Tax Notes contributing editor Ryan Finley discusses the latest developments in three transfer pricing cases — Medtronic, 3M, and Abbott Labs — and their implications for the future.
For additional coverage, read these articles in Tax Notes:
In our “Editors’ Corner” segment, Edith Brashares, former director in the Treasury Office of Tax Analysis, chats about her coauthored Tax Notes piece, “Is the Economic Analysis Section of Regs Worth the Trouble?”
Follow us on Twitter:
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This episode is sponsored by the University of California Irvine School of Law Graduate Tax Program. For more information, visit law.uci.edu/gradtax.
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Credits
Host: David D. Stewart
Executive Producers: Jasper B. Smith, Paige Jones
Showrunner: Jordan Parrish
Audio Engineers: Jordan Parrish, Peyton Rhodes
Guest Relations: Alexis Hart
Tax Notes contributing editor Ryan Finley discusses the latest developments in three transfer pricing cases — Medtronic, 3M, and Abbott Labs — and their implications for the future.
For additional coverage, read these articles in Tax Notes:
In our “Editors’ Corner” segment, Edith Brashares, former director in the Treasury Office of Tax Analysis, chats about her coauthored Tax Notes piece, “Is the Economic Analysis Section of Regs Worth the Trouble?”
Follow us on Twitter:
**
This episode is sponsored by the University of California Irvine School of Law Graduate Tax Program. For more information, visit law.uci.edu/gradtax.
***
Credits
Host: David D. Stewart
Executive Producers: Jasper B. Smith, Paige Jones
Showrunner: Jordan Parrish
Audio Engineers: Jordan Parrish, Peyton Rhodes
Guest Relations: Alexis Hart
This transcript has been edited for length and clarity.
David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: transfer pricing litigation update.
We're diving back into the troubled waters of U.S. transfer pricing disputes. This time we have three cases featuring significant questions and significant money at stake. Tax Notes contributing editor Ryan Finley will join me in just a minute to help us sort out what's going on and what it could mean for the future of transfer pricing.
Later in the episode we'll hear from Tax Notes Federal author Edith Brashares about her coauthored article on the separate economic analysis section of tax regulations.
But first — Ryan, welcome back to the podcast.
Ryan Finley: Thanks for having me.
David D. Stewart: Let's start off with an easy one. Medtronic v. Commissioner, can you tell us what's going on there?
Ryan Finley: Sure. So Medtronic's a case that's been with us for well over a decade. The case is about figuring out the arm's-length royalty for Medtronic U.S.'s license of the IP necessary to make implantable cardio and neurological devices that includes patents, but other things as well, to its subsidiary, which is called MPROC. MPROC manufactures the devices in Puerto Rico. So the case is really about what's the best transfer pricing method to figure out the royalty.
David D. Stewart: OK, so what sort of methods are in dispute? What are people trying to assert?
Ryan Finley: OK, so this is kind of a recurring feud between the IRS and taxpayers that shows up in this sort of methodological conflict. The taxpayer, Medtronic, as is usually the case, favors the comparable uncontrolled transaction method. That's a method. It's sort of a traditional transactional method where you try to find a comparable arm's-length license and you use the royalty from that license to figure out what the royalty ought to be on the controlled license.
Now, Medtronic, the way they applied this method, they used a litigation settlement agreement with Pacesetter Siemens Inc. And then they used the royalty from that settlement agreement and they made a bunch of upward comparability adjustments to establish in their view comparability with the MPROC license. The Tax Court actually mostly accepted this approach, subject to a few additional upward comparability adjustments in its Medtronic I opinion in 2016, but the IRS appealed and the Eighth Circuit later vacated in 2018.
The IRS's favored method is the comparable profits method, or CPM. The CPM determines what's often called a routine return for the tested party, which is the party to the transaction that's supposed to perform relatively standardized functions, have standardized assets and risks, which the standardization is what lets you identify comparable independent enterprises. So basically you look at the returns that these comparable enterprises earn and you basically set their return on assets based on what the return on assets is for these comparables.
