In Executive Order 13789 of April 21, 2017, 82 F.R. 19317, President Donald J. Trump ordered the Treasury Secretary to review all significant tax regulations issued on or after January 1, 2016, and identify all such regulations that (i) impose an undue financial burden on taxpayers, (ii) add undue complexity to the federal tax laws, or (iii) exceed the statutory authority of the IRS.

The Executive Order requires the Treasury Secretary to submit an interim report to the President identifying all such regulations no later than June 20, 2017. Significantly, for the purposes of this review, earlier determinations of whether a regulation is significant under Executive Order 12866, as amended, are not controlling. Treasury Secretary Steven Mnuchin confirmed that the regulations under IRC § 385 (i.e., the debt-equity/earnings-stripping regulations) are among the regulations that will be subject to this review. There is no requirement that the interim report be published, and it is unclear whether sub-regulatory guidance (e.g., revenue rulings, revenue procedures, and notices) is included in this review.

The Executive Order further requires the Treasury Secretary to submit a report to the President recommending specific actions to mitigate the burden imposed by the regulations identified in the interim report, no later than September 18, 2017. This report must be published in the Federal Register upon submission to the president. The Treasury Secretary is required to delay or suspend the effective dates of all such regulations, to the extent permitted by law, and to modify or rescind such regulations, including through notice and comment rulemaking, as necessary. A summary of all such actions will be published in the Federal Register within 10 days following the finalization of all such actions. If all such actions are not finalized within 180 days after the date of the report, an interim summary of such actions will be published in the Federal Register.

In addition, Executive Order 13789 orders (i) the Treasury Secretary and the Director of the Office of Management and Budget (OMB) to review any exceptions from the review process for significant regulations under Executive Order 12866 and any successor order and (ii) the Treasury Secretary to revise I.R.M. pt. 32.1.5.4.7.5.3, which deals with the application of Executive Order 12866 to the issuance of Treasury Regulations. The exceptions to the review process of Executive Order 12866 are contained in a long-secret, but now public, memorandum of understanding (MOU) between Treasury and OMB. The MOU was finally made public after Senate Finance Chairman Orrin Hatch demanded its release in a letter to former Treasury Secretary Lew in April 2016. Since then, Chairman Hatch has sharply criticized the contents of the MOU.

Notwithstanding Executive Order 13789, recent comments from Clifford Warren, special counsel to IRS associate chief counsel for Passthroughs and Special Industries, indicate that the IRS is proceeding with several controversial regulatory projects. Clifford identified several regulatory projects as "ongoing" despite the issuance of Executive Order 13789, including the recently issued regulations under IRC § 385 relating to earnings-stripping transactions and intercompany debt instruments and proposed regulations under IRC § 707 treating certain investment-management fee waivers as disguised compensation.

Based on these comments, it appears that career IRS personnel and senior Treasury officials may have sharply divergent views on how best to implement Executive Order 13789. It would therefore be prudent for affected industries to proactively engage senior IRS and Treasury officials regarding the implementation of Executive Order 13789 with regard to recently issued or proposed regulations that are of particular concern.

Investment funds and their managers should monitor the implementation of Executive Order 13789 with respect to several recently issued and proposed regulations, including (a) the IRC § 385 debt-equity/earnings-stripping regulations; (b) the IRC § 707 investment-management fee waiver proposed regulations; and (c) the IRC §§ 707, 752 bottom-dollar guarantee regulations. The following are some issues to watch for with respect to the review of these regulations:

  1. Multiple private investment funds managed by the same investment manager may find themselves subject to the recently issued IRC § 385 regulations if a common investment adviser owns all of the voting interests in the funds. In issuing the regulations, Treasury specifically rejected comments seeking an exception for such funds.
  2. The proposed IRC § 707 investment-management fee waiver regulations would allow the IRS to disregard certain management fee waivers that are designed to effectively transform management fees that would otherwise be taxed as ordinary income into profit interests that are taxed as capital gains.
  3. The IRC §§ 707, 752 bottom-dollar guarantee regulations eliminated the ability of partnerships to use bottom-dollar guarantees to avoid the application of the disguised sale rules. The disguised sale rules are often triggered when a partnership assumes the debt of a contributing partner or incurs debt to finance a distribution to a contributing partner.

We should know which, if any, of these regulations will be pared back or rescinded when the Treasury Secretary submits a report on his findings to the President this fall. Until then, an opportunity exists to actively engage senior IRS and Treasury officials regarding regulatory projects of concern to investment funds and their managers.