Tax Policy Implications of Democrats’ Narrow Margins

By Stuart E. Leblang, Michael J. Kliegman,  and Amy S. Elliott

It actually happened—Democrats swept Georgia’s Senate runoff elections, securing control of the Senate.¹When Joe Biden is sworn in as the 46th U.S. President on January 20, the fact that he will be leading a unified government will both increase the chances that he could make progress on his broader agenda and (hopefully) mark an end to the general stalemate in Congress—something that markets seem to be cheering.²

But with such narrow majorities in both the House (where, for at least the start of 2021, Democrats can only afford to lose two votes ³ ) and the Senate (where Democrats cannot afford to lose any votes ⁴ ), has the Georgia Senate runoff sweep actually changed the prospects for Biden’s tax agenda?  Yes.  Some of the tax hikes sought by Biden are now back on the table— albeit in a likely tempered fashion.  We think the three big tax changes that have the highest chance of coming to fruition in 2021 that could impact stock prices the most are:

1. An increase in the corporate tax rate from 21 percent to (maybe) 25 percent plus the reinstatement of a corporate minimum tax in some form;
2. An increase in the tax burden on foreign profits (specifically changes to the rate and scope of the tax on global intangible low-taxed income or GILTI);
3. An increase in the tax rate on investment income (capital gains) for the wealthy.

When and how these tax changes will come into play is in flux, but depends in large part on whether Democrats decide to use the streamlined budget reconciliation process, which is expected to be reserved for legislation that does not attract much bipartisan support and that includes tax increases.  At this time, we think that 2021 will be most likely be dominated by:

• A COVID relief package, passed under regular order (meaning a bipartisan group of 60 senators will have to agree) if possible and with no tax increases; ⁵ 
• An infrastructure/jobs/stimulus package, likely passed using budget reconciliation given the expected tax pay-fors ⁶ (increasing taxes on corporations and the wealthy); and
• A bill expanding healthcare, likely passed using budget reconciliation.

The COVID relief package that Biden unveiled January 14 (the “American Rescue Plan”) is expected to advance as soon as he gets into office.  But its size and scope—reportedly $1.9 trillion ⁷ and including a stimulus payment increase to $2,000 per person, increased federal unemployment benefits, $350 billion in state and local government funding and an expansion of child tax benefits ⁸ —could make it hard to attract enough Republican support.  In that case, the bill could end up getting fast-tracked by abandoning efforts to pass it under regular order, but then certain of its provisions may have to be jettisoned.  Further, it is our belief that any package that includes tax increases will face opposition by future Senate Minority Leader Mitch McConnell (R-Ky.).

The Limits of Reconciliation

At least two major pieces of Biden’s COVID relief package may have to be stripped from the bill if it ends up in reconciliation.  The reconciliation rules are fairly strict, and unless lawmakers come up with creative ways to navigate them, the following proposals could be nonstarters:

• The $350 billion in emergency funding for state, local and territorial governments arguably constitutes discretionary (as opposed to mandatory) spending. ⁹ 
• Raising the federal minimum wage from $7.25 per hour to $15 per hour arguably does not have a budgetary impact. ¹⁰ 

The sticking point in reconciliation is generally the so-called Byrd rule, which was designed to ensure that reconciliation is only used to enact legislation to effect deficit reduction.  At a high level, a provision that does not impact outlays or revenues generally violates the Byrd rule.  Other limitations have been codified, including—in 2 U.S.C. §641(g)—using reconciliation to change Social Security benefits or funding (e.g., payroll tax changes are not allowed).

While some have argued that an increase in the minimum wage could survive in reconciliation because it raises revenue, ¹¹ it has not been scored to raise revenue ¹² and any net increased employment taxes associated with the increased wages may not be enough to survive challenge given their merely incidental ¹³ nature (namely, the purpose of the policy is not focused on the revenue impact). ¹⁴ 

For more on how the reconciliation rules could impact Biden’s tax agenda, see our prior report “Predicting How Biden’s Tax Hikes Would Impact Business” (September 10, 2020), appended.  We also put out a primer in 2017 on reconciliation, entitled “A Trader’s Guide to the Budget Process Necessary to Achieve Substantial Business Tax Cuts” (May 22, 2017), also appended. ¹⁵ 

Two Shots at Budget Reconciliation

Biden effectively has two budget reconciliation vehicles (by which legislation can be made into law with only 50 senators and the Vice President) at his disposal this year—one tied to a FY2021 budget resolution and a second tied to a FY2022 budget resolution (the FY2022 budget resolution can be adopted before the FY2022 fiscal year begins on October 1, 2021).  If Biden decides to go the reconciliation route, Senate Budget Committee Chair Bernie Sanders (I-Vt.) would play a larger role and may push for a more comprehensive deal (that could include stimulus, infrastructure, clean energy and healthcare items in the initial COVID relief package). ¹⁶ Although reconciliation is considered a fast-track procedure, it could still likely take months, ¹⁷ although lawmakers will likely race to get something in place before increased unemployment compensation benefits expire in mid-March. ¹⁸ 

It is important to stress that reconciliation will not be easy.  If Biden chooses to go down that path, it will be extremely difficult for the House and Senate to pass a budget resolution in a closely divided Congress.  Biden will essentially need every Democrat (including West Virginia Sen. Joe Manchin) to support such a move away from regular order.  Even though a few Republicans might ultimately vote in favor of a reconciliation bill (depending on what is in it), it is not expected that any Republicans will vote in favor of the related budget resolution, which is a necessary precursor to reconciliation.  Further, as we explained in our September 10, 2020 report, we think Democrats’ control of the Senate is too tight to make broad elimination of the filibuster (the so-called nuclear option) a reality. ¹⁹ 

In the table on the next page, we outline those tax increases impacting the capital markets that we think have the greatest chance of being implemented in 2021.  For more details on the various tax increases, please see our September 10, 2020 report (“Predicting How Biden’s Tax Hikes Would Impact Business”).  However, in this report, we have included an in-depth discussion on the possible changes to the GILTI statute (for more on that, see “Increasing the Tax on GILTI”).

Effective Dates for Tax Changes

Effective dates are critical to understanding the impact of tax increases, especially when it comes to investment income (the tax rate on capital gains).  We have written extensively about this (for example, see our memo “Handicapping Potential Effective Dates for Tax Reform Based on Historical Precedent” (Feb. 8, 2017), appended).  But the effective date issues surrounding capital gains are particularly tricky, because taxpayers can generally choose to hold onto an investment and avoid a realization event if the tax consequences would be too dire (meaning a capital gains tax increase could actually result in a loss of revenue for the fisc ²⁷ ).

In 2012, when the tax rate on capital gains was 15 percent, the Joint Committee on Taxation (JCT) estimated that taxing capital gains at ordinary income rates in 2013 and beyond (specifically, at a top rate of 38.02 percent) would lose $850 billion over 10 years (assuming no repeal of stepped-up basis at death, something we think is unlikely to get through this Congress).^[28]According to the Committee for a Responsible Federal Budget, JCT “tends to estimate the revenue-maximizing level [of capital gains taxation] at about 28 percent,” ²⁹ which is far lower than Biden’s 39.6 percent proposal.