By design, whatever's left after the tested party, in this case MPROC, gets its routine return, has to get paid back to the other party. Here, it's sort of paid back as a royalty to Medtronic U.S. So the dispute here, it's basically on one hand you have the IRS questioning the comparability of this Pacesetter agreement, and then on the other side you have Medtronic saying that MPROC's role is too crucial, too irreplaceable, too unique. It bears a level of risk and holds intangibles that are just absolutely without peer in the entire world, and therefore you cannot possibly find any other implantable medical device manufacturer to use in a CPM analysis.
As I said, in Medtronic I, the Tax Court sided with Medtronic, which means they rejected the CPM and then in Medtronic II, which happened on remand after the Eighth Circuit vacated, the decision turned out a little differently, but they still rejected the CPM.
David D. Stewart: So what are the different outcomes from these methods that make one side want to use one versus the other party saying that, "No, the only way to do it is this other method"?
Ryan Finley: So the IRS tends to like the CPM because it fixes the returns that an offshore licensee can earn, and that forces them to pay whatever's left back to the U.S. in the form of a royalty. So it really kind of establishes a ceiling on the amount of income that escapes the U.S. tax base.
Now, Medtronic likes the CUT better. One of the reasons is the CUT method, it sets a royalty, it doesn't cap the returns that the foreign licensee can earn. And also arguably there are sort of systematic differences between the kinds of licenses you see between related parties and the licenses you see between unrelated parties. And these differences tend to skew the royalty rates lower under the CUT method.
David D. Stewart: So you mentioned that this case was remanded. What happened there?
Ryan Finley: So on remand, there was a trial held in summer of 2021, eventually led to a Medtronic II opinion in August 2022. The opinion introduced another method into the case. It was actually based on a method that Medtronic had proposed in post-trial briefing, although Kerrigan made some significant adjustments to it. It's funny, what you call this method is itself controversial, but what Judge Kathleen Kerrigan chose to call it is an unspecified method, which is there's a reg section that basically acknowledges the possibility that a method that the regulations don't specifically specify might be the best method, but subject to certain conditions.
This method, it bears such a strong similarity to basically a version of the CUT method that has even more adjustments than the original CUT method accepted in Medtronic I, which was actually one of the reasons that the comparability of the Pacesetter agreement was called into question in the first place, that you needed so many comparability adjustments to say that they're comparable.
But basically this method, this, I've called it a mutation of the CUT method, it started with a Pacesetter royalty just like the CUT would have, and it made these upward adjustments that kind of involved elements of the CPM and sort of elements of a profit split. None of it really aligns with the way you apply these concepts in the regulations, but by starting with the Pacesetter royalty and then making these adjustments functionally, it really is a version of the CUT method, I think.
The main distinction is that the CUT regulations would never let you make these kinds of exotic and very innovative adjustments, but whatever you call it, the method, and this is intentional, it yielded a royalty rate that was near the midpoint of the rates that the IRS's CPM analysis implied and the royalty rate that Medtronic's CUT method analysis yielded. So Kerrigan had said that her goal was bridging the gap between the party's positions. And if nothing else, her method did that. But no one was really happy with the outcome, not the IRS because its method was rejected, in favor of a method that's on questionable grounds under the regulations.
And Medtronic wasn't happy either because Kerrigan took the method they proposed, but the last step of this method involved an allocation of basically a pool of remaining profit. And she basically, she significantly shifted the percentage so that more profit went to the U.S. So even though methodologically in a sense Medtronic won — monetarily, not so much. So fast-forward, now we have a second government appeal to the Eighth Circuit and we also have a Medtronic cross-appeal. The government filed its opening brief in December, and Medtronic filed its opening brief just earlier this month.
David D. Stewart: What are some of the main arguments being raised on this appeal?
