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An easy-to-miss footnote at the bottom of a late-January memo on President Donald Trump’s regulatory freeze seems to support the conclusion that the moratorium extends to IRS revenue procedures and notices.
A broad Jan. 20 memo from White House Chief of Staff Reince Priebus imposing a regulations freeze on all federal agencies raised questions about whether the directive covered sub-regulatory guidance issued by the Internal Revenue Service, which is published in the Internal Revenue Bulletin but not the Federal Register.
The last footnote in a Jan. 24 memorandum offering details for implementing the freeze seems to clear up some of that confusion. It says: “Note there may be circumstances where a substantive action of the type EO 12866 contemplates is not published in the Federal Register.”
Everyone is still working to fully understand the regulatory freeze, “but it does sound like it goes beyond notices of proposed rulemaking and final and temporary regulations to include other forms of guidance,” said Pamela Olson, U.S. deputy tax leader at PricewaterhouseCoopers LLP.
Some practitioners have expressed concern that including sub-regulatory guidance in the moratorium could obstruct important administrative guidance, but Olson told Bloomberg BNA those concerns are likely overblown. “I think if there’s something that needs to get out, they’ll find a way to get it out,” she said. It just may require extra work by Treasury Department and IRS officials to inform “those up the chain” why that action needs to be taken, said Olson, who served as assistant secretary for tax policy during the George W. Bush administration.
Olson also said there will be more opportunities for conversations on the cabinet level to discuss what guidance should or shouldn’t be included in the moratorium once the Treasury Department secretary is in place. The Senate still hasn’t voted on Steven Mnuchin’s confirmation.
The regulations freeze isn’t the only action by the Trump administration that has raised questions about scope. The president’s recent “two-for-one” executive order, which requires the elimination of two regulations for every new one issued, has also generated confusion.
The executive order seemed to apply to a broad definition of regulation, but interim guidance explaining the order restricts its application to “significant regulatory action” as defined in Executive Order 12866, issued by President Bill Clinton in 1993.
This provides a potentially “yes but no scenario” as to whether the directive applies to tax regulations on a wide scale, said George A. Hani, chair of the Tax Department at Miller & Chevalier Chartered.
In the past, Treasury and the IRS have been able to cite a 1983 Memorandum of Agreement with the Office of Management and Budget relating to a President Ronald Reagan executive order as a means to exempt most tax regulations from the definition of “significant” and allow them to circumvent further analysis by the OMB.
“The IRS is currently reviewing the executive order,” an agency spokesman told Bloomberg BNA in an e-mailed response to questions about the directive.
“I think that the 385 regs were deemed significant and maybe one other instance in the last half dozen, dozen years was deemed significant,” Hani said, adding that he’s never seen a revenue procedure or revenue ruling that was deemed significant.
The basis for the 1983 MOA is that any effect tax regulations have on the economy stems from Congress’ statute, not the regulations that clarify the statue unless they are legislative instead of interpretive, said Lisa M. Zarlenga, a partner at Steptoe & Johnson LLP who was Treasury tax legislative counsel in President Barack Obama’s administration.
Because of this prior treatment, it would seem many tax regulations would be exempt from the “two-for-one” executive order. However, that doesn’t mean the Trump administration won’t take a different stance. “I think in today’s political climate all past decisions are subject to reconsideration and the Trump administration may view things differently,” Hani said.
Olson said even if tax regulations are largely exempt from the executive order, the directive is still likely to change the behavior of Treasury and IRS officials. “Maybe what comes as a result of this is a more rigorous review of” regulatory projects, she said.
“I think that would be good,” she said, adding that today’s regulatory-heavy environment can hinder business operation. Olson pointed to other countries that have taken steps to reduce regulations, including Canada, which has a “one in, one out” law, similar to Trump’s order.
Public Citizen Inc., the Natural Resources Defense Council Inc. and the Communications Workers of America, AFL-CIO, filed a lawsuit against Trump and his “two-for-one” executive order Feb. 8 on the grounds that he lacked the constitutional authority to issue the directive.
The complaint filed with the U.S. District Court for the District of Columbia alleges the executive order violates the Administrative Procedure Act because requiring federal agencies “[t]o repeal two regulations for the purpose of adopting one new one, based solely on a directive to impose zero net costs and without any consideration of benefits, is arbitrary, capricious, an abuse of discretion, and not in accordance with law.”
John Harrington, a former Treasury international tax counsel, told Bloomberg BNA it might be difficult to argue agencies would take “arbitrary and capricious” actions outlawed under the Administrative Procedure Act.
One reason is because it is so early that “at this point it’s speculative” what agencies might do, he said Feb. 9.
But another is that for the IRS and Treasury, it might be especially tough to figure out how pulling any one particular rule would violate the APA, Harrington said. It isn’t clear that tax regulations would fit within the still-murky requirement that agencies have to pull two burdensome or costly regulations to write another one, he said.
“It’s tricky from a tax standpoint,” Harrington, now an international partner with Dentons US LLP, said. “The underlying assumption is that every regulation imposes a burden, but for tax regulations it’s often different. In many cases, they offer guidance that people need and welcome even if they do impose a burden. With tax regulations it’s all over the map.”
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