If Biden includes an increase in the capital gains tax rate in a package so that he can raise revenue—as we would expect—and not merely to address Democratic concerns regarding income inequality, then he may decide to make the increase prospective (effective beginning in 2022) in order to give investors a short window of time to sell and lock in the lower rate, as has been done in the past. ³⁰ While there is a risk that the change could be made effective as of the date the details of the legislation were announced^[31]or even retroactive back to the beginning of 2021, ³² we do not think either is particularly likely.

Other (Less Likely) Tax Changes

Note that the tax increases we think are likely do not include a major re-write of the international tax provisions contained in the 2017 Tax Cuts and Jobs Act (TCJA) (something we generally think lawmakers neither have the bandwidth for nor the desire to pursue), but simply a tweaking of the existing GILTI regime.

They also do not include items such as a carbon tax with a border adjustment (which, as noted below, we think could nevertheless end up in a bill), even though Janet Yellen, Biden’s pick for Treasury secretary, ³³ supports such a tax. ³⁴ Similarly, a cash flow tax with a border adjustment (something we have also written about extensively ³⁵ ) seems unlikely to us at this time, although it, too, could make an appearance in a bill this year if the conditions are right. ³⁶ 

These proposals—although always a favorite of tax policy wonks from both political persuasions—historically have had trouble gaining broad support from lawmakers.  We expect it may take some more time for that to change (although maybe not much more time).

Finally, we would be remiss not to mention that even though Biden will have the benefit of a unified government when he enters office, his margins are razor-thin.  If legislating becomes difficult (for example, because a moderate Democrat decides to switch parties to change the balance of power in Congress), Biden may have to shift gears and rely more on formal notice- and-comment regulations in order to achieve his business tax policy goals (mainly rolling back some of TCJA).^[38]

In that case, he will need to carefully navigate the Administrative Procedure Act (APA) and the Anti-Injunction Act (AIA) so that any rule changes would withstand court challenge. ³⁹ We expect Biden will not try any fancy maneuvering to increase the tax burden on businesses outside these confines. ⁴⁰ 

For more on these possible regulatory rewrites, see “Changing GILTI Regulations.”

Although we are focused on business tax increases, there is also the chance that business tax relief could make its way into legislation in 2021, including in particular delaying the tightening of how much interest expense businesses can deduct (pushing off the planned 2022 switch from EBITDA to EBIT for purposes of calculating a company’s Section 163(j) limit), delaying the research and development cost amortization planned for 2022 and extending full expensing of qualified business property (as full expensing under Section 168(k) phases out in 2023).  In addition, Biden has proposed a new 10 percent Made in America tax credit to try to get more businesses to relocate their supply chains to the United States, although the details are sparse.

What to Expect on Day One

As soon as Biden takes office, it is expected that he will order all work to stop on pending regulations (those that have not yet been finalized). ⁴³ This was done by the last five presidents, and we have no reason to believe Biden will not do the same. ⁴⁴ Any proposed tax regulations that the incoming Biden administration does not like can then simply be withdrawn. ⁴⁵ At that point, Treasury and the IRS may decide to draft and reissue a revised proposal or may simply decide that further guidance is unnecessary.

Rules that were already published as final will generally not be impacted by such a freeze, but could be subject to possible repeal under the Congressional Review Act (CRA) or could be modified prospectively by the Biden administration (amending the regulations to, for example, narrow their scope, modify the approach taken or even revoke them altogether ⁴⁶ ).  Because Democrats will control both chambers of Congress when Biden takes office January 20, CRA repeal of final rules and certain other guidance ⁴⁷ promulgated toward the end of Trump’s term would be feasible, but we view the risk of this as low in the tax space given the other priorities on lawmakers’ plates and the substance of the tax regulations that would be at issue. ⁴⁸ 

Absent the “if legislation is stymied” scenario floated above, we also think the chances are low that Biden would bother to prospectively modify any final tax rules issued by the Trump administration (including the previously mentioned GILTI high tax regulations).  Doing so would require carefully jumping through a number of hoops (namely, the APA and the AIA, as discussed in more detail below).

Further, a decision on that likely will not happen until a new Treasury Assistant Secretary for Tax Policy has been installed.  Biden has yet to communicate who he is considering for the position, although in some circles, a top contender is thought to be New York University School of Law Professor Lily Batchelder, who is currently leading Biden’s IRS transition team. ⁴⁹ 

Another potential candidate for a high-level Treasury tax position is said to be Kimberly Clausing, formerly an economics professor at Reed College who recently joined the University of California, Los Angeles, School of Law faculty.  Clausing has written extensively on international taxation and has argued that the corporate tax rate should be increased and the U.S. international tax rules should be reworked to better target profit shifting and further decrease incentives for offshoring.^[50]She has also been critical of the business tax cuts in the COVID relief bill passed in March 2020 (the Coronavirus Aid, Relief, and Economic Security (CARES) Act). ⁵¹ We are not in a position to be able to predict who might be the next Treasury Assistant Secretary for Tax Policy, but it is not hard to imagine a world in which Clausing might face a confirmation challenge.

Assuming the timing of Biden’s pick proceeds at the same pace as her predecessor (Trump’s pick and the current Treasury Assistant Secretary for Tax Policy is David Kautter, who was confirmed in August 2017 ⁵² ), one might expect little movement on such final rule modifications in Biden’s first year in office.

One other tax item to watch out for is the likely springtime release of the so-called green book, ⁵³ a document traditionally issued by Treasury whenever the sitting president releases his budget.  The document outlines in detail those budget proposals that raise money—i.e., all of the tax proposals—so it could serve as a preview to what tax hikes Biden is interested in pursuing, even via administrative means. ⁵⁴ It usually comes out in February, but has been known to be delayed until as late as May in recent years, a delay that would be expected to be more likely in the first year of a president’s term.  Trump’s Treasury has yet to release any green books, even though it has released budgets.

Regardless, the first priority of the incoming Biden administration will be getting COVID and related economic problems under control. ⁵⁵ While business tax changes are expected further down the road (especially given Biden’s history as tax dealmaker ⁵⁶ ), the tax changes that come first will likely be tied to individual relief efforts, including expanding the child and earned income tax credits.

Increasing the Tax on GILTI

The changes Biden wants to make to the tax on global intangible low-taxed income (GILTI) involve statutory provisions ⁵⁷ that can only be changed through an act of Congress.

The GILTI provision generally imposes a tax (of about 10.5 percent) on certain “intangible” income earned in a foreign country if it is earned by a foreign corporation that is controlled by a U.S. corporation.  For GILTI purposes, the “intangible” income that is taxed is generally all income earned by the foreign corporation (other than highly mobile, passive so-called subpart F type income) in excess of a 10 percent return on what amounts to the foreign corporation’s depreciable property (technically, qualified business asset investment or QBAI).

