Law360

Law360, New York (June 8, 2017, 10:39 AM EDT) -- The Trump administration has issued several executive orders that may impact tax regulations. This article examines the current status of these EOs with respect to tax regulations and discusses how the regulations present an opportunity for taxpayers to weigh in with the Treasury Department on guidance that affects them.

President Trump has issued the following EOs aimed at regulatory reform:

  • EO 13771 — Reducing Regulation and Controlling Regulatory Costs (Jan. 30, 2017
  • EO 13777 — Enforcing the Regulatory Reform Agenda (Feb. 24, 2017)
  • EO 13781 — A Comprehensive Plan for Reorganizing the Executive Branch (March 13, 2017)
  • EO 13789 — Identifying and Reducing Tax Regulatory Burdens (April 21, 2017)

Though their application to tax guidance is unclear, the Treasury Department is actively considering how these EOs will apply. This presents an opportunity for taxpayers to weigh in. In addition, the Treasury Department and the IRS have issued their call for items for their annual Priority Guidance Plan, which may look very different this year than it has in past years.

Comments on 2016 Regulatory Review

On April 21, President Trump signed EO 13789 instructing Treasury Secretary Steve Mnuchin to review all significant tax regulations since the beginning of 2016. The EO requires the Treasury Department to provide an interim report within 60 days identifying all regulations that:

  1. impose an undue financial burden on United States taxpayers;
  2. add undue complexity to the federal tax laws; or
  3. exceed the statutory authority of the Internal Revenue Service.

A final report recommending actions to mitigate the burdens of the identified regulations is required within 150 days. Importantly, the EO states that the standard determination of “significant” tax regulations (i.e. regulations that have an annual economic effect of $100 million or more, and other factors under EO 12866) does not control.

While the EO has been generally viewed as targeting the controversial debt/equity regulations under section 385 that were issued last fall, this clarification of “significant” suggests that the scope of regulations reviewed under the order could be potentially broader. Indeed, practitioners that have submitted comments have addressed a broad range of items that they believe should be reviewed. In addition, the Treasury Department has indicated that proposed and temporary regulations are on the table in addition to final regulations.

Letters from the Chamber of Commerce, AICPA and other groups, including ACLI, Business Roundtable and the National Retail Federation, offer suggestions for review. While all these letters mention the section 385 regulations, other proposed candidates include proposed rules on tax-free spin-offs under section 355, final rules on foreign goodwill under section 367(d), temporary and proposed regulations on calculation of disallowed foreign tax credits under section 901(m), and proposed rules on minority valuation discounts for estate tax purposes under section 2704.

Although EO 13789 is limited to 2016 regulations, the considerations that are going into this review — primarily cost — will be relevant in analyzing Treasury regulations under the other EOs, in particular deregulatory actions under EO 13771 (discussed below). Thus, if taxpayers aren’t able to provide input before the 60-day deadline for the Treasury Department’s interim report, Treasury would still be interested in this feedback.

Application of “Two For One” EO to Tax Regulations

On Jan. 30, 2017, President Trump issued EO 13771 on Reducing Regulation and Controlling Regulatory Costs, which the Office of Information and Regulatory Affairs (OIRA) further interpreted in a memorandum dated Feb. 2, 2017. This EO, which was immediately effective, requires executive agencies to repeal at least two existing regulations (referred to as “deregulatory actions” in the OIRA memo) before issuing a new significant regulation, which is the reason why this EO is referred to as “two-for-one.”

Furthermore, during fiscal year (FY) 2017, executive agencies must achieve a “net zero” increase in costs of new regulations. Thus, the deregulatory actions must zero out any new regulations. Then, in FY 2018 and later FYs, the executive agencies will have a “cost budget” for regulatory changes.

The OIRA memo clarifies that deregulatory actions include both regulatory and sub-regulatory guidance, while regulations are limited to “significant” regulations (as defined in EO 12866, generally having an economic effect of $100 million). Thus, there are many more potential deregulatory actions to choose from to offset regulations. In addition, the OIRA memo states that regulations that are overturned by acts of Congress may count as deregulatory actions. This could include, for example, regulations that are made obsolete by tax reform or repeal of the Affordable Care Act taxes.

Some have speculated that the two-for-one EO is likely targeted at environmental and other non-tax regulations, and have noted that its application to tax regulations could actually have a detrimental effect on taxpayers who look to Treasury/IRS guidance for clarity in how the government will apply the statute. Nonetheless, there is no carve-out for tax regulations. Presumably the Treasury Department will put together a list of deregulatory actions that it can use to “pay for” future tax regulations.

The government may also adopt a creative interpretation of deregulatory actions, as hinted by some Treasury officials at the recent ABA Tax Section meeting in Washington, DC. One suggestion is to treat tax regulations that provide clear rules, and even safe harbors, as not adding to the cost budget because they provide certainty that minimizes compliance costs, especially in contrast to defending disputes with the IRS in the absence of clear rules to follow.

Another suggestion is that taxes are effectively transfer payments and, thus, revenues should not be counted as costs, which leaves paperwork costs, compliance burden and other secondary effects as the only costs.

A third suggestion is to treat each regulation section as a deregulatory action as opposed to a full regulation package. For example, the Treasury Department and the IRS issued regulation sections 1.1411-1 through -10 to implement the net investment income tax — this could be counted as 10 deregulatory actions instead of 1.

Getting Back to Business As Usual

Various Treasury officials stated at the ABA Tax Section meeting that the Treasury Department has established its process for clearing regulations consistent with the Trump administration’s regulatory freeze memorandum dated Jan. 20, 2017, and has begun that process for some regulations.

In addition, the government has issued Notice 2017-28, its annual request for suggestions for the Priority Guidance Plan. This plan may look very different this year than it has in its 25-year history if the Treasury Department decides to include deregulatory actions on it.

At a minimum, we anticipate that the plan will focus more on guidance that reduces cost and complexity for taxpayers. In addition, consistent with the trend the past couple years, we expect the plan to be shorter in recognition of reduced IRS resources. Treasury officials repeatedly stated their desire for taxpayer input at the ABA Tax Section meeting.

Concluding Remarks

The Trump administration is focused on regulatory reform, in particular, reducing regulatory burden. In the tax area, however, fewer regulations may not mean less regulatory burden. Tax regulations often provide greater certainty on how the IRS interprets the tax law, which is what taxpayers often want.

It is not yet clear how the EOs will impact tax regulations, and the Treasury Department is currently studying the issue. Taxpayer input could be valuable in helping Treasury identify ways to reduce complexity and financial burden on taxpayers.