Ferguson prohibited FTC political appointees from holding leadership positions in the ABA, participating in or attending ABA events, and renewing ABA memberships.
- Ferguson pointed to several historical examples of what he asserts have been ABA political partisanship and leftist advocacy to support his decision, as well as views on the ABA’s loyalty to the interests of Big Tech.
Ferguson Intends to Pursue Diversity, Equity, and Inclusion (DEI), Environmental, Social, and Governance (ESG) Collaborations as Section One Violations
- In a document laying out his policy priorities created prior to his appointment to chairman, FTC Chairman Ferguson explained he intends the FTC to “investigate and prosecute collusion on DEI, ESG, advertiser boycotts, etc.,” suggesting the agency may focus its investigations on companies participating in industry groups or other collaborative ventures intended to address social issues or manage industry risks associated with environmental, labor, or diversity issues.
Uncertainty Prevails Over Future FTC Enforcement of the Robinson-Patman Act
- FTC Commissioner nominee Meador has written favorably of federal enforcement of the Robinson-Patman Act, a statute prohibiting discriminatory pricing which was largely ignored until the last years of the Biden administration.
- Meador suggested that the law should be enforced, particularly in the grocery and consumer packaged goods industries. Ferguson and Holyoak have written in recent FTC dissents that the FTC’s resources would be better served by enforcing the law in appropriate cases where the alleged price discrimination harms competition (e.g., involving actors with market power using price discrimination to monopolize).
- Until Meador is confirmed, it is uncertain whether and how Robinson-Patman will be enforced.
NIH’s Mandatory 15% Indirect Rate – Next Steps Following Preliminary Injunction
CLIENT ALERT / US POLICY
March 6, 2025
Read time: 13 min
In partnership with BDO USA, P.C.
On March 5, 2025, a US district court in Massachusetts issued a preliminary injunction blocking the National Institutes of Health (NIH) from implementing a February 7, 2025, “Supplemental Guidance” notice that would establish “a standard indirect rate of 15% across all NIH grants for indirect costs in lieu of a separately negotiated rate for indirect costs in every grant.” Notice No. NOT-OD-25-068, Supplemental Guidance to the 2024 NIH Grants Policy Statement: Indirect Cost Rates (Feb. 7, 2025). The preliminary injunction enjoins the Government from taking any steps to implement, apply, or enforce the February 7 “Rate Change Notice,” extending the prohibition in the temporary restraining orders that the same court issued on February 10, 2025.
The district court’s 76-page memorandum and order finds that the plaintiffs challenging the Rate Change Notice are likely to succeed on their principal claims that the Rate Change Notice violates existing statutes and regulations and is arbitrary and capricious. But although the preliminary injunction prevents NIH from implementing a blanket 15% indirect rate across all NIH grants for the time being, the Government’s actions and arguments in this and other litigation strongly indicate that the Government will pursue a variety of alternative avenues to limit indirect cost recovery in NIH grants and achieve the same bottom-line result. In fact, the court’s analysis may provide NIH with a roadmap to achieving key parts of its intended result, albeit with respect to a narrower class of grants and recipients. For these reasons, recipients with existing negotiated indirect cost rate agreements (NICRAs) – particularly NICRAs that will expire in the near future – should consider taking the following steps:
- Immediately gather relevant documents and accounting data and prepare for a fight, whether under an existing NICRA or the negotiation of a new NICRA.
- Quickly challenge any refusal by NIH to reimburse costs under existing grants in accordance with negotiated indirect rates, as well as any attempt by NIH to unilaterally modify existing grants to reduce indirect cost recovery.
- Carefully consider the benefits and risks of changing accounting practices and understand the limits on your ability to do so.