The three major changes Biden seeks to make to the way GILTI is taxed are:

1)   Doubling the rate from 10.5 percent to 21 percent;

2)   Disallowing the 10 percent return described above (QBAI), resulting in more income being deemed intangible and subject to the GILTI tax; and

3)   Calculating GILTI on a country-by-country basis, rather than on an aggregate basis (the statute currently calculates income and foreign taxes for determining GILTI by blending amounts across all controlled foreign corporations or CFCs).

While it is possible that Biden could succeed in doubling the GILTI rate to 21 percent, it is important to point out that, the way GILTI works today, its rate is tied to the base corporate rate (right now, it is half the base rate ⁵⁸ ).  So if Democrats increase the base corporate rate to, say, 25 percent, such an increase will cause an automatic increase in the GILTI rate to 12.5 percent.

Biden may very well push for the two to be calculated separately (as we think he envisioned— given expectations that Biden wanted the corporate rate increased to 28 percent while the GILTI rate would be increased 21 percent, 75 percent of the base rate).  The easier path for lawmakers would be to preserve the existing tie between the two.  Alternately, they could make the GILTI rate set to 75 percent of the base rate so that if the base were 25 percent, the GILTI rate would be 18.75 percent.  It is unclear how much support Biden has for the QBAI and country-by- country changes, but legislation that made those changes could very well also rework the tie between the base rate and the GILTI rate, making 18.75 percent more likely.

The concept of increasing the tax burden on foreign profits would likely attract broad Democratic support.  But these specific detailed changes to GILTI might run into some headwinds if lawmakers decide to look carefully at them.  (There is a real risk that if GILTI is too harsh, it could backfire by pushing more corporations to consider inverting—moving their tax domicile outside of the United States.) Regardless, we would not expect any GILTI changes to get passed outside the context of reconciliation.

In addition, it will be interesting to see how the Biden administration handles ongoing negotiations with the Organisation for Economic Co-operation and Development (OECD) and some 137 countries and jurisdictions regarding sweeping changes to the international tax rules.  The negotiations revolve around two proposed reforms:  (1) so-called Pillar One, which would reallocate taxing rights to countries where a business’s users are located (which is of particular interest to digital firms, ⁵⁹ among others), and (2) so-called Pillar Two, which would impose a global minimum tax—the GloBE—on the biggest firms.  This multilateral effort is aimed at reaching consensus on these reforms by mid-2021, putting pressure on the Biden administration to get up-to-speed quickly if it wants to influence the direction of the talks.

The Trump administration had been trying to get the OECD to agree that any non-U.S. entity subject to GILTI should effectively be exempt from the GloBE regime—a position that generally has not been well-received by other negotiators.  However, the GloBE rules are applied on a country-by-country basis, whereas GILTI is generally applied after aggregating the relevant income and taxes of all foreign subsidiaries (those that are subject to high taxes and low taxes).

Many in the business community argue that if U.S. multinationals are subject to both GILTI and GloBE, they will be at a serious disadvantage and will ultimately come out as losers in the race to secure a larger share of the global market.  But Biden has arguably made his stance on aggregate versus country-by-country clear, ⁶⁰ so there is some expectation that he would support a harsher (country-by-country) application of GloBE.

Changing GILTI Regulations

Revisiting regulations can be challenging if they are final, but many commentators have targeted one GILTI provision—the high-tax exception—as particularly susceptible to change by Biden’s administration.  If you ask Democratic taxwriter Sen. Ron Wyden of Oregon, the GILTI high-tax exception was “pulled out of thin air” by Trump’s Treasury Department and lets “megacorporations choose how they want to be taxed.” ⁶¹ But many disagree, including an official who spent seven years at Treasury—first during the Obama administration and then staying on to help write the TCJA regulations.  Doug Poms, who served as Treasury International Tax Counsel, took issue with Wyden’s remarks that the high-tax exception was a giveaway, saying:  “It was a well-thought-out position on what was a reasonable reading of the statute.” ⁶² 

The GILTI high-tax exception generally provides that if you have income that is taxed in a foreign country at a rate above 90 percent of the U.S. rate (90 percent of 21 percent is 18.9 percent), then you can elect to exclude that income from potentially being subject to tax under the GILTI regime.  Treasury issued regulations allowing for the exception after enactment of the GILTI regime caused many companies to consider planning opportunities that would have converted their GILTI into subpart F income—a phenomenon previously unheard of. ⁶³ 

In general, foreign-source income is either GILTI, subpart F income or income from QBAI.  The final GILTI high-tax exception regulations also modified the subpart F rules to conform the high- tax exception across the two regimes (making the high-tax exception that had been in the subpart F rules more restrictive so that it matched that added to the GILTI rules).  If the GILTI high-tax exception were to go away, some argue that it will cause more taxpayers to plan into the subpart F regime, causing a significant loss of revenue for the U.S. fisc.

Although a modification or outright repeal of the GILTI high-tax regulations probably represents one of the biggest regulatory tax hike dangers from a business tax perspective, it, too, would likely require a new Treasury Assistant Secretary for Tax Policy, a Senate-confirmed position that could take until the third quarter of 2021 to be finalized.  It is expected that the candidate will be asked in her confirmation hearing what her position is on these regulations, which could complicate her approval.  Companies that reportedly pushed for and presumably benefit from the GILTI high-tax exception include (among others) Leggett & Platt, Incorporated (NYSE:  LEG), News Corporation (NASDAQ:  NWSA), Sealed Air Corporation (NYSE:  SEE) and W. R. Grace & Co. (NYSE:  GRA). ⁶⁴ 

Another final regulation that has attracted criticism is the FTC limitation rules that, among other things, decline to allocate R&D expenses to GILTI or subpart F inclusion, instead choosing to allocate such expenses only to certain intangible income defined to exclude those categories.  Critics argue that the exclusion creates a “subsidy” that reflects “an arbitrary and unprecedented interpretation of the statute,” ⁶⁵ while others defend Treasury’s stance in the regulations as an improved “attempt to match the relevant category of expense with the relevant categories of income that the expense is intended to generate.” ⁶⁶ Of lesser risk is possible changes to the base erosion and anti-abuse tax (BEAT) regulations. ⁶⁷ 

Jumping Through Hoops to Modify Rules

Until recently, Treasury and the IRS took the position ⁶⁸ that most tax rules were not subject to the pre-promulgation notice-and-comment rulemaking procedures under the APA, because they believed that most tax rules were generally not legislative regulations but interpretive regulations issued under IRC Section 7805 (and arguably exempt from the APA). ⁶⁹ 

It was commonplace for the IRS to issue proposed regulations concurrently with temporary regulations that sought comments but were legally binding immediately (while claiming that the APA was inapplicable).  This arguably made it more difficult for taxpayers to challenge the validity of a rule before they would effectively be forced to comply with it.  This issue is now in front of the Supreme Court as it decides the scope of the AIA (which generally provides that federal courts cannot hear cases designed to restrict the ability of Treasury to assess or collect tax) ⁷⁰ as applied to certain tax rules. ⁷¹ 

Aspects of this so-called tax exceptionalism ⁷² ended in 2018 when a new memorandum of agreement (MOA) was entered into between Treasury and the Office of Management and Budget (OMB) Office of Information and Regulatory Affairs (OIRA), effectively requiring tax regulations to be subject to OIRA review (additional, arguably political, scrutiny) pursuant to Executive Order 12866 in cases where the action will have a major impact on the economy, raises novel legal or policy issues or creates a serious inconsistency. ⁷³ There is already speculation that the incoming Biden administration may—by simple executive order—scrap the 2018 MOA and return to a time when tax regulations largely sidestep OIRA. ⁷⁴ 

The takeaway is that in order for a Biden Treasury to streamline, rework or revoke tax regulations that the Trump administration already finalized, it will take time and care. ⁷⁵ Proposed regulations must be issued and comments must be sought and responded to (the comment period is 60 days).  The new regulations must be crafted in a way as to withstand potential challenges that they exceeded the authority provided by Congress or are contrary to the statute (or, if the statute is ambiguous, that the new regulations are arbitrary and capricious).  Depending on the complexity of the guidance, this process (crafting proposed regulations, seeking comments, finalizing the regulations to take into account the comments) could take over a year.