Ryan Finley: So we're still arguing about the best method. Now, of course we have a third candidate in the running, and the legal turf has shifted a bit because now there's a Medtronic II opinion for the parties to sort of dissect and debate. The main arguments the government has made, and I think they're right about most of them, that this CUT-like Medtronic II method has the effect of basically circumventing pretty bright-line regulatory conditions that have to be met before you can apply the CUT method. It would kind of potentially undermine the regulatory scheme if you could pick and choose which conditions you want to satisfy in the CUT regulations and then just white out CUT method and write unspecified method. I think that's kind of a broader issue that's raised here.
The government's also argued that this method that Judge Kerrigan applied, even though she referred to it as an unspecified method, it doesn't actually meet the regulatory conditions of an unspecified method in the section of the regulations that authorize them. On the flip side, the government's also defending the CPM analysis. They say that the Tax Court applied the wrong comparability standard, it was inappropriately strict, and that they didn't make the factual findings necessary to reject the comparables.
And Medtronic's brief, they're still arguing that the CUT method is the best method, but they're saying that the next best method is this unspecified method only, not the way Judge Kerrigan applied it, but the way they originally applied it. Medtronic also claims that you can adjust intangible property into comparability through these sort of royalty rate comparability adjustments, although whether that's really allowed under the regulations is definitely at least debatable.
David D. Stewart: What are the broader implications for this case? We've got the rise of unspecified methods, so what could this case bring about?
Ryan Finley: Well, I think that the IRS would consider it an unfavorable outcome if this really led to a rise in unspecified methods, especially unspecified methods along these lines. I think from the IRS's perspective, the significance, it really is about reinforcing judicial acceptance of the CPM. Really, the first time a court decisively came down in favor of the CPM as applied by the IRS over other methods, including the CUT method favored by a taxpayer, was in 2020 in the Coca-Cola opinion. So if the government wins, if the case is remanded and the CPM is ultimately accepted, that would really consolidate the tentative acceptance of recognition of the CPM that the IRS first secured in Coca-Cola.
Now, that wouldn't end the debate and that would only be in one circuit, and taxpayers could still make similar arguments in other circuits, but it would still be a significant setback for this idea that there's a hierarchy of methods. Of course, a Medtronic win would be very significant as well because then it would cast out on the reach of Coca-Cola. It would create doubt as to whether this hierarchy of methods that the regulations repudiated 30 years ago is somehow still there. Between Coca-Cola and Medtronic, there really wouldn't be a whole lot of guidance as to, in terms of, future cases as to whether the CPM or the CUT method ought to be preferred in these circumstances.
David D. Stewart: Now, how do you see the court resolving this issue?
Ryan Finley: Yeah, it's always very hazardous to predict. Many of the outcomes in these cases are surprises to many people. I would say that when Eighth Circuit vacated in 2018, they really showed a clear sensitivity to the importance of the regulations when they basically, I mean, they didn't say that the Pacesetter agreement wasn't comparable. They said that the Tax Court failed to substantiate its assumption that the Pacesetter agreement was comparable. But in doing so, it really did, the opinion really did cast doubt on the prospects of this Pacesetter agreement ever really satisfying the regulatory standards. But again, it's really hard to predict. But the limited sort of tea leaves we have would suggest that maybe Medtronic might face a little bit of an uphill battle.
David D. Stewart: All right, let's turn to another case. This one being a case that went on for quite a while, that would be 3M v. Commissioner. First, could you give us some background on the case?
Ryan Finley: Yeah, well, it did go on for quite a while, which did not escape the attention of many people who were eagerly awaiting it. A part of that reason might be that the plurality opinion was over 300 pages. It also might be because on top of that, there's another two concurring opinions and three dissenting opinions. But whatever the case may be, the case is about the concept of blocked income, which refers to income that a controlled taxpayer would've violated the law if it had paid it or received it. And then the question is whether the IRS can make a section 482 allocation of income that would be considered blocked income because of a legal restriction.
