Feb. 14, 2017

Andrew Velarde and Emily L. Foster



Because of two Trump administration policy changes restricting new regulations, the IRS will not be releasing any guidance -- including revenue procedures and revenue rulings -- beyond the most routine items for "a while," an official said February 13.

"The chief counsel's office has been in communication with Treasury about how this kind of regime might affect the tax regulatory process," said Robert Wellen, IRS associate chief counsel (corporate), about the policy changes. The first is the administration's unusual "one-in, two-out" executive order 2017 TNT 19-31: White House News, which generally requires agencies to eliminate two regs for every new one issued. The second is a January 20 memorandum 2017 TNT 14-53: White House News that calls for a regulatory freeze pending administrative review.

"Discussions continue. Read your newspaper. I don't know how this is going to come out," Wellen said in New York at a conference sponsored by the Practising Law Institute.

Wellen added that the restriction on new guidance is "very broad" and that the IRS is no longer submitting guidance to the Federal Register or to the Internal Revenue Bulletin beyond the most routine administerial guidance, such as updates to interest rates or mileage allowances. However, the agency will continue to release private letter rulings and chief counsel advice memoranda, he said.

Wellen also said he was hopeful that the Senate's confirmation of Treasury Secretary Steven Mnuchin would be the beginning of the process of "a tax team taking shape." He added that he hopes it would also allow guidance from the IRS to be reviewed, in accordance with the terms of the January 20 memorandum.

Under the 2-for-1 executive order, if a new regulation imposes a "cost," a term not defined within the order, that cost must be offset. Wellen said he was uncertain if cost meant administrative cost or tax dollars, but added that in speculating how the order worked, one theory within the IRS is that if a regulation raises revenue, that may count as a cost. An Office of Management and Budget memo 2017 TNT 25-28: White House News from February 2 clarified that the executive order applies only to regs that are significant regulatory actions, and that cost is measured as the opportunity cost to society as defined by OMB Circular A-4.

Practitioners had previously speculated about the extent to which Trump's executive order applied to tax guidance, which historically has been viewed as interpretive and has not usually been included as a significant regulatory action. Under a 1983 memorandum of agreement 2016 TNT 185-20: Tax Correspondence between Treasury and the OMB, the two agencies agreed on types of Treasury regs not subject to review under a predecessor to Executive Order 12866, granting a waiver from review procedures except for legislative regs designated as major. EO 12866 requires that significant regulatory actions be subject to increased scrutiny by the OMB. Regs will be considered significant if they produce an annual effect on the economy of $100 million or more, adversely affect materially the economy or a sector of the economy, or raise novel legal or policy issues. Wellen described the $100 million baseline as a low threshold. (Prior analysis 2017 TNT 25-1: News Stories. Prior coverage 2016 TNT 185-1: News Stories.)

"What's going to happen with that memorandum of understanding, whether it will remain in place, be changed, or revoked altogether . . . I have no idea," Wellen said.

Bandwidth for Tax Reform

Speaking on an earlier panel, Krishna Vallabhaneni, Treasury deputy tax legislative counsel, said he won't be reviewing the projects on the priority guidance plan as he typically does every year. It's not entirely clear whether Treasury will issue any guidance soon, which is typical whenever a transition occurs, he said, adding that it would be pure speculation on what the priorities will be until a new team has a chance to assess what's in the pipeline.

The lack of substantive guidance is not just because of the new team's desire to review what's in the pipeline and perhaps shift priorities, but also because "there's a lot of interest in pushing tax reform, and so at least in the Office of Tax Policy, that's going to be taking a lot more bandwidth than in prior years," he explained. If there's "going to be a significant change to the tax law, it doesn't make a whole lot of sense to throw resources at putting out new regulations based on the old tax rules," Vallabhaneni said, adding that the Office of Tax Policy has been engaged in tax reform efforts.

