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Editorial 6 MIN READ

The Trump administration's regulatory freeze, six months in

One memo, four executive orders, and a Treasury notice have slowed the pipeline of new business-formation rules to a crawl

The Editors
Staff, Incorporator.org
6 min read Updated
Contents 5 sections
  1. What actually happened
  2. The eight tax regulations on the Treasury list
  3. Second-order effects on business formation
  4. What remains unclear
  5. Sources

eptember 26, 2017. Eight months into the administration, the federal rulebook for anyone forming or restructuring a business looks materially thinner than it did a year ago. Not because existing rules were repealed at scale. Because new ones stopped arriving.

The machinery is a single-page memo from the White House Chief of Staff on Inauguration Day, two cross-government executive orders, one order aimed specifically at Treasury, and a July Treasury notice that named eight tax regulations for reconsideration. Each piece is narrow. Together they have changed the default from "another rule is coming" to "probably not, and certainly not this quarter."

What actually happened

On January 20, 2017, Chief of Staff Reince Priebus sent a memorandum to the heads of executive departments and agencies titled "Regulatory Freeze Pending Review." The memo, published in the Federal Register on January 24 at 82 FR 8346, did three things. It told agencies to send no new regulations to the Office of the Federal Register until a department head appointed by the President had reviewed them. It told agencies to withdraw regulations already sent to the OFR but not yet published. And it told agencies to postpone the effective date of regulations already published but not yet effective, for sixty days, pending review. The memo carved out emergency and statutorily required actions.

Ten days later, on January 30, the President signed Executive Order 13771, "Reducing Regulation and Controlling Regulatory Costs," published at 82 FR 9339. EO 13771 is the one readers know as the "two-for-one" rule. It orders that for every new regulation an agency proposes to issue, the agency must identify at least two existing regulations to be repealed, and that the total incremental cost of new regulations in fiscal 2017 be no greater than zero. OMB's interim guidance in April clarified that "regulation" for these purposes means significant regulatory action, and that the zero-cost cap is net of the cost savings from the offsetting rescissions.

On February 24, EO 13777, "Enforcing the Regulatory Reform Agenda," 82 FR 12285, put institutional weight behind the freeze. It directs each agency to designate a Regulatory Reform Officer and to stand up a Regulatory Reform Task Force whose job is to identify regulations that eliminate jobs, impose costs exceeding their benefits, or are outdated. Those task forces have been reporting through the summer.

Two orders then narrowed the aperture to tax and energy. EO 13783, "Promoting Energy Independence and Economic Growth," signed March 28 and published March 31 at 82 FR 16093, told agencies to review regulations that burden domestic energy production — a category that includes a long list of Interior, EPA, and BLM rules relevant to the formation of mineral-rights LLCs, pipeline partnerships, and similar vehicles. And EO 13789, "Identifying and Reducing Tax Regulatory Burdens," signed April 21 and published April 26 at 82 FR 19317, ordered Treasury to review all significant tax regulations issued on or after January 1, 2016, and to recommend which should be rescinded, modified, or replaced. The 13789 review is the one that matters most for readers of this site.

The eight tax regulations on the Treasury list

On July 7, Treasury issued Notice 2017-38, which identified eight tax regulations that met the EO 13789 criteria of imposing undue financial burden or undue complexity. The notice, published in Internal Revenue Bulletin 2017-30 on July 24, is the operative document. The regulations named are:

  • The section 103 proposed regs on definitions of political subdivisions (REG-129067-15);
  • The section 337(d) temporary regs on REIT/RIC conversions of C-corp property (T.D. 9770);
  • The section 7602 final regs letting outside contractors take testimony in summonses (T.D. 9778);
  • The section 752 final and temporary regs on disguised sales and partnership liability allocations (T.D. 9788);
  • The section 385 final and temporary debt-equity regulations (T.D. 9790);
  • The section 987 final regs on foreign-currency branches (T.D. 9794);
  • The section 367 final regs on outbound transfers of foreign goodwill and going-concern value (T.D. 9803); and
  • The section 2704 proposed regs on valuation discounts for family-controlled entities (REG-163113-02).

For anyone forming or restructuring closely held entities, the two that most directly touched business-formation practice are the section 385 debt-equity rules and the section 2704 valuation rules.

Section 385. Treasury's October 2016 regulations under section 385 require extensive contemporaneous documentation for related-party "expanded group" debt instruments, on penalty of automatic recharacterization as equity. The compliance calendar was aggressive and the documentation burden heavy enough that it reshaped how many multinational groups planned intercompany financing for 2017. In Notice 2017-38 Treasury flagged the documentation rules for reconsideration, and in subsequent guidance Treasury announced it would delay the applicability date of those documentation requirements by twelve months — to January 1, 2019 — while it decides whether to revoke or substantially modify them. The practical effect for a closely held group spinning up a new foreign holding structure in the second half of 2017 is that the near-term documentation cliff has moved.

Section 2704. The August 2016 proposed regulations under section 2704 would have sharply curtailed lack-of-control and lack-of-marketability discounts in the valuation of interests in family-controlled entities for estate and gift tax purposes. The proposed regs were deeply unpopular with the estate-planning bar, and Treasury's July notice flagged them explicitly. Treasury has signaled that meaningful action on the 2704 proposal will come. As of this writing it has not been formally withdrawn, but the working assumption among planners is that the rule as proposed will not take effect.

Second-order effects on business formation

The cumulative effect of the freeze is visible in two places. First, the Federal Register itself is lighter. The Unified Agenda Treasury and other agencies published during the summer shows fewer new significant actions in the pipeline than in recent years, and several items previously listed as "proposed rule stage" have been moved to long-term or inactive status. Second, practitioners are planning differently. The April and May 2016 work to get ahead of the section 385 documentation cliff has been deferred. Estate planners who had accelerated gifting in 2016 in anticipation of 2704 are standing down. Energy-sector formations that had been structured around contested Interior and BLM rules are being revisited.

Not every change is a loosening. EO 13771's two-for-one mechanic interacts awkwardly with routine tax guidance, much of which is genuinely burden-reducing or taxpayer-favorable — safe harbors, elections, filing-date relief. Treasury has taken the position, in various statements, that most tax guidance falls outside the scope of "significant regulatory action" under EO 12866 and therefore outside the 13771 offset regime, but that position has not been fully tested. Practitioners have noticed a measurable slowdown even in taxpayer-favorable guidance that would have issued routinely in a normal year.

What remains unclear

Three things. Whether the administrative-procedure challenges to the postponements — filed under the APA in several district courts during the spring — will disturb the schedule. Whether tax reform legislation, which continues to move in Congress, will moot the section 385 and section 2704 debates by changing the underlying Code. And whether the 13777 task forces, now reporting out, will identify deregulatory targets specific enough to translate into notice-and- comment proposals before year-end, or whether the freeze will hold simply by virtue of nothing replacing it.

For someone forming an entity this quarter, the operational read is narrow. The filing mechanics at the state level have not changed. Federal tax treatment of an LLC or S-corp at formation has not changed. What has changed is the risk, in the planning horizon, of a new federal rule landing mid-structure. That risk is lower today than it was twelve months ago, and the next six months will tell whether that is the new baseline or an interregnum.

Sources

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