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OMB Directive Offers Interim Guidance on Regulatory Cap; Dearth of New IRS Guidance Continues

(Parker Tax Publishing March 2017)

The Office of Management and Budget (OMB) has provided guidance to help the Treasury Department, the IRS, and other government agencies implement the President's regulatory cap (aka, the "two-for-one regulation order"). Despite the OMB guidance, the IRS has yet to issue any new regulations or substantive revenue rulings, procedures, or notices under the new administration.

On January 20, 2017, the White House issued a memorandum freezing the issuance of regulations pending a review by a department or agency head appointed or designated by President Trump (White House Memorandum Regarding Regulatory Freeze). This caused the IRS to withdraw several regulations that had not yet been published in the Federal Register, including proposed partnership audit regulations dealing with the change in partnership audit rules that takes effect for partnership tax years beginning after 2017.

On January 30, 2017, President Trump signed an Executive Order (EO) titled "Reducing Regulation and Controlling Regulatory Costs" (Regulatory Cap EO). Section 2 of the EO, which is titled "Regulatory Cap for Fiscal Year 2017," provides that whenever an executive department or agency publicly proposes for notice and comment or otherwise issues a new regulation, it must identify at least two existing regulations to be repealed. The EO states that the Director of the Office of Management and Budget (OMB) must provide the heads of agencies with guidance on the implementation of Section 2 of the EO.

Under Section 2(d) of the EO, the OMB Director is directed to provide the heads of agencies with guidance on the implementation of Section 2. Section 2(d) of the EO provides that:

"Such guidance shall address, among other things, processes for standardizing the measurement and estimation of regulatory costs; standards for determining what qualifies as new and offsetting regulations; standards for determining the costs of existing regulations that are considered for elimination; processes for accounting for costs in different fiscal years; methods to oversee the issuance of rules with costs offset by savings at different times or different agencies; and emergencies and other circumstances that might justify individual waivers of the requirements of this section. The Director shall consider phasing in and updating these requirements."

OMB Guidance on Regulatory Cap for Fiscal Year 2017

Shortly after the issuance of the Regulatory Cap EO, the OMB issued a memorandum to assist regulatory policy officers at various government agencies, including the Treasury Department and the IRS, with the implementation of the EO (OMB Guidance).

The OMB Guidance addresses in question and answer format the implications of Section 2 of the EO. Specifically, the guidance provides that, for purposes of implementing Section 2 in fiscal year 2017, regulatory policy officers must adhere to the following requirements:

(1) Unless prohibited by law, whenever an executive department or agency publicly proposes for notice and comment or otherwise issues a new regulation, it must identify at least two existing regulations to be repealed.

(2) For fiscal year 2017, the total incremental cost of all new regulations to be finalized, including repealed regulations, must be no greater than zero, unless otherwise required by law or consistent with advice provided in writing by the OMB Director.

(3) In furtherance of the requirement of (1), above, any new incremental costs associated with new regulations must, to the extent permitted by law, be offset by the elimination of existing costs associated with at least two prior regulations.

In complying with the EO, executive departments and agencies may issue two "deregulatory" actions for each new significant regulatory action that imposes costs. The savings of the two deregulatory actions must fully offset the costs of the new significant regulatory action. Actions that are considered deregulatory actions and thus qualify for savings include:

(1) any existing regulatory action that imposes costs and the repeal or revision of which will produce verifiable savings may qualify; and

(2) any meaningful burden reduction through the repeal or streamlining of mandatory reporting, recordkeeping or disclosure requirements may qualify.

Agencies must confirm that they will continue to achieve their regulatory objectives after the deregulatory action is undertaken.

Measuring Cost Savings

In determining the cost savings, costs must be measured as the opportunity cost to society as determined in accordance with OMB Circular A-4. OMB Circular A-4 provides that the principle of "willingness-to-pay" (WTP) captures the notion of opportunity cost by measuring what individuals are willing to forgo to enjoy a particular benefit. OMB Circular A-4 notes that while economists tend to view WTP as the most appropriate measure of opportunity cost, an individual's "willingness-to-accept" (WTA) compensation for not receiving the improvement can also provide a valid measure of opportunity cost.

The OMB Guidance also states that purely deregulatory actions that confer only savings to all affected parties generally will not trigger the requirement for the agency to identify two existing regulatory actions to be repealed. However, if such deregulatory actions impose costs on individuals or entities, agencies will need to offset those costs.

With respect to costs that occur over different time periods, the OMB directive provides that all cost estimates should be annualized in accordance with OMB Circular A-4. While timing issues will be handled on a case-by-case basis, in general, the start and end points for the annualization of costs should be directly comparable across the new and corresponding repealed regulatory actions.

Regs Cap is Also Affecting Revenue Rulings, Procedures, and Notices

Unfortunately, it is not entirely clear what type of documents are affected by the EO or the OMB Guidance. While the EO and the OMB Guidance generally refer to "regulations," the definition of the term "regulation" as defined in the EO also includes a reference to the term "rule." Does this then mean that IRS revenue procedures, IRS revenue rulings, IRS notices, and other forms of sub-regulatory guidance are subject to the regulatory cap? Specifically, Section 4 of the EO provides that:

"For purposes of this order, the term "regulation" or "rule" means an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or to describe the procedure or practice requirements of an agency, but does not include: (1) regulations issued with respect to a military, national security, or foreign affairs function of the United States; (2) regulations related to agency organization, management, or personnel; or (3) any other category of regulations exempted by the Director."

Revenue rulings and procedures could be seen as an "agency statement designed to implement, interpret, or prescribe law or policy or to describe the procedure or practice requirements of an agency." Besides appearing in the definition of the term "regulation," the only other place the term "rule" appears is in Section 2(d) of the EO which provides that the OMB Director must provide methods to oversee the issuance of rules with costs offset by savings at different times or different agencies.

Thus, it is unclear what type of documents are subject to the regulatory freeze. What is known, however, is that in the first six weeks of the new administration, the IRS has released just four revenue rulings, procedures, and notices, all of a perfunctory nature. The IRS released 22 such documents during the corresponding period last year, indicating a sharp fall-off in sub-regulatory guidance.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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