In 3M, the restriction at issue was a Brazilian law that capped the royalty rate on certain kinds of IP licenses between a local subsidiary and its foreign parent. Under the regulations now, it's often called the blocked income regulations, there's a pretty stringent list of conditions that have to be satisfied before the IRS will agree not to reallocate income because of a foreign legal restriction. And taxpayers' position, including 3M's, is that these conditions go way beyond what judicial precedent suggests that the conditions ought to be. So 3M, basically they argue that the regs are substantively invalid largely on the basis of this Supreme Court decision in First Security Bank of Utah, and there's also a parallel procedural challenge.
Just a little background on First Security Bank; it's a really interesting opinion. You could ask 17 different Tax Court judges and get five different answers. One view is that it excluded blocked income from the definition of income, period. One interpretation is that it construed section 482 in such a way that blocked income cannot be reallocated. And then yet another way of interpreting it is that the decision was based on the regs that were in place at the time. And which it is really matters because it changes to the statute and changes to the regs. It affects the precedential value of First Security Bank for this case.
David D. Stewart: All right, so how did the Tax Court ultimately come down on this case?
Ryan Finley: The Tax Court didn't really come down any one way. There was a plurality opinion signed on by seven of the 17 Tax Court judges who reviewed the opinion. There were another two judges who concurred in the result but did not sign on to the plurality opinion giving nine judges in favor of upholding the regs, and then the remaining eight judges signed on to one or more of the three dissenting opinions. But in terms of what the plurality opinion said, basically under Chevron that the regs were consistent with a reasonable interpretation of the statute and that the rulemaking procedure complied with the Administrative Procedure Act.
And importantly, the plurality opinion said that the two sentences of section 482 that were in effect at the time, the first allows the IRS to make allocations to clearly reflect income. And the second sentence, which imposes this commensurate with income standard, that either one of those independently would provide authorization for these blocked income regulations because the income that was blocked in this case was royalty for a license of IP.
David D. Stewart: Now, I understand this case had a direct impact on another case. So what effect did this have?
Ryan Finley: Yeah, this blocked income issue has kind of been tied to the Coca-Cola case as well. Shortly after the opinion came out in 3M, Judge Albert Lauber, who's the judge in the Coca-Cola case, requested briefing on the blocked income issue that he had reserved holding on in 2020 pending 3M. So once 3M was decided, that allowed Coca-Cola to move forward. Judge Lauber, he issued a supplemental opinion on the blocked income issue in Coca-Cola. But it was a little different, it wasn't necessarily based on the reasoning in 3M. Some of the regulatory conditions that were central in 3M were less important in Coca-Cola and vice versa.
And Coca-Cola, the main thing was there's a requirement under the regulations that the foreign legal restriction block the payment of whatever it is in any form. So for example, if you were able to pay the amount as a dividend, you're not allowed under the regulations to say, "Hey, we can't pay the royalty." The regulations would say, "Yeah, you could pay it, you just have to say it's a dividend." The problem in Coca-Cola is that they had for some time been paying dividends and crediting them against the royalties that were required under section 482. So it's a little bit of a difficult argument to say that you can't be forced to mischaracterize royalty income as a dividend when you have been crediting dividends against royalty income for years.
So in any case, that led to a supplemental opinion, and eventually that'll clear the way for what everyone expects will be an appeal of the Coca-Cola case.
David D. Stewart: So turning back to 3M now, where do you think things stand now? I understand it's on appeal to the Eighth Circuit. What's happened?
Ryan Finley: Right. So 3M, they've filed their opening appellant brief also with Eighth Circuit. The brief, it makes quite a few arguments. A lot of them are arguments you'd expect based on the party's positions in the case. The brief says that First Security established the authoritative interpretation of section 482, and it also argues that it excludes blocked income from the general definition of income overall. The brief also sort of focuses on the idea that the plurality came down the way they did based on Chevron deference instead of, as they put it, the best reading of the statute, that according to 3M overstretched sort of Chevron deference.