It is easy to say you want to roll back tax rules from a prior administration, but it can be a difficult exercise to actually accomplish.  The Trump administration sought to roll back final debt- equity regulations designed to, among other things, target earnings stripping (T.D. 9790). ⁷⁶ While Trump’s Treasury did not end up pulling the entire rule package, it was able to revoke ⁷⁷ the documentation rules in Treas. Reg. Section 1.385-2 (a process that took years ⁷⁸ ).  Trump’s Treasury also intended to streamline the controversial recast rules in Treas. Reg. Section 1.385-3 that treat as stock certain debt instruments (namely to withdraw the per se funding rule in what has also been referred to as the distribution regulations), ⁷⁹ but it has yet to do so, and time is running out.

Biden’s Spending Agenda

As we detailed in a prior report, ⁸⁰ many of the tax increases initially proposed by Biden were already earmarked to help pay for his spending priorities.  For example, the promised $2 trillion investment in alternative energy in his first term—part of his larger so-called Build Back Better infrastructure plan—would be paid for in large part by his planned increase to the corporate tax rate.^[81]He would pay for expanded access to affordable healthcare by increasing taxes on the wealthy. ⁸² Other Build Back Better costs would be funded in part by imposing a 15 percent corporate minimum tax on book income—to “ensure that corporate America finally pays their fair share in taxes”—and by “reversing some of Trump’s tax cuts for corporations.” ⁸³ 

But with narrow Democratic majorities in the House and Senate, Biden’s spending priorities stand their best chance in budget reconciliation.  There are exceptions that could get bipartisan support, ⁸⁴ including certain investments in infrastructure (such as access to universal high-speed broadband, the importance of which has grown during the pandemic).  Lawmakers seem to be coalescing around the idea that infrastructure spending is really economic stimulus that could either be entirely debt-financed or only paid for in part.  (A common infrastructure pay-for is an increase in the federal gas tax, but that is a heavy lift—such an increase has not occurred since 1993—and is not particularly sustainable, given the increasing prevalence of electric vehicles.)

Even Yellen has acknowledged the need for deficit spending. ⁸⁵ While it is possible we could get through 2021 without any increases in business taxes, investors should b

^{[1] This represents the fourth time in history that the Senate has been split 50-50, with the vice president serving as tie-breaker.  At noon on January 20, when Joe Biden and Kamala Harris are sworn in, the Senate will effectively be Democratic controlled, with the leader of the Democrats in the Senate (Chuck Schumer) recognized as the majority leader.  The last time there was a 50-50 split (in 2001), an agreement was entered into that provided, among other things, that the vice president’s party got to chair all Senate committees, although each party was equally represented (by number) on each committee (https://www.everycrsreport.com/files/20061227_RS20785_c2a33ed96b4cd522a2130c1b25f2bf6b7661eeab.pdf).}

^{[2] “A Democratic-controlled Senate likely means that more fiscal stimulus is on the way, not just in the form of checks to individuals but also infrastructure spending and aid to cash-strapped local governments.  No wonder interest rates are ticking higher,” as reported by Aaron Back, Investors Learn to Love Unified Government; Market reaction to Georgia runoff shows that partisan division in Washington is no longer good for stocks, Wall St. J., Jan. 6, 2021 (https://www.wsj.com/articles/investors- learn-to-love-unified-government-11609941941).}

^{[3] As of publication, Democrats hold 222 House seats and Republicans hold 211 House seats in the 117th Congress, with one seat vacant in Louisiana (a special election to fill the seat of Republican Luke Letlow, who passed away, is scheduled for March 20, 2021) and one seat still under judicial review (a judge has yet to certify the winner of New York’s 22nd Congressional District seat—either Democrat Anthony Brindisi and Republican Claudia Tenney—and the uncertainty could reportedly last months).  The House has 435 total voting seats, and if all seats cast a vote, then 218 votes are needed to secure a majority.  However, once Biden takes office, it is expected that the number of seats held by Democrats will go down to only 219 (as compared to Republicans’ likely 213 seats once the two vacancies already mentioned are filled), as three Democrats are expected to leave the House to take positions in the Biden administration:  Reps. Cedric Richmond of Louisiana, Marcia Fudge of Ohio, and Deb Haaland of New Mexico.  Special elections will need to be held to fill their vacancies, and it regularly takes five to seven months for such elections to occur (although a special election to fill Richmond’s seat is tentatively scheduled for March 20, 2021, when other elections are being held).  To pass a bill in the House by majority, lawmakers need to secure one-half plus one of the recorded votes (vacancies do not count).  That means that if 213 Republicans vote against a bill and two Democrats join them to make 215, Democrats will need all of their remaining members (217) to vote in favor of the bill in order to secure a majority needed for it to pass.  If three Democrats vote against the bill with all Republicans (216), then the remaining Democrats (216) will not have enough to secure a majority and the bill will not pass.  There is no tie-breaker in the House.}

^{[4] Including from the two Independents that caucus with the Democrats.}

^{[5] “Mr. Biden’s ‘rescue’ proposal . . . would be financed entirely through increased federal borrowing,” as reported by Jim Tankersley and Michael Crowley, Biden Outlines $1.9 Trillion Spending Package to Combat Virus and Downturn, N.Y. Times, updated Jan. 15, 2021 (https://www.nytimes.com/2021/01/14/business/economy/biden-economy.html).}

^{[6] Id, “Mr. Biden plans to unveil another, larger set of spending proposals in February, and he began laying the groundwork to finance those efforts by raising taxes on corporations and the rich.”}

^{[7] Erica Werner and Jeff Stein, Biden unveiling $1.9 trillion economic and health care relief package, The Washington Post, Jan. 14. 2021 (https://www.washingtonpost.com/us-policy/2021/01/14/biden-stimulus-covid-relief).}

^{[8] Just expanding the child tax credit (CTC) from $2k/child to $3k/child or $3,600 if the child is under age 6 is estimated to cost $1.391 trillion over 10 years (https://budgetmodel.wharton.upenn.edu/issues/2020/9/24/biden-child-tax-credit-expansion), but according to a white paper on Biden’s American Rescue Plan, he is only proposing to expand the CTC for one year on an emergency basis.}

