Partnership Rules May Not Mark Opening of Rulemaking Floodgates

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By Allyson Versprille

Taxpayers shouldn’t read too much into the recent release of proposed partnership audit rules, because while it might signal progress in kick-starting the rulemaking process, it’s unlikely there will be a deluge of rules coming out soon, former Treasury officials said.

The regulatory process came to a standstill on Jan. 20 when President Donald Trump imposed a regulatory freeze, followed by several executive orders, including a Jan. 30 directive requiring that federal agencies eliminate two rules for every new one. Until last week, the only guidance the Internal Revenue Service and Treasury Department had issued since those actions were taken was subregulatory guidance—notices, revenue procedures, and revenue rulings. That changed on June 13 when the IRS rereleased the partnership audit rules (REG-136118-15).

“The issuance of the proposed regulations about the partnership audit process does not necessarily reflect a change in the volume of regulations that we’ll see in the near future,” said Eric Solomon, a principal in Ernst & Young LLP’s National Tax Department in Washington and a former Treasury assistant secretary for tax policy.

Gregory F. Jenner, a partner at Stoel Rives LLP who is both a former acting assistant secretary for tax policy and a deputy assistant secretary for tax policy, agreed. He told Bloomberg BNA that the partnership audit regulations were likely a “one-off,” given the relatively “apolitical” nature of the rules and the fact that they were time-sensitive. The new partnership audit regime, which was enacted by Congress in the Bipartisan Budget Act of 2015, takes effect Jan. 1, 2018.

“I don’t know that we can necessarily expect to see the pipeline open up, at least not to the extent that it was opened previously,” Jenner said.

Solomon said the statutory deadline may have played a large part in the release of the partnership audit rules. A Feb. 2 White House memo offering guidance on the implementation of the January two-for-one executive order notes that: “Agencies may proceed with significant regulatory actions that need to be finalized in order to comply with an imminent statutory or judicial deadline even if they are not able to identify offsetting regulatory actions by the time of issuance.” An April 5 memo includes similar language.

Identifying Two Rules

It could be that Treasury and the IRS determined—in consultation with the Office of Management and Budget—that the partnership audit rules qualified under that exception to the two-for-one order because the law says the new regime is effective in 2018, Solomon said.

However, even if the exception did apply, it may not mean the IRS and Treasury are off the hook in terms of identifying two regulatory actions to be repealed, he said.

The Feb. 2 memo said, “In all cases, however, agencies should identify additional regulatory actions to be repealed in order to offset the cost of the new significant regulatory action, even if such action is required by law.”

Solomon said that if the IRS and Treasury, when consulting with the new administration, determine “that this is a ‘significant regulatory action’ and they conclude that this exception would apply, this does seem to indicate that the agency would be required to identify regulatory actions to be repealed.”

Pam Olson, U.S. deputy tax leader at PricewaterhouseCoopers LLP and a former Treasury assistant secretary for tax policy, said she suspects that the partnership audit rules fall entirely outside the scope of the two-for-one executive order. The rules probably don’t fall into the category of “significant,” she said, adding that the “essential nature” of the rules in providing guidance to taxpayers and practitioners may also exempt them from the order.

But if the IRS and Treasury are required to select two rules to repeal, Olson said there are a lot of “deadwood” regulations—such as those that are obsolete because the associated statute has been repealed—that can be considered.

IRS Commissioner John Koskinen said June 21 at the annual IRS-Tax Policy Center Joint Research Conference on Tax Administration that the details of the two-for-one executive order are still being hashed out and that it’s unclear how the directive applies to tax regulations. “We’re still talking with the administration and Treasury about how this would work,” he said.

Getting ‘Arms Around’ Process

While the release of the rules likely doesn’t signal an opening of the floodgates, it may suggest that the new administration is starting to “get its arms around” the regulatory process and has an idea of how it wants to operate, Olson said.

“I think what it signals is that the administration is completing its analysis of the regulatory process and is getting comfortable with moving forward and issuing regulations,” she said.

When it comes to the regulatory process, some administrations “hit the ground a little faster than others just by virtue of the fact that they get personnel in place quickly,” Olson said.

The Trump administration still has several important positions at Treasury to fill. In May, the president nominated David Kautter to be the next assistant secretary for tax policy, but he has yet to be confirmed.

Both Jenner and Olson said Kautter’s confirmation will go a long way in reviving the regulatory process.

With assistance from Kat Lucero.

To contact the reporter on this story: Allyson Versprille in Washington at

To contact the editor responsible for this story: Meg Shreve at

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