Andrew Roberson and Justin Crouse authored this bylined article on the US Department of the Treasury’s response to Executive Order 13789. “In light of tax reform, Treasury’s push for reducing regulatory burdens and OMB review of tax regulatory actions, Taxpayers should monitor for any future regulatory action taken by Treasury,” the authors wrote.
Originally published in Law360
Just 10 days after his inauguration, President Trump signed Executive Order 13771, establishing the tenet of deregulation to be adopted by the Trump administration. Executive Order 13771 outlined the Trump administration’s vision for reducing regulation and controlling regulatory costs, and established a principle that for every one new regulation issued at least two prior regulations be identified for elimination — the “one in, two out" principle.
President Trump’s Call for Reducing Tax Regulatory Burdens
President Trump signed another executive order on April 21, 2017 — Executive Order 13789 — which called on the U.S. Department of the Treasury to identify and reduce tax regulatory burdens that impose undue financial burdens on U.S. taxpayers or otherwise add undue complexity to federal tax laws.
In response, Treasury released an interim report on regulations identified for burden restriction and requested comments on whether such regulations should be rescinded or modified. Treasury subsequently submitted a report to the president on Oct. 2, 2017, which was largely consistent with Treasury’s interim report but set forth in greater detail the specific actions recommended by Treasury.
The Oct. 2017 report recommended the withdrawal, revocation or revision of eight Treasury regulations in order to eliminate or otherwise mitigate the “burdens imposed on taxpayers,” and also stated that Treasury is considering possible reforms of several recent regulations not identified in its interim report — such as regulations under Internal Revenue Code Section 871(m) — relating to payments treated as U.S. source dividends — and the Foreign Account Tax Compliance Act.
The Oct. 2017 report also stated that Treasury and the Internal Revenue Service have initiated a comprehensive review of all regulations — regardless of when they were issued — that will be coordinated by the Treasury Regulatory Reform Task Force and will be in furtherance of executive orders adopting a PAYGO approach to regulations.
Retrospective Review: Reducing Tax Regulatory Burdens
Following its promise to comprehensively review all regulations, Treasury released an April 2018 report in which it outlined Treasury’s efforts to support President Trump’s regulatory reform agenda and to implement the one-in-two-out principle. Consistent with the Oct. 2017 report, the April 2018 report noted that Treasury has undertaken a retrospective review of significant recent tax regulations pursuant to Executive Order 13789 and identified eight regulations for rescission or modification. Treasury indicated that these actions will “advance the President’s policy of regulatory efficiency in support of lower individual and corporate compliance burdens.” The April 2018 report also provided that Treasury has:
- reduced its regulatory agenda by approximately 100 regulations from its Fall 2017 agenda
- issued a notice to eliminate almost 300 “deadwood” tax regulations that are duplicative or obsolete
- withdrawn two regulations deemed “significant” in the Oct. 2017 report
- issued a series of reports providing specific recommendations to make the U.S. financial regulatory system more efficient
Lastly, the April 2018 report provided that, since the issuance of Executive Order 13771, no new “tax regulatory actions” have been undertaken by Treasury but rather, actions from Treasury’s fall 2017 agenda have either been identified as “deregulatory” or have not yet been classified.
Prospective Review: A New Approach to Regulatory Efforts
In addition to Treasury’s regulatory review efforts, future tax regulatory action will now be subject to oversight and control of the Office of Management and Budget. Historically, Treasury’s regulatory powers had largely been exempted from OMB authority. However, Executive Order 13789 directed Treasury and the OMB to “review and, if appropriate, reconsider the scope and implementation of the existing exemption for certain tax regulations from the review process set forth in Executive Order 12866 and any successor order.”
In response, Treasury and OMB released a memorandum of agreement, or MOA, on April 12, 2018, which outlined a framework for review of tax regulatory actions, which, according to Treasury Secretary Steven Mnuchin, will “increase scrutiny of regulations most likely to impose new costs, while preserving Treasury’s ability to ensure taxpayers receive timely, clear rules and guidance on how to comply with our tax code.”
Pursuant to the MOA, Treasury must submit a quarterly notice to the Office of Information and Regulatory Affairs in the OMB outlining planned tax regulatory actions that: (a) describes each regulatory action, (b) identifies any significant policy changes and (c) articulates the basis for determining whether such tax regulatory action is likely to (i) create a serious inconsistency, (ii) raise novel legal or policy issues or (iii) have an annual non-revenue effect on the economy of $100 million or more. The Office of Information and Regulatory Affairs will conclude its review within 45 days after Treasury’s submission — although certain actions under the Tax Cuts and Jobs Act may be expedited. To the extent there are any unresolved issues, a principals meeting between Treasury and OMB may occur.
Also pursuant to the MOA, Treasury generally will not be permitted to publish any tax regulatory action in the Federal Register or otherwise publicly release any tax regulatory action unless OMB notifies Treasury that it has either waived or concluded its review.
The push to reduce tax regulatory burdens, along with OMB oversight, means that Treasury and the IRS must operate under a new paradigm.
On the heels of historic U.S. tax reform in which the need for taxpayer guidance is great, IRS and Treasury officials have been unusually quiet about the issuance of any new tax regulatory actions. This was particularly evident at a recent tax conference hosted by the American Bar Association, where IRS and Treasury officials continued to respond to questions and comments with the oft-repeated response that they “understand the issue and are working on regulations.” While government officials have historically been tight-lipped regarding future regulatory guidance, this approach may be influenced by a general directive of the administration in light of the new oversight and control powers granted to OMB.
Taxpayer Reactions to Guidance
Taxpayers generally welcome guidance from the IRS and Treasury as it allows them to plan their transactions in conformity with the law. However, disputes often arise as to whether an agency has exceeded its authority when guidance is issued, particularly regulations and other published guidance such as revenue rulings, revenue procedures, notices and announcements.
For regulations, a starting point is whether the requirements of the Administrative Procedures Act have been followed. Litigation on this topic has increased in recent years and it is generally recognized that tax law is not exempt from the APA. Some common challenges involve whether notice and opportunity for comment is provided prior to the promulgation of temporary and final regulations and, if such comments are received, whether they have been adequately considered and sufficient explanations have been provided.
Another pertinent inquiry for regulations is whether the regulations pass muster under the Chevron test. Under Chevron, if the agency has been delegated authority to issue regulations on a particular subject, a two-pronged test is applied. The first prong looks at whether the statutory language is clear or ambiguous. If Congress’s intent is clear, then the regulations are not entitled to any deference. However, if Congress’s intent is unclear — i.e., the statute is ambiguous — the court will move to the second prong to determine whether the agency’s interpretation is reasonable, not arbitrary and capricious. Regulations that pass both tests will be entitled to deference.
For other published guidance, the prevailing standard of deference is the Skidmore test. This test focuses on the “power to persuade” and is a lesser standard of deference than that provided by Chevron.
It should be noted that the IRS is generally precluded from arguing contrary to its own regulations, as well as its other published guidance. Thus, taxpayers may rely on these types of guidance in planning their transactions. In the case of non-regulatory published guidance, however, taxpayers must take care to ensure that such guidance addresses substantially the same issue and involves many of the pivotal facts.
In light of tax reform, Treasury’s push for reducing regulatory burdens and OMB review of tax regulatory actions, Taxpayers should monitor for any future regulatory action taken by Treasury. Taxpayers should also carefully review such guidance to ensure that the IRS and Treasury have not exceeded their regulatory authority and have followed all necessary requirements in enacting guidance.