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President Donald Trump’s executive order requiring federal agencies to eliminate two rules for every new one might delay the IRS’s work on regulations, including much-needed rules on the new partnership audit regime, former officials told Bloomberg BNA.
The Jan. 30 executive order is another significant step in Trump’s efforts to fulfill his campaign promise that he would cut back federal regulations. It follows a Jan. 20 White House memorandum placing a freeze on all federal rulemaking until the new administration can review all regulations in process.
Some practitioners and former officials said the new executive order adds to uncertainty in the tax world, saying it could drag out the time frame—or even lead to repeal—for regulations taxpayers need. One practitioner said the order could be a good thing that would cause the government to take a closer look at regulations.
The requirements under the new executive order could have the effect of “prolonging the timeline by which IRS and Treasury issue regulations, many of which could be beneficial for taxpayers,” said Jorge Castro, founder of CastroStrategies LLC and a former senior Internal Revenue Service official and congressional tax counsel.
“Not every regulation that the IRS and Treasury are working on is negative for taxpayers,” he said. For example, through the partnership audit rules currently being drafted, the IRS and the Treasury Department are working toward providing clarity “and relieving burdens of the partnership audit legislation that Congress passed, so a lot of those upcoming regulations could be positive to a lot of businesses,” he said.
Lisa M. Zarlenga, a partner at Steptoe & Johnson LLP and former tax legislative counsel at Treasury’s Office of Tax Policy, said that while there are some rules that taxpayers don’t like, often they want the IRS and Treasury to issue guidance to provide “business certainty” and an understanding of how the government is interpreting a statute.
The forced repeal of multiple rules could be counterproductive, said Scott Levine, a partner and corporate tax specialist at Jones Day. Some tax rules “are taxpayer-friendly or at least provide bright lines,” he said Jan. 30, offering certainty for third-party and international transactions.
He said the repeal of these rules without replacements “could leave significant holes in the tax law.”
However, Robert Kovacev, also a Steptoe partner, said he thinks the order is “a good thing. It will force Treasury and IRS to take a close look at existing regulations with an eye towards reform.”
The executive order requires agencies to conduct a cost analysis in which the cost of any new regulation must be canceled out by eliminating at least two others. This order imposes a significant additional test that officials have to complete before issuing new regulations, and no Treasury or IRS leader will take the process of identifying two pieces of legislation to eliminate lightly, Castro said.
Zarlenga noted that there is a statutory deadline for the partnership audit rules. The new regime is supposed to become effective in 2018.
It is unclear “whether guidance that’s necessary under a statute will have some sort of exception or whether, to issue those rules, they’ll have to come up with two regs to pull,” Zarlenga said.
Practitioners had differing views on the cost issue.
Michael Desmond, a Treasury tax legislative counsel during the George W. Bush administration, said the process of figuring out how much a regulation costs could be enormously difficult, noting that tax regulations aren’t supposed to have an economic impact or raise revenue.
Speaking separately and not in response to Desmond’s comments, Kovacev called the idea that tax guidance doesn’t have an impact on the economy “ludicrous. That’s a fiction that the IRS has insisted on for some time.”
Jeff Paravano, a managing partner at Baker & Hostetler LLP who specializes in both domestic and international tax structuring, said the cost issue gives the director of the Office of Management and Budget tremendous power.
Given the zero net compliance cost requirement and the lookback to Oct. 1, 2016, “it quickly becomes clear, as a practical matter” that “no new tax regulations may be promulgated in the near term without a waiver from the director of OMB,” he said.
Initially, there is likely to be a lot of “low-hanging fruit” that the IRS and Treasury can eliminate in order to meet the two-for-one requirement, Zarlenga said. The controversial debt-equity rules under tax code Section 385 may be one target because they “have been at least speculated to be on the chopping block under the new administration,” she said.
Under the same logic, the estate valuation discount rules under Section 2704 could also be singled out.
Additionally, the executive order may hinder the IRS and Treasury’s ability to issue anti-abuse regulations without projecting their intentions to the general public beforehand, Zarlenga said.
The executive order says that “unless otherwise required by law, no regulation shall be issued by an agency if it was not included on the most recent version or update of the published Unified Regulatory Agenda.”
The IRS and Treasury often won’t include anti-abuse projects on the unified agenda “because they don’t want people to plan around it,” Zarlenga said.
She also pointed out that the definition of “regulation” in the executive order is “fairly broad” and calls into question whether the order applies to sub-regulatory guidance such as revenue rulings, revenue procedures and notices. This concern is similar to those expressed about the regulations freeze imposed by the Trump administration earlier this month.
At least with the regulations freeze there was a reference to documents sent to the Office of the Federal Register, which makes it seem as if sub-regulatory guidance may not be impacted, Zarlenga said. In the executive order “there’s no such reference. So this seems a little bit more confusing than the reg freeze.”
If sub-regulatory guidance is covered by the executive order, that “could wreak more havoc on the IRS and Treasury’s ability to get guidance to taxpayers.” Conversely, if notices and revenue procedures aren’t impacted, taxpayers may see the government using those types of documents more, she said.
Brian Kittle, a partner at Mayer Brown LLP, also said he found the executive order confusing. The document doesn’t clearly define what would be considered a regulation, he said, adding that it isn’t clear what would happen if the IRS puts into place regulations that have different pieces that take effect at different times.
Desmond, who now has his own tax practice, said he thinks the order has a broad impact and could create a “massive quantity of burden on individuals and businesses. There’s a question of whether it could impact forms and publications, he said. “You never know.”
To contact the editor responsible for this story: Meg Shreve at firstname.lastname@example.org
Text of the Jan. 30 executive order is at http://src.bna.com/lOk.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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