Tax Bytes: Week of March 17, 2025

Tax developments

Pillar 2’s viability: Perspectives from industry leaders

In a prior edition of Tax Bytes, we explained how “some, including the Finance Ministers of Hungary and India, have questioned the viability of Pillar 2.” Last week, the Federation of German Industries (BDI) published a position paper titled, Global Minimum Tax: Developments Jeopardize Competitiveness Necessary Protection of the German Economy. The BDI Paper underscores the urgency for EU decision-makers to take measures to protect the European economy in light of the current executive orders and US tax policies under President Trump. It emphasizes the importance of preventing US punitive taxes and suggests a temporary suspension of the European Minimum Tax Directive to protect the European economy. It further suggests that if the suspension is not possible, mitigating US punitive measures through extending the UTPR safe harbor and simplifying global minimum tax regulations is the next best option. 

While the EU has stood firm in its commitment to implementing Pillar 2. BDI, along with others, anticipate the Trump Administration will also stand firm in its position regarding what it deems discriminatory foreign taxes. Treasury is to prepare a list of options for protective measures to take in response to any discriminatory tax measures by March 20, 2025. Separately, several agencies (including Treasury) are also working to provide unified reports, launch investigations, and/or come up with methods to address extraterritorial taxes by President Trump’s April 1 deadline. 

We will stay abreast of any updates with respect to Pillar 2 and provide material updates.

Congress uses CRA to repeal DeFi regulations

On December 30, 2024, in the waning weeks of President Biden’s term, the Treasury Department issued final regulations imposing reporting requirements on certain participants operating in the decentralized finance (DeFi) segment of the digital assets industry (the DeFi Regulations). Previously issued regulations had addressed industry participants resembling traditional securities brokers but did not extend the requirements to participants acting as “digital asset middlemen” that do not take custody of customers’ “private keys.” While the DeFi Regulations closed this gap and mandated reporting by “digital asset middlemen,” many cryptocurrency industry groups, practitioners and taxpayers were concerned that they imposed a significant compliance burden and implicated privacy concerns.

In his first weeks in office, President Trump has emphasized deregulation with executive orders and actions. Under the Congressional Review Act (CRA), Congress can repeal recently finalized agency regulations by passing a joint resolution of disapproval in both chambers. The joint resolution of disapproval has the effect of treating the rule as though it had never been issued. The CRA was enacted in 1996 but had only been used to overturn one rule prior to the first Trump administration. Subsequently, Congress has overturned several rules. Congress overturned 16 Obama-era regulations during the first Trump administration, and three Trump-era regulations during the Biden administration. On March 11, 2025, the House of Representatives passed a resolution to overturn the DeFi Regulations. The previous week, the Senate passed a similar, though not identical, resolution. The Senate will need to vote to approve the House’s resolution before it can be sent to President Trump, who is expected to sign it, in which case the IRS would be barred from issuing a similar rule in the future. Of the 20 rules that Congress had previously overturned using the CRA, only one of them was a Treasury Regulation, making the DeFi regulations potentially only the second Treasury Regulation overturned under the CRA.

Hyatt contests Tax Court’s 2023 decision on treatment of loyalty program payments

On March 7, 2025, Hyatt Hotels Corporation (Hyatt) filed its brief contesting the Tax Court’s decision in Hyatt Hotels Corp. v. Commissioner, which required Hyatt to recognize as income payments made by owners of Hyatt-branded hotels into a fund that pays for the Company’s customer loyalty program, the Gold Passport Program.¹ In its brief, Hyatt asserts that the longstanding “claim of right” doctrine should apply, which provides that for a receipt of funds to be income, the recipient must receive them under a claim of right and without restriction as to their use. Applying the “claim of right” doctrine, Hyatt contends it did not receive the funds under a claim of right and that it was under “severe legal restrictions” regarding the use of the funds. In its decision, rather than apply the “claim of right” doctrine, the Tax Court applied a strict interpretation of the trust fund doctrine, requiring Hyatt to include contributions to the fund as income unless the amounts were subject to legally enforceable restrictions on their use, but also provided there was no economic benefit that inured to Hyatt from such amounts – a requirement that Hyatt alleges is not part of the “claim of right” doctrine. Even under the trust fund doctrine, Hyatt argues income recognition is not required as the hotel owners, and not Hyatt, are the fund’s true beneficiaries.