Then there's also the issue as to whether the commensurate with income standard, which as I said, it's something that applies to intangible property, whether that was relevant because the plurality had held that this sentence, with or without the first sentence, this was a sufficient independent statutory authority to apply the blocked income regs at least in this case. But what was, I think, more interesting and something that wasn't necessarily obvious from the parties' positions before is the brief really tries to take advantage of favorable Supreme Court rulings that could possibly be forthcoming regarding Chevron and in the Moore case. 3M, as I said, they really emphasized the idea that it was, the pluralities decision was based on deference doctrines, which may not be with us for that much longer.
And it actually says in the brief that 3M reserves the right to sort of reformulate its arguments if Chevron is overturned in the meantime. But they also try to sort of parlay more by saying that if the Court were to interpret income in a way that includes blocked income, that you may have a 16th Amendment violation. So the brief says, "Hey, you should reject that interpretation because it would create a serious constitutional question." And I don't think anyone saw a 16th Amendment issue in the 3M case until very recently, but the dispute is that it's a pure question of law.
So despite all the ink spilled and time spent by the Tax Court, it will be reviewed de novo by the Eighth Circuit. And where they'll come down, I think, is anyone's guess. But it's important to remember that the Eighth Circuit is not the only circuit that's going to be taking a look at the blocked income regulations. As I said, Coca-Cola is surely headed for appeal, and so the Eleventh Circuit will have a look at it too, and it could continue to come up in other circuits in the future as well. So it's an issue that won't be settled for some time.
David D. Stewart: It'll be very interesting to watch. Now, I got one more case to ask you about and that's Abbott Labs v. Commissioner. So what is the status of this case and what is it all about?
Ryan Finley: Well, it's about many things. This case is pretty — it's in its infancy. The Tax Court petition was filed at the end of 2023. There are a whole bunch of issues. Some are transfer pricing, some aren't. The thing that jumps out to somebody who focuses on transfer pricing is a reg validity challenge. Well, there are two. One is challenging the cost-sharing regulations rule that parties to a cost-sharing arrangement, or CSA, have to share stock-based compensation costs. Basically stock options that one of the parties grants. But they also are challenging an analogous rule under the services regs that says that whenever you use cost as the basis or cost-plus to charge out services, that you have to include the stock-based compensation cost and that cost base.
Abbott Labs is challenging both. The cost-sharing regulation is, it's kind of the modern counterpart to the regulation that was challenged in Altera. And Altera itself was sort of a sequel to Xilinx. So this is kind of the newest installment in a dispute that's been going on for decades at this point.
But the important difference with Altera is No. 1, that it involves the services regs. And that's important because if you look at the Ninth Circuit's Altera opinion that reversed the Tax Court and sided with the IRS, it's not clear whether the commensurate with income standard was strictly necessary for the Ninth Circuit to come down the way it did, but it figures prominently in the opinion. And services are not subject to the, I mean, it would be a strained reading of the commensurate with income standard to suggest that routine services fall under the commensurate with income standards. So that means that you can, to the extent that the inclusion of stock-based compensation and the cost base is authorized by the statute, it would have to be under the first sentence and not the second that includes the commensurate with income standard.
The other important difference is that we're in a different circuit now. The Ninth Circuit precedent doesn't control because if this case leads to an appeal, and I would think it's very likely that it will, it would be the Seventh Circuit that would hear that appeal. So obviously they're not bound by Ninth Circuit precedent.
David D. Stewart: Now, you mentioned that these cases keep cropping up. I remember covering this back when I was the transfer pricing reporter here. So why is stock-based compensation such a big deal and why does it keep coming up?
Ryan Finley: Well, it's a big deal because it accounts for a significant share of the employee compensation costs of the kinds of big multinationals that enter these sort of intergroup transactions and arrangements. If you say that parties to a cost-sharing arrangement don't have to share stock-based compensation costs, then the U.S. participant can pay its employees in stock options and the whole deduction stays in the U.S. If you have a U.S. service provider that's charging out a cost-plus, and you say that they can grant stock options to the people who are performing these services, but you don't have to include that in the cost base, then there's no reimbursement or markup on these service charges. And because of the amount that's at stake here, those are significant amounts.
