IRS tax regulations and the 1 for 2 Trump executive order

by Monte A. Jackel

Shortly after being sworn into office, President Donald Trump issued an executive order mandating that for every new regulation issued by a federal agency the agency must eliminate two regulations.

The purpose of this executive order was (and is) to help ensure that future regulations do not impose a net monetary burden on the public. And so, the executive order requires that any monetary costs imposed by the new rule must be counter-balanced by cost savings from the elimination of two other rules.

The Office of Management and Budget (OMB) followed up this executive order by issuing a directive to the federal agencies as to the manner of implementing this executive order.

Essentially, the way the executive order is worded, only “significant regulatory actions” are subject to the executive order.

This sounds reasonable. But, wait a minute.

A prior executive order going back a good twenty years or so, and a private agreement between the Department of the Treasury and OMB issued at that time, provides that IRS regulations will be subject to a more stringent review process if the regulations are “significant regulatory actions,” generally defined as regulations that have a very meaningful impact on the economy as a whole.

Still, then what is the problem since IRS regulations clearly impact the public in a very meaningful economic manner?

Interpretive regulations

Well, the IRS for years has taken the position that almost none of its regulations are subject to OMB review because its regulations are interpretative only and, if there is a meaningful effect on the economy because of the issuance of its rule, it is a problem deriving from the statute itself and not the regulation.

Therefore, IRS regulations are not “significant regulatory actions” even though they have a very meaningful economic impact and would seem more suitable to be “significant” than the rules of many other federal agencies.

Yes, you heard that right. If the IRS decides (in consultation with the Treasury Department) that its regulations are not “significant regulatory actions” and if the Trump executive order only applies to “significant” regulations, then IRS regulations will not be subject to the 1 for 2 rule because the IRS says so.

Did the Trump executive order truly intend this result? Could this possibly be the correct interpretation of the law?

Consider the issue first from the IRS’s viewpoint. The IRS issues regulations that provide guidance to the public on how certain statutes apply in cases that are generally of broad interest and impact to the general public at large and for their tax advisors as well.

If the IRS had to eliminate two existing rules for every new one issued, the taxpaying public and their tax advisors would suffer, it may be argued, because there would be less overall guidance for the public on how to apply the tax law.

On the other hand, should the IRS be the sole arbiter of whether its regulations are for the public good and completely exclude OMB from the process because OMB does not have tax lawyers and would not understand “those hard IRS regulations” anyway? OMB seems to think so. That, it seems to me, would be an abdication of responsibility on the part of OMB.

It is also a given that the IRS priority guidance plan that is issued once per year and updated quarterly thereafter would become a cumbersome and perhaps useless document if the 1 for 2 rule applied to all of its rules.

This priority guidance plan sets forth the regulation and ruling projects that the IRS expects to issue during its fiscal year (July 1–June 30). If this plan had to also list recommendations for two rules to be eliminated if the new one is issued, that would make this guidance plan much longer than it is now and would truly slow down the pace of the regulatory guidance process.

After all, if the IRS has to find two rules to eliminate that will truly cut costs and that can afford to be eliminated to counter the increased cost burden on the public of the new rule, then the IRS may be put to the choice of eliminating two needed rules just to publish a new needed rule. That, it can be argued, would make little to no sense.

Still, there is something bothersome about the IRS and Treasury basically excluding OMB from the review process and having the IRS decide if a particular rule it wants to issue is subject to the 1 for 2 rule.

If the IRS can do this, is it the only federal agency worthy of such deference? And did the President intend for this result or is this just the result of an unknown practice of the IRS by the new administration?

IRS regulatory freeze

Right now, there is a freeze on publishing new regulations based on a memorandum issued by the President’s chief of staff shortly after the President took office.

This regulatory prohibition will be hard to police. First, if an agency states that it has gotten OMB approval to publish the regulation, who confirms whether this is the case?

Certainly the public does not get to see such an approval. Second, if the directive not to publish regulations is violated and the regulation is published by the IRS anyway, is the regulation still legally valid so that the public may rely on it even though internal government procedures were not complied with?

