The noise that you just heard may be another blessed nail in the coffin of Treasury’s proposed regulations that would have made it more difficult for an entity to qualify as a political subdivision so that it can issue tax-exempt bonds on its own behalf. Treasury just issued Notice 2017-38, which sends 8 regulatory projects, including the proposed political subdivision regulations, to the President in response to his order to identify and pare back or eliminate regulations that add undue financial burden or undue complexity.

Issue Price Regulations Sneak Past the Guards

The fact that Treasury included the proposed political subdivision regulations among the list of burdensome regulations that are now on the chopping block will get all of the headlines, but there’s another story here, too. Treasury somehow concluded that the issue price regulations were not a “significant” tax regulation (apparently they aren’t regular readers of this blog). In other words, Treasury didn’t even consider whether the new issue price regulations might be burdensome. In fact, Treasury says that the issue price regulations were “minor or technical in nature,” and – you’ll love this – “generated minimal public comment.”


The Executive Order to Review Significant Tax Regulations 

Earlier this year, the President issued Executive Order 13789, which instructed the Treasury Department to review “significant tax regulations” to see whether they “impose an undue financial burden on U.S. taxpayers,” “add undue complexity to the Federal tax laws,” or “exceed the statutory authority of the [IRS].” For purposes of this exercise, the President instructed Treasury to ignore the OMB’s previous designation of a regulation as “significant.” Rather surprisingly, OMB designated as significant only one of the 105 regulations that were issued during the relevant window, which was January 1, 2016 to April 21, 2017. Treasury reviewed all of the 105 regulations that were issued during that window and concluded that 53 of the 105, including the final issue price regulations, were insignificant. Treasury then reviewed only the remaining 52 regulations to see whether they met any of the criteria in the Executive Order.

The Executive Order instructs Treasury to come up with an “interim report” – that’s where we are now – and then to submit a final report to the President by September 18, 2017, recommending “specific actions to mitigate the burden imposed by regulations identified in the interim report.” The proposed political subdivision regulations are among those regulations that have been flagged by Treasury in the interim report as either adding undue financial burden or adding undue complexity (or both).

It would have been one thing for Treasury to have deemed the issue price regulations to be significant, reviewed them under the Executive Order, and then to have decided that, notwithstanding the profound changes that the new issue price rules have caused, the “juice was worth the squeeze,” as the saying goes. But that’s not what happened, apparently, and we aren’t told why. It’s probably fair to call the issue price regulations more “technical” than the political subdivision regulations were (although all tax-exempt bond rules are rather technical from a layman or general tax practitioner’s perspective), and “technical-ness” was one of the descriptors that Treasury used for regulations that were deemed too insignificant to merit scrutiny under the Executive Order. And, as the Mars Climate Orbiter team could tell you, even merely “technical” matters can have profound consequences.

What to do now? 

Treasury is again asking for comments on each of the eight regulatory projects that are flagged as burdensome in Notice 2017-38. Given the amount of disk space and brain power that the proposed political subdivision regulations have consumed so far among the various industry groups that ripped the proposal, it might be worth it just to re-submit the original comments, or at least send a summary of the prior comments while reinforcing the conclusion that Treasury should abandon the project. At the very least, perhaps a Hallmark card of encouragement telling Treasury that it is now on the right track. (A summer associate down the hall suggested printing out a thumbs-up emoji and mailing it to the appropriate address.)

More to come on this, for sure.