Background
Context is critical here. In 2017, the first Trump administration attempted to reduce indirect cost rates for all NIH grants to 10%, which was the “de minimis” rate at the time under the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (the “Uniform Guidance) at 2 C.F.R. Part 200, and Department of Health and Human Services (HHS) Supplement to the Uniform Guidance at 45 C.F.R. Part 75. Congress responded by including language in the 2018 Consolidated Appropriations Act requiring that HHS’s regulations relating to indirect costs, “including with respect to the approval of deviations from negotiated rates, shall continue to apply to [NIH] to the same extent and in the same manner as such provisions were applied in the third quarter of fiscal year 2017.” Pub. L. No. 115-141 § 226, 132 Stat 348, 740. The 2018 appropriations rider prohibited HHS and NIH from spending appropriated funds “to develop or implement a modified approach to” HHS’s regulations on indirect rates. Id. Subsequent appropriations, including the 2024 Further Consolidated Appropriations Act, contained the same prohibition. See Pub. L. No. 118-47, div. D, tit. II, § 224, 138 Stat. 460, 677.
Fast forward to 2025. On February 7, NIH published Notice No. NOT-OD-25-068, Supplemental Guidance to the 2024 NIH Grants Policy Statement: Indirect Cost Rates (the “Rate Change Notice”). The Rate Change Notice applies to both new and existing grants and was set to become effective on February 10, 2025 (one business day after it was published). Twenty-two states, the Association of American Medical Colleges, the Association of American Universities, and other plaintiffs immediately filed lawsuits in the US District Court for the District of Massachusetts challenging the Rate Change Notice. See Commonw. of Mass. et al. v. NIH et al., No. 1:25-cv-10338; Ass’n of Am. Med. Colls. et al. v. NIH et al., No., 1:25-cv-10340; Ass’n of Am. Univs. et al. v. HHS et al., No. 1:25-cv-10346. All three suits challenged the Rate Change Notice as contrary to the 2024 Further Consolidated Appropriations Act and HHS’s regulations, and invalid under the Administrative Procedure Act (APA), 5 U.S.C. §§ 701-706. On February 10, 2025, Judge Kelley issued a temporary restraining order (TRO) in Commonwealth of Massachusetts, enjoining NIH from implementing the Rate Change Notice in any of the 22 plaintiff states. The next day, Judge Kelley issued a separate TRO in Association of American Medical Colleges, enjoining NIH from implementing the Rate Change Notice nationwide.
Legal Shortcomings of the Rate Change Notices
The court’s memorandum and order identifies numerous substantive and procedural defects in the Rate Change Notice, which the plaintiffs had emphasized to varying degrees in each of the three lawsuits. This article focuses on the three defects that the Government will likely seek to rectify – and, indeed, may have already begun to rectify – to attempt to achieve substantially similar results as the Rate Change Notice through other means.
1. The Rate Change Notice Is Inconsistent With the Uniform Guidance’s Indirect Rate Provisions, as Well as HHS’s Supplement to the Uniform Guidance
The Rate Change Notice recognizes that, “[i]n issuing grants, NIH generally uses the indirect cost rate negotiated by an agency with cognizance for F&A/indirect cost rate (and other special rate) negotiation.” Notice No. NOT-OD-25-068; accord 45 C.F.R. § 75.414(c)(1) (“The negotiated rates must be accepted by all Federal awarding agencies.”); 2 C.F.R. § 200.414(c)(1) (verbatim). The Rate Change Notice, however, purports to rely on the authority in these regulations to “use a rate different from the negotiated rate for a class of Federal awards or a single Federal award,” in 45 C.F.R. § 75.414(c)(1) (italics added for emphasis). That authority, however, may only be used “when required by Federal statute or regulation, or when approved by a Federal awarding agency head or delegate based on documented justification as described in paragraph (c)(3) of this section.” Id. Section 75.414(c)(3), in turn, requires NIH and other HHS awarding agencies to “implement, and make publicly available, the policies, procedures and general decision making criteria that their programs will follow to seek and justify deviations from negotiated rates.”