This has already happened with two IRS regulations and so the question is not an academic one.

Regulatory task force

Even more recently, the President issued an executive order directing each Federal agency to form an agency task force to evaluate the status of the President’s 1 for 2 regulation policy. The President was quoted as saying:

This directs each agency to establish a regulatory reform task force which will ensure that every agency has a . . . real team of dedicated people to research all regulations that are unnecessary, burdensome, and harmful to the economy and therefore harmful to the creation of jobs and business. Each task force will make recommendations to repeal or simplify existing regulations.

Every regulation should have to pass a simple test: does it make life better or safer for American workers or consumers? If the answer is no, we will be getting rid of it and getting rid of it quickly.

It seems that trying to apply this type of standard to tax regulations will be very difficult.

First, assume that the IRS and Treasury appoint a regulatory reform task force to review all regulations and then try to determine whether they are “unnecessary, burdensome, and harmful to the economy” and whether a regulation makes “life better for American workers or consumers.”

When applying this standard to tax regulations, which provide necessary and still relevant guidance to the public on tax issues, how do you determine when those regulations are unnecessary (i.e., unnecessary to whom? The IRS? Taxpayers? Both?).

Also, how do you determine when tax regulations are burdensome? All regulations require some study and review to understand them and then, some regulations are harder to apply than others.

What is the burdensome aspect? That you have to spend time understanding them? That you have to hire expensive tax advisors to tell you what they mean? What if the regulation plugs a tax loophole but is burdensome to apply? What if the regulation is still relevant and plugs a tax loophole but is rarely applied by the IRS, such as the partnership anti-abuse rule of reg. section 1.701-2?

When would a regulation be considered harmful to the economy? Is the harm measured by the fact that the regulation increases tax receipts and is the increase in tax receipts considered harmful or helpful to the economy? Does harmful mean that the regulations plug a tax loophole and it is harmful to taxpayers who were abusing a tax rule that the regulation stops?

It seems that without more concrete standards that set out the parameters for tax regulations, this standard will be next to impossible to apply in the tax area.

Also, will the members of the internal agency body cited by the President be representatives of, say, all IRS Chief Counsel divisions, such as corporate, passthroughs & special industries, international, etc.?

As drafted, the executive order calls for members of a task force who will be unable to evaluate tax regulations across all of the divisions of the IRS because they will not have the technical expertise to do so.

Most likely, this task force within the IRS and Treasury will ask for input from the various IRS Chief Counsel divisions as well as from the Treasury’s Office of Tax Policy. They most likely will also ask for public input on this matter, meaning that input will be coming from outside groups with financial or business interests in seeing that the particular regulation at issue stays or goes, or from tax bar groups, such as the American Bar Association and others, who may or may not have an agenda in recommending action one way or the other.

This process, then, would seem to be no different than how the system works at present when input is solicited from either within or outside of the IRS.

Are we to expect a different result in this case than how the current system works today and, if that is the case, what will the end result of this exercise of review by the task force within the IRS really accomplish?

Stay tuned.

The views expressed herein are solely those of the author and do not represent the views of either Akin, Gump, Strauss, Hauer & Feld or of any other firm or organization.

Monte Jackel

Monte Jackel

Monte Jackel is a senior counsel in the law firm of Akin, Gump, Strauss, Hauer & Feld.

Monte is nationally known for his expertise in the area of partnership taxation, where he has advised taxpayers ranging from Fortune 500 companies to closely held businesses and their owners.

He has also served as Attorney-Advisor in the Treasury Department’s Office of Tax Policy, Washington, D.C., as IRS Associate Chief Counsel (Domestic-Technical), and as IRS Special Counsel in the P&SI division of the Chief Counsel’s office.

Monte is admitted to practice law in the State of New York and the District of Columbia. Monte graduated with a B.A., Queens College, CUNY; a J.D., Hofstra University School of Law; and an LL.M. in Taxation, New York University School of Law.

Monte Jackel

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