Application of regulatory reform act to tax regulations.

On July 14, Tax Executives Institute filed the following comments with Senate Majority Leader Bob Dole, as well as with the Senate Government Affairs Committee and the Senate Finance Committee on the Comprehensive Regulatory Reform Act of 1995, urging Congress to exempt guidance issued by the Internal Revenue Service and the Department of Treasury from the scope of the bill. TEI's comments were prepared under the aegis of its, IRS Administrative Affairs Committee, whose 1994-1995 chair is Robert D. Adams of Halliburton Company.

On behalf of Tax Executives Institute, I am writing to urge that guidance issued by the Internal Revenue Service and the Department of Treasury be exempted from the provisions of S. 343, the Comprehensive Regulatory Reform Act of 1995. For the reasons set forth below, the Institute believes that including tax rules and regulations within the scope of the regulatory reform act would make government less responsive to the needs of the taxpaying public and hence be counterproductive.

Background

Tax Executives Institute is a volunteer association of nearly 5,000 professionals who are responsible for managing the tax affairs of their companies. TEI represents more than 2,700 companies -- a cross-section of the business community. Our members must contend daily with business tax laws, from both tax planning and tax compliance perspectives. The Institute is firmly committed to maintaining a tax system that works -- both for taxpayers and the IRS. We believe the diversity and training of our members enable us to bring a uniquely balanced and practical perspective to your attention.

Discussion

Congress is currently considering legislation that would reform the process under which government rules and regulations are issued. S. 343 would, among other things, require government agencies to prepare a cost-benefit analysis before regulations may be issued and to review systematically their outstanding regulations (possibly causing unreviewed rules to "sunset" after a certain period of time).

Although the bill in its current form provides an exception for guidance relating to the internal revenue laws, TEI is concerned that the language of S. 343(1) is so broad that it could sweep tax guidance within its scope. Specifically, TEI is concerned that the proposed legislation may:

* subject tax regulations, revenue rulings, and revenue procedures to the requirements of the Administrative Procedures Act (APA);

* impose the requirement that a cost-benefit analysis be prepared in respect of tax guidance that is considered to be a "major rule";(2) and

* subject tax rules and regulations to the provisions of the Regulatory Flexibility Act, which could delay the issuance of important guidance.(3)

The APA, which currently exempts "interpretative" rules, is intended to ensure that government regulations are not issued without adequate public input and oversight. Although the IRS generally provides such review, it takes the position that its rules are generally interpretative and (except in certain clearly delimited areas such as section 1502, relating to consolidated returns) not subject to the APA. S. 343 would add the following clause to this interpretative rule exception: "unless such rule, statement, or guidance has general applicability and substantially alters or creates rights or obligations of persons outside the agency." See S. 343, [sections] 3, amending section 553 of title 5. Many IRS regulations and other guidance would seemingly fall within the scope of this exception to the interpretative rule exception. Thus, the bill could ironically spawn numerous time-consuming disputes over whether particular projects even fall within the ambit of the regulatory reform measure and hence deleteriously delay the issuance of final tax rules.

Regardless of the merits of pending regulatory reform efforts in general, TEI is convinced that the country would be ill-served by including tax regulations and rules within the scope of S. 343.4 The Institute understands that the drafters of the bill appreciated the unique purpose and nature of tax regulations and intended to exempt tax rules and regulations from the scope of the rules. In its present form, however, the statutory language remains ambiguous. TEI urges Congress to clarify the exemption for such guidance. At a minimum, the legislative history of the bill should confirm that revenue rulings, revenue procedures, and other similar pronouncements do not fall within the scope of the bill.

Although the bill in its current form seemingly does not subject IRS rules and regulations to the "Sunset" provision, we would oppose any rule requiring the Treasury Department and IRS to review and repromulgate all extant tax rules every few years and to "sunset" those rules not so revalidated. Such a rule would consume an extraordinarily large amount of government resources and no doubt distract the IRS, Treasury, and tax-payers from important tasks. Indeed, a 'sunset" rule could have the unintended and counterproductive effect of requiring business taxpayers to spend scarce resources defending longstanding, beneficial, and generally accepted rules that otherwise might find themselves sunsetted. Such an approach would frustrate rather than further the true goals of regulatory reform.

The tax law of the United States is extraordinarily complicated. For the most part, however, the cause of the complexity lies not with regulatory rules, but with the underlying provisions of the Internal Revenue Code. The Code is replete with unclear, ambiguous, and open-ended provisions. Taxpayers (and the government employees who are charged with enforcing the law) are dependent on regulations to fill in the gaps and to explain the ambiguities. It is critically important that this guidance be issued in as efficient -- and timely -- a manner as possible. Anything that impedes that process should be avoided.

Conclusion

In summary, TEI opposes the application of a regulatory reform bill to tax regulations. We strongly urge that the Senate clarify the exemption for tax rules. If you have any questions, please do not hesitate to call either me at [phone] or Timothy J. McCormally of the Institute's professional, staff at [phone].

(1) References to S. 343 will be to the draft of the bill published in the June 21, 1995, issue of the Congressional Record. (2) The bill (in section 4(a)) adds a subchapter to chapter 6 of title 5, requiring a cost-benefit analysis of "major rules." It also (in new section 621(5)) defines a "major rule" to include a rule determined by the Director of the Office of Management and the Budget or his designee to likely have a gross annual effect on the economy of $50 million or more in reasonably quantifiable costs. (We understand this threshold has been raised to $100 million. "Section 621(9), however, defines a "rule" to exclude guidance relating to the internal revenue laws. Because there is no cross reference to the definition of a "major rule," it is unclear whether this exception exempts internal revenue laws from the definition. We suggest that such a cross reference be included. (3) If the IRS rules are subject to the APA, they are also (by cross reference) subject to the Regulatory Flexibility Act, requiring a "regulatory flexibility analysis" that the final rule minimizes significant economic impact on "small entities" to the maximum extent possible. There are provisions for judicial review by affected small entities of the certification that the rule does not have a significant economic impact. (4) Let there be no mistake: TEI and its individual members frequently take issue with particular IRS rules, or with specific provisions in regulations issued by the Treasury Department. We sometimes conclude that the IRS and Treasury have overstepped their bounds and that they promulgate regulations that unnecessarily increase taxpayer burden. And we sometimes even argue -- strenuously so -- that Congress should intervene to overturn the result in a given set of regulations. TEI sincerely believes, however, that these instances of regulatory overreaching can be most effectively addressed on a case-by-case basis. Subjecting the IRS and Treasury Department to the Comprehensive Regulatory Reform Act would, we believe, do substantially more harm than good.