The court’s memorandum and order recognizes the obvious fact that the Rate Change Notice is not a “deviation” from negotiated rates for “a class of Federal awards or a single Federal award.” It is a refusal by NIH to accept negotiated rates for any award, despite Section 75.414(c)’s explicit default requirement that “negotiated rates must be accepted by all Federal awarding agencies.” See also 45 CFR § 75.352(a)(4) (requiring pass-through entities to similarly use a subrecipient’s negotiated cost rates in subawards). Moreover, NIH has not published “the policies, procedures and general decision-making criteria” that will be used “to seek and justify deviations from negotiated rates,” whether in the Rate Change Notice or otherwise. The Rate Change Notice does not contain or contemplate “decision making criteria” because it does not allow for further decision making – the Rate Change Notice itself is a blanket decision for all NIH awards. See generally Mem. & Order at 18-22.
Section 75.414(c) recognizes that, once a cognizant awarding agency negotiates rates with a recipient, those rates should be honored by other awarding agencies. This is because the negotiated rate has already been found to reflect a reasonable causal/beneficial relationship between the costs in the indirect expense pool, on the one hand, and the costs in the allocation base for that pool, on the other. Section 75.414(c) recognizes that it may be appropriate to deviate from these negotiated rates for individual awards or classes of awards where, for one reason or another, that causal/beneficial relationship does not hold – e.g., where the individual grant or class of grants receives a substantially greater or lesser benefit from indirect costs than is reflected in the negotiated rates. Any such deviation, however, can only be made on a recipient-by-recipient basis, for an individual grant or a class of grants. To our knowledge, the authority in Section 75.414(c) has only ever been used on a case-by-case basis.
The Rate Change Notice is inconsistent with the Uniform Guidance and HHS’s supplement for other reasons, as well :
- The Rate Change Notice reflects a determination by NIH that any indirect rate above 15% is too high, which turns the Uniform Guidance’s entire approach to indirect rates on its head. Fifteen percent is the “de minimis rate” that recipients are allowed to use as a matter of default – i.e., without negotiating indirect rates or provisional rates and submitting the cost data supporting the proposed rate. 2 C.F.R. § 200.414(f).[1] The Uniform Guidance allows recipients to elect to use the de minimis rate in lieu of a negotiated or provisional rate, but the Rate Change Notice effectively makes the election immaterial for NIH awards, as the Notice prevents NIH from negotiating a higher rate.
- Similarly, the entire purpose of negotiated indirect rates is to avoid agency-specific rates. The Uniform Guidance therefore generally requires agencies to honor the rates negotiated by other agencies. 2 C.F.R. § 200.414(c)(1); 45 C.F.R. § 75.414(c)(1). The Rate Change Notice creates an NIH-specific rate that necessarily will conflict with virtually every existing indirect rate agreement, as no recipient will have an agreement for a 15% rate, because no agreement is necessary to apply the de minimis rate.
The Government may have been expecting the court to rule against it on these grounds. On February 28, 2025, HHS issued a “Policy Statement” that its regulations regarding grants and contracts would no longer be subject to the APA’s notice and comment rulemaking process, which allows members of the public an opportunity to participate in the rulemaking process by reviewing proposed rules and offering an agency their views on the wisdom of rules before they go into effect. (See Policy on Adhering to the Text of the Administrative Procedure Act 90 Fed. Reg. 11029 (Mar. 3, 2025).) Although the APA does exempt matters involving grants and contracts from APA’s notice and comment requirements, HHS in 1971 established a policy of employing notice and comment rulemaking, which courts have held binding on HHS.