But the issue keeps coming up also because it really raises an important question under the arm's-length standard. The arm's-length standard generally requires that transactions between commonly controlled enterprises be priced as if the transaction had taken place at arm's length. And most people would agree that arm's-length parties do not share or reimburse each other's stock-based compensation costs. So taxpayer's argument is that arm's-length parties never do this, and the regulations are based on the arm's-length standard, so you can't require control parties to do something that arm's-length parties would never do. It takes the form of substantive validity challenges, although that requires the assumption that the statute forces you to kind of use transactional evidence. And it also is the basis for APA challenges like in Altera.
These challenges, really they rest on at the very least questionable, and in my opinion false, interpretation as to what section 482 really requires. The reasons that arm's-length enterprises don't share stock-based compensation costs just aren't relevant when you're talking about members of the same multinational group. And the main reasons are valuation challenges and sort of stock price volatility risks. And if you're talking about two members of the same group, those challenges are no greater for one of the parties than they would be if they had issued the stock options themselves.
And then the other issue is you don't typically see a lot of these arrangements between unrelated parties. It's well recognized that some transactions for good reasons make sense between related parties, but wouldn't make sense between unrelated parties. But if you just think about what would happen if unrelated parties had entered an arrangement like this, it would be totally economically irrational to keep paying your employees in stock options when if you paid them in any other way, the other party would have to pick up a share of it or you'd be entitled to reimbursement plus a markup. It's just not really how arm's-length enterprises operate.
So to the extent that the arm's-length standard's kind of based on a counterfactual, like what would happen if the parties were unrelated, the idea is that if that were the case, that stock-based compensation costs would have to be accounted for in one way or another.
David D. Stewart: So what sort of reasoning is there that this should be answered differently from the way Altera came down?
Ryan Finley: Well, yeah. So there's the distinction I mentioned before about cost-sharing arrangements versus services, so you have a statutory provision that applies to one and not the other. It could conceivably affect the outcome, but there's also kind of the complex way precedent works for the Tax Court. So the Tax Court decided Altera in Altera's favor, but it was reversed in the Ninth Circuit. As I said, this case will go up to the Seventh Circuit. So under the Golsen rule, the Tax Court doesn't have to follow the Ninth Circuit's opinion, but it's supposed to approach the issue again, kind of reconsider its reasoning, and then decide whether its precedent or the nonbinding Ninth Circuit precedent is the better way to go.
I'd say, to the extent that the merits factor into it at all, I would say that this is a prime opportunity for the Tax Court to distance itself with some of the errors it's made in the past and to follow the Ninth Circuit's Altera opinion that reversed the Tax Court. The idea that the arm's-length standard must always be based on sort of transactional evidence is I think an antiquated idea whose time has come and passed.
David D. Stewart: So gaming this out into the future, what would it mean for either of these parties to win in this case?
Ryan Finley: Well, I think because of the virtual certainty of an appeal, whatever happens at the Tax Court level is kind of tentative. And the Tax Court could go either way — difficult to say — but whatever happens, it's almost certainly going to end up before the Seventh Circuit, and that will be a big deal because if the Seventh Circuit reaches the same conclusion that the Ninth Circuit did, then you have two circuits that took the IRS's side on this issue, and you start to see maybe a budding consensus that the IRS is right.
It could deter future challenges, though of course if you're in any of the other circuits, you still could bring the issue. But if Abbott Labs were to win on appeal, then you would have a circuit split and all of the legal chaos that follows, which who knows, it could end up putting the issue before the Supreme Court. But that's still a pretty long way off.
David D. Stewart: All right, there's definitely a lot of stuff that we need to be keeping track of. And, Ryan, thank you for updating us on all of it.
Ryan Finley: Thanks for having me.
David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Senior Executive Editor for Commentary Jasper Smith. Jasper, what do you have for us?
Jasper B. Smith: Thanks, Dave. In Tax Notes Federal, Greg Matlock and Christine Chai examine the taxation of carbon capture use and sequestration. Eric Jensen challenges the argument that limitations on the taxing power in the Constitution can be ignored if a specific tax can be considered a regulation of commerce.