^{[9] “[R]econciliation can be used to address ‘mandatory’ or entitlement spending—that is, programs such as Medicare, Medicaid, federal civilian and military retirement, SNAP (formerly known as food stamps), and farm programs—but not Social Security.  Mandatory spending is determined by rules set in ongoing authorizing laws, so changing spending usually requires amending those laws.  Reconciliation has not been used to change ‘discretionary’ spending, which is spending controlled through the annual appropriations process,” according to David Reich and Richard Kogan, Introduction to Budget “Reconciliation”, Center on Budget and Policy Priorities, Nov. 6, 2016 (https://www.cbpp.org/research/federal-budget/introduction-to-budget- reconciliation).}

^{[10] “[O]verhauling non-budget-related reforms, such as police reform, gun control and minimum wage, cannot be accomplished” in reconciliation, according to an alert by Holland & Knight (https://www.hklaw.com/en/insights/publications/2021/01/senate- elections-make-budget-reconciliation-a-potential-tool); “Democrats will have a narrow Senate majority and could attempt to pass a relief package without any Republican votes.  But doing so would require a parliamentary Senate procedure that could take time and require Biden to jettison key parts of his proposal, such as the increase in the minimum wage,” as reported by Jeff Stein and Erica Werner, Congressional Republicans balk at Joe Biden’s $1.9 trillion relief plan, complicating push for quick passage, The Washington Post, Jan. 15, 2021 (https://www.washingtonpost.com/us-policy/2021/01/15/biden-stimulus-gop/).  Jan. 15, 2021 at 4:50 p.m. EST}

^{[11] “Some experts say that a minimum-wage increase could be eligible to pass via [reconciliation] because it’s effectively a tax- raising measure.  The 2019 version of the bill was scored by the nonpartisan Congressional Budget Office as having no budget effect, however.  That version would likely be blocked by Senate rules which required items that use reconciliation be fiscal in nature,” as reported by Erik Wasson and Katia Dmitrieva, Biden Urges More Than Doubling Minimum Wage to $15 an Hour (2), Bloomberg News, Jan. 15, 2021 (https://news.bloomberglaw.com/daily-labor-report/biden-seeks-to-lift-minimum-wage-to-15- an-hour-in-stimulus-plan).}

^{[12] “As a group, the workers receiving an earnings increase would pay more in taxes and receive less in benefits than they would have otherwise, reducing the federal budget deficit; however, the workers, business owners, and consumers with reduced income would pay less in taxes and receive more in benefits, increasing the deficit,” according to a Feb. 2014 report by the Congressional Budget Office (https://www.cbo.gov/sites/default/files/cbofiles/attachments/44995-MinimumWage.pdf).}

^{[13] “[R]econciliation legislation must only involve budget-related changes and cannot include policies that have no fiscal impact [or] that have ‘merely incidental’ fiscal impact,” according to the Committee for a Responsible Federal Budget (http://www.crfb.org/blogs/tax-cuts-and-jobs-act-doesnt-comply-byrd-rule).}

^{[14] That said, “all” it takes to overcome this is a complete disregard of the rules by the chair when the Senate is in session.  For example, if the minimum wage provision were to be included in a reconciliation bill, any senator could raise a point of order to strike it from the bill as not Byrd compliant.  The parliamentarian would then likely advise the chair that in fact the provision is not Byrd compliant.  While it has not happened in recent memory, the chair could simply disregard the parliamentarian entirely and say it is Byrd compliant.  We do not think this is likely.}

^{[15] See also Bill Heniff Jr., The Budget Reconciliation Process:  The Senate’s “Byrd Rule”, Congressional Research Service, updated Dec. 1, 2020 (https://fas.org/sgp/crs/misc/RL30862.pdf).}

^{[16] Alan Rappeport and Jim Tankersley, Atop the Powerful Budget Committee at Last, Bernie Sanders Wants to Go Big, N.Y. Times, Jan. 12, 2021 (https://www.nytimes.com/2021/01/12/us/politics/bernie-sanders-budget-committee.html); We expect that soon-to-be Senate Majority Leader Chuck Schumer (D-N.Y.) can keep Sanders in check.}

^{[17] Recall that when President Trump took office in 2017, his first priority was to use the budget reconciliation process to repeal the Affordable Care Act, something that Congress tried and (ultimately, on July 28, 2017) failed to do when Republican Senators John McCain, Susan Collins and Lisa Murkowski voted against the “skinny repeal” bill.}

^{[18] Upcoming Congressional Fiscal Policy Deadlines (http://www.crfb.org/blogs/upcoming-congressional-fiscal-policy-deadlines).}

^{[19] In an interview with Fox News Jan. 11, Sen. Joe Manchin (D-W.Va.) said he still stands by his words from Nov. 9, 2020, when he said “I will not be the 50th Democrat voting to end that filibuster.” (https://www.foxnews.com/politics/manchin-calls- second-trump-impeachment-ill-advised-let-the-judicial-system-run-its-course).}

^{[20] This report is focused exclusively on tax increases that could impact the capital markets.  Other tax changes that are likely in play (but are not the focus of this article) include taxing carried interest at ordinary rates, reinstating to 39.6% the top federal income tax rate for taxpayers with incomes over $400,000, limiting the benefit of itemized deductions for those making over $400,000 to 28% and repealing (in whole or in part) the $10,000 limitation on deducting state and local taxes (the SALT deduction).  Tax changes that we do not think are likely include imposing a 12.4% social security payroll tax on income in excess of $400,000 (this cannot be done in reconciliation), changes to the estate tax (namely, repeal of stepped-up basis at death) and phasing out the pass-through deduction (IRC §199A) for taxable incomes over $400,000 (viewed as benefiting small businesses).}

^{[21] The thinking on the importance of revenue raisers may be changing.  In a Nov. 30, 2020 discussion draft of a paper by Jason Furman and Lawrence Summers (A Reconsideration of Fiscal Policy in the Era of Low Interest Rates, available here:  https://www.brookings.edu/wp-content/uploads/2020/11/furman-summers-fiscal-reconsideration-discussion-draft.pdf), the authors make the case for why the current low-interest-rate environment means that policymakers should be focused on fiscal growth and not debt reduction—meaning pay fors become less critical, especially when trying to avoid a double-dip recession.}

^{[22] Some believe that increasing the corporate tax rate from 21% to 23% (or even 25%) may not be such a huge lift, as many Republicans were pushing for a 25% (or 28%) rate before the 2017 Tax Cuts and Jobs Act reduced the rate to 21%.  Such a limited increase arguably would not impact the competitiveness of America’s corporations.}

^{[23] Unless otherwise noted, the revenue scores in this table are from the University of Pennsylvania Penn Wharton Budget Model available here:  https://budgetmodel.wharton.upenn.edu/issues/2020/3/10/the-biden-tax-plan-updated.}

^{[24] Specifically, Biden wants to impose a 15% corporate alternative minimum tax on the book profits of certain large corporations (net U.S. income of more than $100 million), with offsets limited to net operating losses and foreign tax credits.}