In response to a question about the 2-for-1 executive order, Vallabhaneni said the "default stance is that any regulation that we put out is subject to the recent executive orders and presidential memoranda." He said the February 2 OMB memo answered some of the IRS's questions and that "it's an ongoing effort as more questions percolate up to OMB" and it makes determinations on the IRS's guidance. But there's "no reason to believe that there's going to be any distinction for regulations from any particular agency," Vallabhaneni said.

In response to a question about the status of efforts to withdraw any tax regulations such as the section 385 debt-equity regs, Vallabhaneni stressed that the Treasury secretary is not in place and that the new team will need to be installed before Treasury can take action.

Lawmakers have differing views on the future of the debt-equity regs. House Ways and Means Committee Democrats sent a memo February 8 urging fellow members to oppose a resolution repealing the documentation requirements in the rules. Treasury last year finalized the section 385 regs (T.D. 9790 2016 TNT 199-5: IRS Final Regulations), which provide documentation requirements for some related-party interests in a corporation to be treated as indebtedness and to treat as stock some related-party interests that otherwise would be treated as indebtedness. Several Republican taxwriters strongly opposed the regulations. (Prior coverage 2017 TNT 26-3: News Stories.)

The documentation rules require taxpayers to provide (1) evidence of an unconditional and binding obligation to make interest and principal payments on specific fixed dates; (2) evidence that the holder of the loan has the rights of a creditor, including superior rights to shareholders for dissolution; (3) a reasonable expectation of the borrower's ability to repay the loan; and (4) evidence of conduct consistent with a debtor-creditor relationship.

Practitioners previously offered differing views on whether the debt-equity regs would be withdrawn but also suggested that the documentation rules may have some bearing on the IRS's review of debt transactions within a group even if the regs are withdrawn. (Prior coverage 2017 TNT 21-3: News Stories.)

For applying the 2-for-1 executive order, practitioners at the session offered one suggestion -- issue guidance to address the consolidated return circular basis issues under reg. section 1.1502-11 and remove the section 385 debt-equity regs and reg. section 1.1502-36 governing the consolidated returns unified loss rule.

Vallabhaneni emphasized that just because Treasury is not issuing guidance imminently doesn't mean practitioners and taxpayers can't submit comments and suggestions.

Opening Up the Letter Ruling Process

Speaking on the letter ruling program, Wellen said that generally the IRS would be looking to open up the process. For several years now, restrictions on letter rulings have been in place that limit them to a significant issue rather than a transaction generally. That limitation was implemented because of resource constraints, Wellen said. He added that in seeking to open up the program, he requested input from practitioners, regarding both the most useful subject matters and processes to pursue. (Prior coverage 2015 TNT 91-1: News Stories, 2017 TNT 15-5: News Stories.)

"We're trying to come up with ways we can issue rulings on full transactions," Wellen said, adding that the IRS was attempting to design a program with that goal in mind that would "regularize the process." There is no timeline yet on when the new process will be implemented, he said, although he added that a significant amount of work remains to be done on the project.

Wellen said the IRS was thinking of starting with section 355 and divisive D reorgs and related transactions under the program because of the large amount of letter rulings dedicated to these topics. The IRS was also examining new ways to process ruling requests that would take less time for the IRS and put more of the burden on taxpayers, he said.

"A [letter ruling] dealing with a spinoff that has any complexity at all is going to have . . . 50, 100, 200 separate factual representations that the taxpayer makes," Wellen said. "Believe it or not, we've really never standardized those representations even though this practice has been around longer than I have been practicing law."

Wellen added that while there was logic to the IRS's flexibility toward the forms of taxpayer representations to account for differences in deals, the burden this imposed on the IRS was considerable. A new process might require taxpayers to make representations in a prescribed form or, failing that, explain why such a prescribed form could not be used, he added. He also requested that practitioners "exercise a high level of quality control" when making ruling requests. The IRS may find itself more frequently returning requests that fail to meet a specific level of quality in the future, he said.