Based on HHS’s February 28 Policy Statement, the Government may quickly seek to eliminate the principal barrier that the court identified to the Rate Change Notice by amending Section 75.414(c) without public notice and an opportunity to comment. Although any such amendment would itself be subject to judicial review under the APA, that review would focus on whether the amended rule is arbitrary, capricious, an abuse of discretion, or not in accordance with some other law.[2]
2. The Rate Change Notice Violates the Further Consolidated Appropriations Act of 2024
The court agreed with the plaintiffs that the Rate Change Notice seeks to do exactly what the first Trump administration attempted to do in 2017, and what Congress explicitly prohibited HHS and NIH from doing in each appropriations bill since. Mem. & Order at 22-28. The Rate Change Notice violates Congress’s riders in three ways: (1) by disregarding the deviation process in Section 75.414(c); (2) by spending appropriated funds to “develop or implement a modified approach” to HHS’s existing indirect rate regulations; and (3) by “substantially expand[ing]” the fiscal effect of the deviation in negotiated rates from the fiscal effect of prior deviations.
As with Section 75.414(c), this statutory obstacle may also be short-lived. A final appropriations bill for 2025 has not yet been passed; however, the Trump administration may be able to work with Congress to remove or revise this language in a final 2025 bill.
3. The Rate Change Notice Is Arbitrary and Capricious
The court also agreed with the plaintiffs that the Rate Change Notice fails to provide any meaningful justification or rationale for an across-the-board standard indirect rate for all grants, existing and new, regardless of the terms and conditions, type of grant, or other nuances in grant administration. (Mem. & Order at 30-37.) The court specifically rejected as conclusory and unsupported the Rate Change Notice’s assertion that a 15% indirect rate will allow more funds to be allocated to “direct scientific research costs rather than administrative overhead.” (Notice No. NOT-OD-25-068.) The court ruled that NIH “fails to address how the money will actually be directed to cover direct costs and how that research will be conducted absent the necessary indirect cost reimbursement provided by the Federal Government.” (Mem. & Order at 33.) Similarly, the court faulted NIH’s unsupported premise that there is a “market” for funded research, disregarding key differences between how the Federal Government funds research and how private foundations fund research, and the types of research that these organizations fund. Id. at 34. More fundamentally, the court faulted the Rate Change Notice for not considering whether aligning Federal indirect rate reimbursement with reimbursement by private foundations “is actually a good thing.” Id. at 35.
The Rate Change Notice also focuses entirely on indirect costs, even though the total cost that NIH will reimburse in a given grant is a combination of direct and indirect costs 45 C.F.R. § 75.402, and even though HHS’s regulations recognize that “[t]here is no universal rule for classifying certain costs as either direct or indirect (F&A) under every accounting system” id. § 75.402. See also id. § 75.414(b) (“Because of the diverse characteristics and accounting practices of nonprofit organizations, it is not possible to specify the types of cost which may be classified as indirect (F&A) cost in all situations.”). The Rate Change Notice therefore arbitrarily focuses on only one side of the incurred cost coin and punishes recipients that hold multiple grants and have invested in facilities and other administrative capabilities that support those multiple grants, even if those same recipients’ overall costs are relatively inexpensive and efficient for the research they perform and the science they advance.
Ultimately, however, this aspect of the court’s order may provide NIH and HHS with a roadmap for the development of a new rule that achieves the same result. As noted above, HHS’s February 28 policy statement signals that HHS believes it can enact rules without notice and comment rulemaking, eliminating a potentially time-consuming obstacle to revising Section 75.414(c). Although any new or amended rule would itself be subject to judicial review under the APA, NIH and HHS now have a checklist of considerations that they could seek to address to support a new regulatory approach to indirect rates.
Next Steps
Although the preliminary injunction prevents NIH from implementing a blanket 15% indirect rate across all NIH grants, the Government’s arguments and actions in this litigation and in litigation involving other funding freezes strongly suggest that the Government will seek to achieve the same result through other means. If and when Congress passes an appropriations bill for 2025, Congress may remove or relax the statutory prohibition on changing HHS’s indirect rate rules. And the Government may seek to issue a new deviation under Section 75.414(c) for something fewer than all NIH grants, or it may seek to do away with Section 75.414(c) altogether. Either way, the Government may move quickly to position itself to nominally argue that it is making individualized deviation decisions consistent with law. Other district courts have criticized the Government’s efforts to “simply search for and invoke new legal authorities as a post hoc rationalization for the enjoined agency action,” but have struggled to draw the line between post hoc rationalizations and “undertaking a good-faith, individualized assessment of a contract or grant and, where the terms or authority under law allows, taking action with respect to that particular agreement consistent with any procedures required.” ECF No. 28 at 2, 6, Global Health Council et al. v. Trump et al., ECF No. No. 25-00402 (D.D.C. Feb. 20, 2025). The Government will likely test the location of that line here. Finally, the Government will almost certainly appeal the preliminary injunction and may receive an appellate ruling that vacates or relaxes the injunction.