^{[25] Specifically, Biden wants to impose a 10% offshoring penalty surtax on U.S. companies’ overseas operations that generate goods and services sold in the United States.  Note, however, that the details of this proposal have not been released, and it is very possible that such a surtax could violate World Trade Organization (WTO) Agreements.}

^{[26] There is also a risk that the proposal put forth by soon-to-be Senate Finance Committee Chair Ron Wyden (D-Ore.) to impose an annual tax on unrealized gains in tradable assets such as stocks (mark-to-market) could gain momentum, although at this time, we are not anticipating that it is likely to become law in 2021.}

^{[27] Jane G. Gravelle, Capital Gains Tax Options:  Behavioral Responses and Revenues, Congressional Research Service, May 20, 2020 (https://fas.org/sgp/crs/misc/R41364.pdf).}

^{[28] Oct. 11, 2012, letter from JCT’s Thomas Barthold to Senators Max Baucus and Orrin Hatch (https://www.washingtonpost.com/blogs/ezra-klein/files/2012/10/BN_101212_192832.pdf).}

^{[29] JCT Report Does Not Conflict With Rate-Reducing Tax Reform, Committee for a Responsible Budget, Oct. 12, 2012 (http://www.crfb.org/blogs/jct-report-does-not-conflict-rate-reducing-tax-reform).}

^{[30] The Tax Reform Act of 1986 repealed the exclusion of long-term capital gains for individuals, effectively increasing the top rate on capital gains from 20% to 28%.  The change was signed into law on October 22, 1986 but was effective for taxable years beginning on or after January 1, 1987.  “In anticipation of the increased tax rate, realizations surged 60% in tax year 1986,” according to Timothy Dowd and Robert McClelland, The Bunching of Capital Gains Realizations, Tax Policy Center, Feb. 7, 2017 (https://www.taxpolicycenter.org/sites/default/files/publication/138266/2001148-the-bunching-of-capital-gains- realizations.pdf).}

^{[31] Gene Steuerle, Some Notes On ‘Retroactive’ Income Tax Increases, Tax Notes, Sept. 6, 1993 (http://www.taxhistory.org/www/econpers.nsf/Web/128D83352B83E89E852566DB0063DAB0).}

^{[32] Retroactive tax increases have been upheld by the Supreme Court.  Retroactive tax changes are more common in abusive situations or when the tax change is a benefit.  Retroactive changes are more likely to be upheld when they are set to “apply to the full calendar year in which they are enacted . . . [or] an entire calendar year that ended before enactment” (see Retroactive Legislation:  A Primer for Congress authored by Joanna R. Lampe and published by the Congressional Research Service Aug. 15, 2019 (https://fas.org/sgp/crs/misc/IF11293.pdf)).}

^{[33] Yellen’s Senate confirmation hearing is scheduled for Jan. 19, 2021.}

^{[34] Matthew Green, U.S. could adopt carbon tax under a Biden presidency, ex-Fed Chair Yellen says, Reuters, Oct. 8, 2020 (https://www.reuters.com/article/us-usa-climate-tax/u-s-could-adopt-carbon-tax-under-a-biden-presidency-ex-fed-chair- yellen-says-idUSKBN26T23L).}

^{[35] See “No Need to Fear the Border-Adjustment Tax,” published in Bloomberg View, Feb. 16, 2017; “A Slightly Better ‘Better Way’ Plan,” published in Tax Notes March 6, 2017; and “Insurance For The Border-Adjustment Tax,” published by Forbes March 9, 2017.}

^{[36] See Kyle Pomerleau, Biden should improve his corporate tax proposal, American Enterprise Institute Jan. 13, 2021 (https://www.aei.org/economics/biden-should-improve-his-corporate-tax-proposal/).}

^{[37] See https://clcouncil.org/Bipartisan-Climate-Roadmap.pdf.}

^{[38] Joshua Rosenberg, Yellen’s Tenure May Be Defined Primarily In Regulatory Space, Law360, Jan. 11, 2021 (https://www.law360.com/tax/articles/1342975/yellen-s-tenure-may-be-defined-primarily-in-regulatory-space).}

^{[39] Aysha Bagchi and Allyson Versprille, Rule-Writing Scrutiny Pushes Tax Officials to Explain Themselves, Daily Tax Report, June 8, 2020 (https://news.bloombergtax.com/daily-tax-report/rule-writing-scrutiny-pushes-tax-officials-to-explain-themselves).}

^{[40] “President-elect Joe Biden has indicated he would abide by traditional restraints on presidential power — and perhaps accept some new ones — as part of his effort to restore norms that Trump trampled.  But a lot of progressive Democrats would like to see him do just the opposite,” as reported by David Lauter, Biden wants to restore limits Trump trampled; progressives say ‘not so fast,’ L.A. Times, Dec. 13, 2020 (https://www.latimes.com/politics/story/2020-12-13/biden-restore-limits-trump-trampled- progressives-wary).  See also Daniel Hemel, who wrote that “Rarely, if ever, has a President publicly taken ownership of a tax- related Treasury decision, much less a decision that moved the dial in a taxpayer-unfriendly direction.  In this respect, the Obama administration’s April 2016 actions on inversions and earnings stripping were indeed ‘unprecedented’—or, more precisely, unprecedented in the history of tax policy,” in his article The President’s Power to Tax, Coase-Sandor Working Paper Series in Law and Economics, No. 762 (2016) (https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=2485&context=law_and_economics).}

^{[41] T.D. 9902.}

^{[42] T.D. 9922.}

^{[43] Technically, any final regulation that has not been actually published in the Federal Register (not just sent to the Federal Register) as of noon on January 20, 2021 can be withdrawn, at least pursuant to the most recent regulatory freeze memos (https://www.whitehouse.gov/presidential-actions/memorandum-heads-executive-departments-agencies/; https://www.federalregister.gov/documents/2009/01/26/E9-1639/memorandum-for-the-heads-of-executive-departments- and-agencies; https://www.federalregister.gov/documents/2001/01/24/01-2368/memorandum-for-the-heads-and-acting- heads-of-executive-departments-and-agencies).  If a final regulation has been published but is not yet in effect, the incoming administration may temporarily postpone the regulation’s effective date for 60 days.  Tax regulations are often effective on the date they are published in the Federal Register.  Economically significant or major rules are supposed to be effective 60 days after they are published in the Federal Register (pursuant to 5 U.S.C. §801(3)) unless an agency can show good cause that such a delayed effective date would be impracticable, unnecessary, or contrary to the public interest—an exception that the Treasury Department and the IRS have taken advantage of.}

^{[44] “[A]nalysts predict Biden will start on his first day in office by freezing all Trump administration rules in the pipeline.  The last five presidents of both political parties on their first day in office have had their chief of staff issue an order to stop work on all pending regulations effective a minute after midnight on Jan. 21,” as reported by Cheryl Bolen and Courtney Rozen, Unglamorous White House ‘Prune’ Job Critical to Biden Agenda, Bloomberg Daily Tax Report, Nov. 30, 2020 (https://news.bloomberglaw.com/daily-labor-report/unglamorous-white-house-prune-job-critical-to-biden-agenda).}

