(Updated on 10/20 – It’s official: Treasury officially withdraws proposed political subdivision regulations.)

The eagerly awaited verdict on the proposed political subdivision regulations (Proposed Political Subdivision Regulations) (“Proposed Regulations”) is finally in and their withdrawal has been announced.  These regulations have been a frequent subject of our posts (here,  here, here, here, here, and here) Treasury issued its interim Report on June 22, 2017 (here) under Executive Order 13789 identifying eight regulations for review, including the Proposed Regulations.  (Discussed in previous blogs by Michael Cullers and Johnny Hutchinson here and here.) Now Treasury has issued its “Second Report to the President on Identifying and Reducing Tax Regulatory Burdens,” (“Second Report”) dated October 2, 2017, announcing its recommendations on those eight regulations as well as potentially far-reaching plans for further review of burdensome regulations.  Of the eight regulations reviewed, Treasury recommended full withdrawal of only two, one being the Proposed Regulations (the other being an anti-taxpayer regulation addressing transfers of family businesses, which could be an especially sympathetic area under the Trump administration).  In recommending withdrawal of the Proposed Regulations, Treasury noted that “some enhanced standards for qualifying as a political subdivision may be appropriate” but that “regulations having as far-reaching an impact on existing legal structures as the proposed regulations are not justified.”  So what might we expect in the future?

Most importantly, we can breathe a justified sigh of relief for our political subdivision clients whose status would have been jeopardized by the vagaries of the Proposed Regulations.  As for future guidance on political subdivision status, the Second Report merely states that “Treasury and the IRS may propose more targeted guidance in the future after further study of the relevant legal issues.”

John Cross stated at the recent NABL Bond Attorneys’ Workshop that if Treasury/IRS issues further guidance, it will be more narrowly targeted.  This sounds like the sensible approach that the government should have taken in the first place to address its limited concerns, if justified, reflected in the technical advice memo (TAM 201334038) that started this controversy.

More broadly, the Second Report provides some, albeit limited, hope for further action on overly burdensome regulations.  In addition to “considering possible reforms of several recent regulations not identified in the June 22 Report [referenced above],” the Second Report states that, in furtherance of the policies prompting this review of regulations, “Treasury and the IRS have initiated a comprehensive review, coordinated by the Treasury Regulatory Reform Task Force, of all tax regulations, regardless of when they were issued.”  The goal is to “identify tax regulations that are unnecessary, create undue complexity, impose excessive burdens, or fail to provide clarity and useful guidance.”  The Second Report piques our curiosity by reporting that the IRS Office of Chief Counsel has already identified more than 200 regulations for potential revocation.  Unfortunately we have to wait for later reports identifying these regulations.  Presumably those reports won’t be too much later, though, because the Second Report also states that Treasury and the IRS expect to begin the rulemaking process for revoking these regulations during this fourth quarter of 2017.

Can we expect any of this future activity to affect the large volume of public finance tax regulations?  Prior to the action on the Proposed Regulations, I probably would have guessed that the public finance tax regulations don’t have a sufficiently high profile to attract Treasury’s attention.  But withdrawal of the Proposed Regulations – one of only two withdrawn regulations — suggests that the review is broad-based and not limited to what might be viewed as high profile regulations.  So we are all encouraged to consider the regulations we consult daily with a view to identifying those regulations that, in the words of Executive Order 13789, “impose an undue financial burden on U.S. taxpayers, (ii) add undue complexity to the Federal tax laws, or (iii) exceed the statutory authority of the Internal Revenue Service (IRS).”