Given this uncertainty, recipients with existing NICRAs – particularly NICRAs that will expire in the near future – should consider taking the following steps:
1. Immediately gather relevant documents and accounting data and prepare for a fight, whether under an existing NICRA or the negotiation of a new NICRA.
Recipients should gather their indirect rate proposals and agreements, along with all supporting information provided to the cognizant Federal agency that negotiated those indirect rates. Recipients should also gather all grant proposals and applications documenting their reliance on the negotiated indirect rates, as well as any correspondence or submissions regarding indirect costs for individual awards. The goal is to establish a history of agreement with the Federal Government that the negotiated indirect rates reflect the recipients’ actual, allowable indirect costs for all grants. These documents and data will be critical not only in the event that the Government refuses to honor negotiated rates under existing grants, but also will be important for negotiating rates for future years not covered by an existing agreement, and for responding to future attempts by the Government to justify deviations for particular grants. This information will also be critical to defending against efforts to adjust negotiated rates under existing regulations, which generally require the Government to demonstrate that the recipient’s cost proposal for those rates included unallowable costs. 45 C.F.R. § 75.411.
2. Quickly challenge any refusal by NIH to reimburse costs under existing grants in accordance with negotiated indirect rates, as well as any attempt by NIH to unilaterally modify existing grants to reduce indirect cost recovery.
The preliminary injunction in Massachusetts v. NIH and other lawsuits under the Administrative Procedure Act will provide a vehicle to challenge attempts by NIH to create post hoc rationalizations for a blanket mandatory 15% indirect rate. As the court recognized, however, the Tucker Act 28 U.S.C. § 1491 provides a vehicle for a monetary judgment against a Federal agency under a grant. Recipients should consider carefully whether a particular action by NIH reflects the implementation of a broader effort to effectuate some arbitrarily low cap on indirect costs, or instead reflects a refusal by NIH to honor the terms of a particular grant. Because these are not mutually exclusive scenarios, recipients will need to carefully select the appropriate forum for ensuring that they receive the reimbursements to which they are entitled. In any case, it is important for recipients to assert their rights quickly, before the Government can backfill the record with additional post hoc explanations and arguments.
3. Carefully consider the benefits and risks of changing accounting practices and understand the limits on your ability to do so.
As noted above, both the Uniform Guidance and HHS’s regulations recognize that “[t]here is no universal rule for classifying certain costs as either direct or indirect (F&A) under every accounting system.” 2 C.F.R. § 200.412; 45 C.F.R. § 75.412. These regulations also recognize that the “diverse characteristics and accounting practices of nonprofit organizations” allow for a variety of approaches to classifying costs as direct or indirect. 2 C.F.R. § 200.414(b); 45 C.F.R. § 75.414(b). Although these regulations provide recipients with discretion to reasonably select a particular classification, the regulations repeatedly emphasize the need to consistently follow the selected approach. 2 C.F.R. §§ 200.403(d), 200.412; 45 C.F.R. §§ 75.403(d), 75.412. The requirement consistently applies even if a recipient elects to use the de minimis rate. 2 C.F.R. § 200.414(f); 45 C.F.R. § 75.414(f).