^{[45] This can be done by publishing a withdrawal in the Federal Register.}

^{[46] For example, when Donald Trump took office in 2017, his administration took issue with the final Section 385 debt-equity documentation rules (T.D. 9790), ultimately proposing to (and eventually finalizing the proposal to) remove them.  However, it took time.  An executive order issued April 2017 first identified them as a target for removal, but their removal was not finalized until May 2020 (by way of T.D. 9897).}

^{[47] The Government Accountability Office (GOA) determined that Rev. Proc. 2018-38, which provides that certain tax-exempt organizations are not required to report the details of their donors to the IRS, is a rule subject to the CRA.  Although the Senate narrowly voted to overturn Rev. Proc. 2018-38 under the CRA with the help of Senator Susan M. Collins (R-Maine), the House, which was controlled by Republicans at the time, did not follow suit.  More recently, it was determined that IRS Notice 2020-65, which addressed implementation of the Aug. 8, 2020 Presidential Memorandum on payroll tax deferral in light of COVID-19, is a rule subject to the CRA (even though the IRS submitted it as a non-major rule), such that “Congress has an opportunity to review the rule and pass a joint resolution of disapproval to void the rule” (https://www.gao.gov/assets/710/709404.pdf).}

^{[48] Congress has only used the CRA to overturn rules 17 times since 1996—15 of those occurred in 2017 and none of the 17 overturned rules involved taxes.  Congressional Review Act, U.S. Government Accountability Office (https://www.gao.gov/legal/other-legal-work/congressional-review-act#database).}

^{[49] Aaron Lorenzo, Transition 2020:  Team Biden names Lily Batchelder to lead IRS transition, POLITICO Pro, Nov. 24, 2020 (subscription only).}

^{[50] Kimberly Clausing, Options for International Tax Policy After the TCJA, Center for American Progress, Jan. 30, 2020 (https://www.americanprogress.org/issues/economy/reports/2020/01/30/479956/options-international-tax-policy-tcja/).}

^{[51] Kimberly Clausing, Business Tax Principles for Economic Recovery in the Time of Coronavirus, Center for American Progress, May 15, 2020 (https://www.americanprogress.org/issues/economy/news/2020/05/15/485020/business-tax-principles- economic-recovery-time-coronavirus/).}

^{[52] Previously, Mark Mazur was confirmed to the position in Aug. 2012, after having been nominated in Nov. 2011.  Between 2009 and 2012, the position was filled will interim nominees who were never confirmed.  Eric Solomon, who held the position during both the Obama and Bush administrations, was confirmed in Dec. 2006, after having been nominated in May of that year.  His predecessor, Pam Olson, was confirmed in Sept. 2002 after having been nominated in July of that year.}

^{[53] Technically, the document is titled “General Explanations of the Administration’s Fiscal Year Revenue Proposals.” Prior green books are available here:  https://home.treasury.gov/policy-issues/tax-policy/revenue-proposals.}

^{[54] “Almost invariably, the Greenbook includes proposals that the President plausibly could carry out on his own—without any congressional action—by directing the Treasury Department to promulgate appropriate regulations,” writes Daniel Hemel in The President’s Power to Tax, Coase-Sandor Working Paper Series in Law and Economics, No. 762 (2016) (https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=2485&context=law_and_economics).}

^{[55] ““Masking, vaccinations, opening schools. . . These are the three key goals of my first 100 days,” said Biden, as reported by Adam Edelman, Dareh Gregorian and Rebecca Shabad in 100M shots in the first 100 days:  Biden unveils Covid priorities, introduces health team, NBC News, Dec. 8, 2020 (https://www.nbcnews.com/politics/white-house/biden-introducing-health- team-trump-holds-covid-vaccine-summit-n1250338).}

^{[56] “Biden was a key dealmaker on taxes during his time as vice president.  He was central to two of the biggest and knottiest tax agreements of the Obama administration,” as reported by Dan Diamond, who further explained that in 2010, Biden “negotiated a deal with Senate Republican leader Mitch McConnell to keep the [George W. Bush tax] breaks for two more years in exchange for a temporary payroll tax holiday and expanded jobless benefits.  Then, in 2012, Biden did it again, working out a last-minute agreement with McConnell to make most of the Bush tax cuts permanent,” Biden, after the fall, POLITICO Nightly, Nov. 30, 2020 (https://www.politico.com/newsletters/politico-nightly/2020/11/30/biden-after-the-fall-491011).}

^{[57] The 10.5% GILTI rate is effected by way of the GILTI deduction under IRC §250(a)(1)(B).  The 10% net deemed tangible income return is in IRC §951A(b)(2).  GILTI is calculated on an aggregate basis pursuant to the statute, including §951A(c)(1).}

^{[58] Note that the GILTI rate is scheduled to increase to 13.125% in 2026 pursuant to IRC §250(a)(3)(B).  Also note that because of the limit (the 80% in IRC §960(d)(1)) on how much foreign tax credits (FTCs) allocable to the GILTI can be claimed, if Biden were to increase the GILTI rate to 21%, the effective GILTI rate (taking into account the FTC limitation) would be more like 26.25%— arguably high enough to trigger M&A activity to get as many foreign subsidiaries out from under U.S. parents as possible.}

^{[59] Consider the impact of imposing harsher taxes on digital firms today “given that these businesses have been instrumental in keeping the global economy alive and governments functioning (not to mention education, social life, etc.) during the pandemic year of 2020,” writes Jeff VanderWolk in The OECD/Inclusive Framework’s Digitalization Project:  Politics Over Policymaking, Daily Tax Report, Dec. 8, 2020 (https://www.squirepattonboggs.com/-/media/files/insights/publications/2020/12/the-oecd- inclusive-frameworks-digitalization-project-politics-over-policymaking/the-oecd-inclusive-frameworks-digitalization-project- politics-over-policymaking.pdf).}

^{[60] “The changes Biden has proposed to the existing [GILTI] tax rules in the United States would more closely align those rules with the design the OECD is pursuing.  Thus, one might expect a Biden Administration to continue to be supportive of that part of the project,” wrote Michael Mundaca, Joe Biden is President-elect:  What’s next for US tax and trade policy, EY, Nov. 10, 2020 (https://www.ey.com/en_us/tax/joe-biden-is-president-elect-what-is-next-for-us-tax-and-trade-policy).}

^{[61] Richard Rubin, Trump-Era Tax Rule Benefiting Some Multinationals May Get Revised Under Biden, Wall St. J., Dec. 7, 2020 (https://www.wsj.com/articles/trump-era-tax-rule-benefiting-some-multinationals-may-get-revised-under-biden- 11607337001).  Sen Wyden introduced a bill—the Blocking New Corporate Tax Giveaways Act (S. 3280)—that would allow for a much more narrow GILTI high-tax exception than that provided for by Treasury.}

^{[62] Id.}

^{[63] Andrew Velarde, Some Companies Are Tripping Over Themselves to Trip Subpart F, Tax Notes, Nov. 30. 2018 (subscription required).}