To the extent Hyatt is required to recognize contributions to the fund as income, Hyatt alternatively argues that it should be able to offset income by the estimated costs of fulfilling the loyalty program pursuant to the trading stamp method provided under Treas. Reg. §1.451-4.² Under this method, a taxpayer that issues or sells “trading stamps” that may be redeemed for “merchandise, cash, or other property” recognizes revenues when the stamps are issued or sold and deducts the estimated costs to redeem those stamps contemporaneously. The Tax Court determined Hyatt was not eligible for the trading stamp method viewing the regulatory language “other property” as limited to tangible property, which would exclude intangible items, such as hotel stays, upgrades, airline miles or other hotel amenities available to members of Hyatt’s Gold Passport Program. In its brief, Hyatt argues that hotel stays or airline miles are clearly property interests within the plain meaning of “other property” and the Tax Court’s application of the ejusdem generis principle to defeat the plain meaning of "other property” was improper.

As this case progresses, it will be interesting to see whether the Seventh Circuit agrees with Hyatt’s application of the “origin of the claim” doctrine or aligns itself with the Tax Court’s “trust fund” approach, as well as how it chooses to define “other property” for purposes of the trading stamp method.

More ERC suits allege APA violations of notice and comment requirements by IRS

On March 7, 2025, two new complaints were filed by Hammill Manufacturing Co. and R.L. Morrissey & Associates Inc. alleging that upon issuing Notice 2021-20 to provide taxpayers with employee retention credit (ERC) guidance, the IRS did not comply with the Administrative Procedure Act (APA), which requires notice and comment procedures to promulgate proposed regulations. The plaintiffs allege that the IRS bypassed the notice and comment period by incorporating FAQs that were previously posted on the government’s website, instead of following the APA procedures for promulgating regulations.

The IRS issued Notice 2021-20 to provide guidance in a “question-and-answer” (Q&A) format for employers claiming the ERC for qualified wages paid after March 12, 2020, and before January 1, 2021. The Q&A guidance was published on the IRS website as FAQs to assist taxpayers in calculating and claiming the ERC. By merely incorporating these FAQs into Notice 2021-20, the plaintiffs allege that the IRS was able to bypass the formalities and taxpayer engagement required under the APA’s notice and comment requirements. 
 
Due to this shortcut, the plaintiffs allege the IRS was able to rely on the Notice to delay the processing and payment of ERC claims which should have been paid out over a year ago. Both complaints are just the latest in a string of cases that challenge the legality of Notice 2021-20.

Proposed PTEP Rules: Stakeholder feedback and recommendations

Several comments were filed in advance of the March 4 deadline addressing proposed regulations (the Proposed Rules) on Previously Taxed Earnings and Profits (PTEP), which were published on December 2, 2024. Various stakeholders, including the National Foreign Trade Council (NFTC), the Tax Executives Institute, Inc. (TEI), the Alliance for Competitive Taxation (ACT), and the US Chamber of Commerce filed substantive comments. The commenters raised several significant concerns, including highlighting the complexity of the Proposed Rules and the increased compliance burden such rules would impose on taxpayers with respect to share basis tracking and the intricate system of PTEP accounts and basis pools required for compliance. 

A central theme across the comments was the potential for double taxation of PTEP under the proposed regulations. The comments voiced material issues with the proposed share-by-share approach to basis adjustments under section 961(b). They argued that this method, while intended to prevent non-economic losses, could paradoxically result in gain recognition and thus double taxation on routine PTEP distributions when the distribution is pro rata across shares with differing bases. Such an outcome contradicts the fundamental purpose of sections 959 and 961. To address these concerns, some comments recommended allowing for more flexibility in utilizing basis across a US shareholder's shares in a CFC. Two organizations proposed a mechanism for transferring basis between shares with excess basis to those with insufficient basis to cover PTEP distributions. Another comment suggested adopting a basis recovery model similar to that used for S corporations and pointed to the consolidated return regulations as another potential framework. 

As noted in the comments, the Proposed Rules, as drafted, create instances where double taxation could arise. The proposed solutions would address such issues, but it remains to be seen whether Treasury and IRS agree that such solutions appropriately address the government’s concerns. Considering the change in administration and the proposals for significant tax legislation in 2025, it will be interesting to see whether and when Treasury and IRS will finalize the Proposed Rules and whether the promised further tranches of guidance on PTEP will come. 

Upcoming Eversheds Sutherland event

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_{1 Hyatt Hotels Corp. v. Comm’r, 7th Cir., No. 24-03239, petitioner-appellant’s brief 3/7/25. See our alert on the Tax Court’s 2023 decision here.
2 In 2011, the Fourth Circuit determined Capital One was not permitted to use the trading stamp method with respect to its rewards program because the reward points were not issued with sales. Capital One Fin. Corp. v. Comm’r, 659 F.3d 316 (4th Cir. 2011).}