NIH’s standard rate agreements typically provide that NIH’s acceptance of the recipient’s rates is subject to several conditions. In addition to the condition that costs included in the recipient’s rate proposal are allowable, the agreement requires that the same costs that have been treated as indirect costs are not claimed as direct costs, and that similar types of costs have been accorded consistent accounting treatment. Violation of these conditions could provide a basis for NIH to rescind the rate agreement and potentially assert a claim for payments made pursuant to the agreement.
Further, the consistent treatment of costs as either direct or indirect, but not both, is a key factor regarding the adequacy of an organization’s accounting system. The Government requires grantees or contractors to maintain adequate accounting systems when receiving and disbursing Government funds. The Government may, and does, perform its own audits and assessments of grantee or contractor accounting systems to determine if such systems are capable of accounting for Federal funds received on a consistent, fair, and equitable basis. If the Government determines that accounting system deficiencies exist, the Government may determine the accounting system to be inadequate, thereby potentially negatively affecting a grantee’s or contractor’s ability to receive additional Federal funding opportunities.
Any change in accounting practices must therefore be done carefully and transparently, and in most cases should only be done prospectively. Recipients considering such a change should consult with experienced accounting and legal professionals to ensure that the change is appropriate and does not hand NIH a basis to achieve a unilateral rate reduction for a particular grant that achieves the same or a similar result that NIH sought to achieve through the Rate Change Notice.
Federal Court Blocks Trump’s DEI-Related Executive Orders Nationwide
CLIENT ALERT / US POLICY
February 25, 2025
Read time: 3 min
Shortly after taking office, President Donald Trump issued two executive orders (EOs) targeting diversity, equity, and inclusion (DEI) programs: EO 14151, “Ending Radical And Wasteful Government DEI Programs and Preferencing,” and EO 14173, “Ending Illegal Discrimination And Restoring Merit-Based Opportunity” (collectively, the DEI-related EOs).
On February 21, 2025, following a lawsuit filed by the National Association of Diversity Officers in Higher Education and the American Association of University Professors (collectively, the plaintiffs), the US District Court for the District of Maryland granted a motion for preliminary injunction based on First and Fifth Amendment challenges to the DEI-related EOs. The court’s order prevents certain aspects of the EOs from taking effect nationwide until a final determination is made on the plaintiffs’ constitutional challenge.
Legal Overview
The plaintiffs challenged the following three specific provisions in the DEI-related EOs as being unconstitutional:
- Termination Provision: A provision that directed federal agencies to terminate “equity-related” grants or contracts within 60 days.
- Certification Provision: A provision that required federal agencies to include a term in contracts and grants requiring federal contractors and grantees to certify that they do not operate any programs promoting DEI that violate federal anti-discrimination laws as a condition of receiving funding.
- Enforcement Threat Provision: A provision that directed the attorney general to take measures to deter DEI programs and identify potential civil compliance investigations.
The plaintiffs argued that these provisions collectively violate the First and Fifth Amendments because they are designed to chill viewpoint speech. They also asserted that the provisions are unconstitutionally vague in informing federal contractors that may be exposed to liability under the False Claims Act what their obligations are and how to comply with them.
The court agreed with the plaintiffs, concluding that:
- The Certification and Enforcement Threat Provisions likely violate the First Amendment by chilling speech and imposing viewpoint-based restrictions; and
- The Termination and Enforcement Threat Provisions are likely unconstitutionally vague, failing to provide clear guidance and inviting arbitrary enforcement.
What Companies Should Do Next
While the nationwide injunction pauses some of the more controversial provisions included in the DEI-related EOs, it is only a preliminary finding, and the Trump administration may take steps to challenge it. Companies should use this time to work with legal counsel to proactively audit their DEI policies to ensure compliance with existing laws while maintaining alignment with company values.
Joseph Anderson, a law clerk in New York office, also contributed to this client alert.