^{[64] Jesse Drucker and Jim Tankersley, How Big Companies Won New Tax Breaks From the Trump Administration, N.Y. Times, Dec. 30, 2019 (https://www.nytimes.com/2019/12/30/business/trump-tax-cuts-beat-gilti.html) and Richard Rubin, Trump-Era Tax Rule Benefiting Some Multinationals May Get Revised Under Biden, Wall St. J., Dec. 7, 2020 (https://www.wsj.com/articles/trump-era-tax-rule-benefiting-some-multinationals-may-get-revised-under-biden- 11607337001).}

^{[65] Stephen E. Shay, Reuven S. Avi-Yonah, Patrick Driessen, J. Clifton Fleming Jr., and Robert J. Peroni, Why R&D Should Be Allocated to Subpart F and GILTI, Tax Notes, June 22, 2020 (subscription required).}

^{[66] Paul W. Oosterhuis and Moshe Spinowitz, Why Treasury Got It Right:  R&D Should Not Be Allocated to GILTI, Tax Notes, Sept. 14, 2020 (subscription required).}

^{[67] In T.D. 9885, Treasury arguably takes a broad interpretation of what constitutes cost of goods sold (COGS), which is generally excluded from the BEAT.  The BEAT—base erosion and anti-abuse tax—was one of the provisions in TCJA designed to shore up the tax base by imposing a minimum tax on certain related-party transactions, including presumably the payment of royalties.  But if the COGS exception (which is in the statute) is interpreted broadly, taxpayers may freely be able to economically embed royalty payments into the price of goods, transforming them into capitalizable COGS, effectively excluding the payments from the BEAT.}

^{[68] See the 1983 Memorandum of Agreement between Treasury and the Office of Management and Budget (OMB) and the 1993 exchange between the administrator of the Office of Information and Regulatory Affairs (OIRA) and Treasury General Counsel reaffirming the agreement, as described by Michelle A.  Sager in Treasury and OMB Need to Reevaluate Longstanding Exemptions of Tax Regulations and Guidance, Government Accountability Office (GAO), Sept. 2016 (https://www.gao.gov/assets/680/679518.pdf).}

^{[69] “Interpretative regulations are generally exempt from the APA rulemaking requirements, including its notice and comment requirements,” according to Internal Revenue Manual §32.1.2.3 (https://www.irs.gov/irm/part32/irm_32-001-002).  See also Kristin Hickman, Coloring Outside the Lines:  Examining Treasury’s (Lack of) Compliance with Administrative Procedure Act Rulemaking Requirements, 82 Notre Dame L. Rev. 1727 (2007), available at https://scholarship.law.umn.edu/faculty_articles/57.  See also Regulatory Guidance Processes:  Treasury and OMB Need to Reevaluate Long-standing Exemptions of Tax Regulations and Guidance, GAO-16-720, Sept. 2016 (https://www.gao.gov/assets/680/679518.pdf).}

^{[70] See IRC §7421(a) which provides, subject to certain exceptions, that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.”}

^{[71] Based on Dec. 1 oral arguments in CIC Services LLC v. IRS et al., No. 19-930 (U.S., filed Jan. 24, 2020), it is thought that the court is sympathetic to limiting pre-enforcement challenges to tax regulations, according to Monte Silver, Justices Likely To Shield Treasury From Preemptive Action, Law360, Dec. 4, 2020 (https://www.law360.com/tax/articles/1334481/justices-likely- to-shield-treasury-from-preemptive-action).}

^{[72] According to the Sept. 2016 GAO report cited in the footnote above, IRS and Treasury “rarely recommend to OIRA that tax regulations are major under CRA or economically significant under E.O. 12866.”}

^{[73] The 2018 MOA is available here:  https://home.treasury.gov/sites/default/files/2018-04/04- 11%20Signed%20Treasury%20OIRA%20MOA.pdf}

^{[74] “[I]t’s hard to understand why the Biden administration would maintain Trump administration rules for OMB oversight of tax rules,” wrote Martin A. Sullivan in Should the Biden Administration Maintain OMB Review of Tax Regs?, Tax Notes, Dec. 14, 2020 (subscription required).  But not all agree.  “Biden has nominated Neera Tanden to be OMB director.  Tanden has a strong personality, which might weigh in favor of keeping the OIRA’s current tax regulatory review process in place,” said Lisa M. Zarlenga of Steptoe & Johnson LLP December 10 on a webinar hosted by the firm as reported by Jonathan Curry in Biden Tax Reset Could Target Process and Policy, Tax Notes, Dec. 11, 2020 (subscription required).}

^{[75] Brian Faler, Biden will have a hard time attacking Trump’s tax cuts via regulation, POLITICO Pro, Dec. 16, 2020 (subscription required).}

^{[76] Allyson Versprille, Isabel Gottlieb, and Laura Davison, Trump Weighs Weakening Obama Rules to Curb Corporate Inversions, Bloomberg, Oct. 8, 2019 (https://www.bloomberg.com/news/articles/2019-10-08/trump-weighs-weakening-obama-rules-to- curb-corporate-inversions); see also https://www.treasury.gov/press-center/press-releases/Documents/2018- 03004_Tax_EO_report.pdf.}

^{[77] T.D. 9880.}

^{[78] Trump took office in Jan. 2017.  Treasury issued proposed regulations removing the documentation rules in Sept. 2018.  The proposal was not finalized until Nov. 2019.}

^{[79] REG-123112-19.}

^{[80] “Predicting How Biden’s Tax Hikes Would Impact Business” (Sept. 10, 2020).}

^{[81] Katie Glueck and Lisa Friedman, Biden Announces $2 Trillion Climate Plan, N.Y. Times, July 14, 2020 (https://www.nytimes.com/2020/07/14/us/politics/biden-climate-plan.html).}

^{[82] “As President, Biden will make health care a right by getting rid of capital gains tax loopholes for the super wealthy.  Today, the very wealthy pay a tax rate of just 20% on long-term capital gains. . . .  As President, Biden will roll back the Trump rate cut for the very wealthy and restore the 39.6% top rate he helped restore when he negotiated an end to the Bush tax cuts for the wealthy in 2012.  Biden’s capital gains reform will close the loopholes that allow the super wealthy to avoid taxes on capital gains altogether.  Biden will assure those making over $1 million will pay the top rate on capital gains, doubling the capital gains tax rate on the super wealthy” (https://joebiden.com/healthcare/).}

^{[83] See https://joebiden.com/build-back-better/.}

^{[84] Keith Laing, Biden Bump for Infrastructure Imperiled by Trump Election Fight, Bloomberg News, Nov. 23, 2020 (https://www.bloomberglaw.com/product/tax/document/XFR0NESC000000).}

^{[85] “During a congressional hearing in July, [Janet Yellen, President-elect Joe Biden’s pick for Treasury secretary,] backed additional federal spending and said deficit concerns shouldn’t prevent Congress from providing a robust response to the worst recession since the Great Depression,” as reported by Naomi Jagoda, Biden’s Treasury pick will have lengthy to-do list on taxes, The Hill, Nov. 27, 2020 (https://thehill.com/policy/finance/527629-bidens-treasury-pick-will-have-lengthy-to-do-list-on-taxes).}