In Tax Notes State, Steven Wlodychak explores the ruling in Wynne and how the decision in Zilka compares. Nicholas Montorio and Denise Moderski discuss recently issued New York state tax regulations.
In Tax Notes International, Angelo Nikolakakis questions the clarity of the recent Husky Energy decision. Andreas Seela summarizes recent updates in Thai tax law and explores the potential consequences and motivations of these changes.
And finally, in featured analysis, Joe Thorndike argues that even if a ruling in Moore raises questions about the constitutionality of a wealth tax, a VAT could still reduce inequality and raise revenue.
And now, for a closer look at what's new and noteworthy in our magazines, here's Tax Notes Federal Editor in Chief Ariel Greenblum.
Ariel Greenblum: Thanks, Jasper. I'm here with Edith Brashares, former director in the Treasury Office of Tax Analysis. Welcome to the podcast, Edith.
Edith Brashares: Thank you very much. I'm glad to be here.
Ariel Greenblum: We're here to discuss your Tax Notes Federal article, "Is The Economic Analysis of Treasury Regulations Worth the Trouble?," which you coauthored with John Horowitz. Could you tell us about it?
Edith Brashares: Sure. This is an area that had been a major focus of reg writing processes during the TCJA era. John Horowitz, my coauthor, and I thought readers would be interested in an assessment of how it went. I'll note that this is under a 2018 MOA [memorandum of agreement] between Treasury and OMB, and that no longer applies. As of June 2023, there's a new MOA, so Treasury doesn't have to do this kind of analysis of tax regs. Anyway, while we were at Treasury, the Office of Tax Policy devoted considerable effort to conducting these economic analysis, and the process delayed promulgation of TCJA regs as a result.
And we thought readers would want to know what led to these delays and what could mitigate them. And of course, readers should also know what the contribution of OMB review was and try and decide whether the delays could be worthwhile if they were getting something valuable in return.
Ariel Greenblum: So because Treasury is not required anymore, do you know if they're going to be doing this economic analysis of any of its regulations anymore, or is this just going to be a blip in Treasury's history, this economic analysis?
Edith Brashares: It depends on who's in the White House. I wouldn't be surprised if there was a Republican administration that required economic analysis and review by OMB in the future for tax regulations. So that's part of the reason why we wrote the paper was you want to talk about what experience we have had and maybe if in the future they want to have some sort of economic analysis, they'll think about it a little bit more.
Ariel Greenblum: Right. It's not that economists have nothing to say about Treasury regulations, it's just you said in the article that the rubric for evaluating regs really was like health regulations; other kinds of regulations were a better fit for the framework.
Edith Brashares: Yes, that's exactly right. And that's because traditional cost benefit essentially treats tax revenues as transfers and ignores them. And if that's the case, then sort of one of the major reasons why you have tax laws if you will, it's to raise revenue. And so you're sort of missing out on a lot of the big issues.
The other thing I think is that tax may be a bit different than say in the health and the environmental area in terms of there's a statute. The statute lays out what the law is, and the regulation is just sort of working at the edges many times on that law, whereas in the environmental area, particularly, I can think of Congress may hand to the EPA, for example, the requirements to come up with how you define something as what the standard is, how you define it. Really a lot of what is already, if you will, done in the tax statutes.
Ariel Greenblum: Thank you. Before we let you go, where can listeners find you online?
Edith Brashares: John and I do not have a website, but people can send me an email at ebrashares@gmail.com. So my first initial and last name at gmail.com.
Ariel Greenblum: Great. Thanks again for joining us on the podcast, Edith.
Edith Brashares: Great.
Ariel Greenblum: You can find Edith's coauthored article online at taxnotes.com. And be sure to subscribe to our YouTube channel, Tax Notes, for more in-depth discussions on what's new and noteworthy in tax. Again, that's Tax Notes with an S. Back to you, Dave.
David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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