Lawmakers Revisit Tax Treatment of Carried Interest
CLIENT ALERT / US POLICY
February 21, 2025
Read time: 5 min
The tax treatment of carried interest has long been a subject of political debate. Since 2007, almost annually, the taxation of carried interest has found its way into either proposed legislation or presidential budget proposals. Most recently, on February 6, 2025, US President Donald Trump had discussions with Republican leadership while Democratic leadership reintroduced legislative proposals to treat carried interest as ordinary income.
Overview of Carried Interest
Private investment fund sponsors typically receive management fees (based on a specified percentage of the fund’s capital commitments) and carried interest. Frequently referred to as a “loophole,” carried interest is a contractual right that qualifies as a “profits interest” for tax purposes, entitling the sponsor to a share of the gain recognized by an investment fund. Like any other partner, the character of the income or gain allocated to the sponsor with respect to carried interest is determined based on the character of the income or gain recognized by the fund. If the sponsor’s carried interest is attributable to qualified dividend income or, subject to the limitations imposed under Section 1061 of the Internal Revenue Code, long-term capital gain recognized by the fund, the sponsor is eligible for favorable federal income tax rates (generally at a 23.8% federal income tax rate).
Section 1061 and the 2021 Treasury Regulations
Enacted in 2017 as part of the Tax Cuts and Jobs Act, Section 1061 recharacterizes certain gain that would otherwise qualify as long-term capital gain with respect to “applicable partnership interests” as short-term capital gain. An applicable partnership interest is any interest in a partnership that, directly or indirectly, is transferred to – or is held by – a taxpayer in connection with the performance of substantial services by that taxpayer, or any other related person, in any applicable trade or business. Under Section 1061, a three-year holding period (instead of the typical one-year holding period) generally is required for a carried interest holder to qualify for long-term capital gains treatment.
Prior Carried Interest Proposals
Prior to the enactment of Section 1061, several carried interest recharacterization bills and other similar legislative proposals were considered by US Congress. Beginning in 2007, many bills proposed to tax all or a portion of income earned by fund sponsors from carried interest as ordinary income. One set of proposals would have applied solely to funds engaged in investment or real estate activities while a broader set of these proposals would have applied to carried interest from any fund, regardless of the fund’s activities.
Various proposals sought to treat certain net income derived from, and gain on the disposition of, an “investment services partnership interest” as ordinary income. This would have subjected the income and gain to a higher tax rate and self-employment taxes. These bills generally defined an “investment services partnership interest” as a partnership interest held by any person in connection with the conduct of a trade or business that involves certain investment activities, which would include most fund sponsors.
Since the enactment of Section 1061, Congress has continued to consider the federal income tax treatment of carried interest. Notably, as part of the deliberations over what became the Inflation Reduction Act of 2022, Congress considered further limiting long-term capital gain eligibility for carried interest by, among other things, increasing the required holding period from three to five years.
Current Carried Interest Legislation Proposals
On February 6, 2025, President Trump met with Republican leadership and discussed including the elimination of preferential tax treatment for carried interest in a list of priorities he wants to accomplish in this year’s tax bill. While President Trump previously called for ending capital gains eligibility for carried interest in his 2016 campaign tax reform, the Tax Cuts and Jobs Act of 2017 only tightened eligibility requirements by enacting Section 1061.
On the same day President Trump discussed ending the carried interest preferential treatment, Democratic leadership proposed new bills that would treat carried interest as compensation (taxed at ordinary income tax rates and subject to self-employment taxes), eliminate the preferential tax treatment of qualified dividends, and eliminate the exclusion for gain from the sale of qualified small business stock, in each case, to the extent realized with respect to an investment services partnership interest.
The Trump administration’s policy on carried interest has not yet been fully defined and current bills on the tax treatment of carried interest are in the beginning stages of the legislative process, so it remains to be seen whether carried interest holders’ eligibility for preferential tax rates will be further curtailed or eliminated altogether.
McDermott’s tax and investment funds teams have extensive experience helping investment fund sponsors navigate the complexities of carried interest taxation. If you have questions or need advice, please contact your primary McDermott lawyer, the authors of this article, or a member of our investment funds team.
