Benjamin M. Willis (@willisweighsin on Twitter; ben.willis@taxanalysts.org) is a contributing editor with Tax Notes. He formerly worked in the mergers and acquisitions and international tax groups at PwC and with the Treasury Office of Tax Policy, the IRS, and the Senate Finance Committee. Before joining Tax Analysts, he was the corporate tax leader in the national office of BDO USA LLP. The views expressed here are his own.
In this article, Willis examines past presidential transitions and what could happen with last-minute tax guidance.
What happens to tax guidance at the time of a presidential transition? Will last-minute regulatory overreaches be made? Presidential transitions can differ wildly depending on who the outgoing president is and their goals and susceptibility to political or financial influence. Exploring the 1992 and 2016 transitions can offer insight into the upcoming transition possibilities. Responses to different types of presidential transitions may inform President-elect Biden’s actions, such as revoking any 11th-hour executive guidance. While some governmental deregulatory efforts began immediately after Election Day, tax rules that benefit large taxpayers are quite different from health or environmental regulations.
2016 Presidential Transition
Democratic Party nominee Hillary Clinton conceded the election to President Trump on November 9, 2016, just hours after media outlets reported Trump would secure enough votes to win the election. That afternoon, outgoing President Obama announced that he had spoken with Trump and invited him to the White House the next day to begin discussing the presidential transition. Obama instructed his staff to follow President George W. Bush’s example in 2008 to ensure a gracious and smooth transition. Treasury’s tax guidance halted.
The transition from the Obama administration to Trump’s administration followed guidelines and policies in the Presidential Transition Act of 1963, which sets forth rules governing a peaceful and proper presidential transition in the two and a half months between Election Day and Inauguration Day.1 The day after the election, the General Services Administration usually begins to provide support services to the president-elect and vice president-elect so the upcoming administration, in this case Biden-Harris, can get started quickly.
Soon after the first Monday in November, election results identify the next president and the GSA issues a letter signaling cooperation from the outgoing administration and the process for transitioning the powers from the incumbent president to the president-elect begins. Of course, not all transitions move at the same speed. What if there is a global pandemic that causes the process of counting mail-in ballots to take longer?
The transition from President Clinton to President George W. Bush beginning in 2000 was shortened by nearly a month because of the extended Florida ballot recounts. But the issues of whether hanging chads evidenced hole-punched votes, which required the Supreme Court to weigh in,2 and properly mailed ballot votes should be counted are quite different. But what if an incumbent president doesn’t want to respect the policies underlying the law of the land on presidential elections and transitions? And what if the legal challenges of the incumbent president are believed to have merit? Policies and intent are often ignored. And the laws don’t specifically address every procedural issue, as is the case with tax guidance.
1992 Presidential Transition
President George H.W. Bush pushed out some last-minute tax guidance just one day before President-elect Clinton was inaugurated. While Clinton claimed a quick victory on November 3, 1992, that didn’t keep Bush from staying busy until January 20.
On January 22, 1993, Treasury withdrew 27 regulation projects awaiting publication in the Federal Register following a request by the new Office of Management and Budget Director Leon Panetta. Panetta’s memorandum asked all heads and acting heads of agencies to withdraw all proposed or final regulations not yet published in the Federal Register. A proper transition was sought, and thus it was intended that Clinton’s designees approve any regulations.
Twenty-seven regulations were withdrawn, 25 of which had a confidential status.3 There were two regulations that were issued but not yet published in the Federal Register. The first package contained proposed original issue discount rules on the treatment of contingent payment debt instruments (FI-59-91) and was filed January 19 and scheduled for publication on January 25.4 The second package contained proposed unrelated business income tax rules on exempt organization indebtedness incurred in acquiring or improving real property (EE-27-81), filed January 15 for publication on January 25. While there was speculation that these packages were politically motivated to provide for more generous treatment of debt, there is little public information on why these and the other 25 confidential packages were pushed forward during the transition.
I suppose the lesson is that while there may be no clear rules on regulatory promulgation during a transition, there are also no clear rules indicating when such regulations cannot be withdrawn by the executive. It would seem prudent that Treasury would now be reviewing with the Biden-Harris transition team any regulations, rulings, and other guidance that were not previously issued because such guidance will likely be revisited and possibly be revoked. Interagency relationships will likely also be revisited.5
2020 Presidential Transition
Several media outlets called the presidential race for Biden on November 7, although it isn’t clear when the current administration will begin working with their transition team. Although technically the determination of president-elect by the states does not occur until mid-December, the policies underlying transitions encourage collaboration as soon as possible to prevent harm to the American people. The approach that the Trump-Pence administration will take on tax guidance is uncertain, which I don’t think comes as a surprise to readers.
The fourth quarter update to the 2019-2020 priority guidance plan was released on October 1, and the current administration may look to it to see what, if anything, it would like to push forward alone or discuss with the transition team.6 One would expect work will continue on rules to correct, alter, and expand the Tax Cuts and Jobs Act; the like-kind exchange rules for real property (currently under OMB’s Office of Information and Regulatory Affairs review); debt-equity rules under section 385 to reduce regulatory burdens; unrelated business income tax rules for tax-exempt entities; and remaining necessary rules involving the Taxpayer First Act and the Bipartisan Budget Act’s partnership audit regime.
One could also see Treasury making the clarification of COVID-19 rules a priority through guidance and regulations. However, many of those rules modify benefits for large taxpayers, so one could imagine difficulty in separating COVID-19 relief from general tax benefits. I expect the Treasury transition team will have their hands full, which could impede a peaceful and successful transition with a possible goal of frustrating the efforts of a Biden-Harris administration in preparation of a push for the next election.
Perhaps all attempts to shift executive power because of an impending transition will be viewed negatively and scrutiny will be needed everywhere. For example, when should transition norms be respected exactly — the day of the election? On November 4, the day after the election, the Department of Health and Human Services issued a notice of proposed rulemaking that would revoke most current HHS regulations unless explicitly reviewed and determined not to be unduly burdensome. These rules would require the agency to look at regulations every decade. How much effort would it take to review all HHS regulations every 10 years to keep the rules on the books?7 HHS regulations cover food safety, drug approval, adoption and childcare, and healthcare financing, for example. Will other deregulatory efforts take place? This recent change to health regulations would align with Executive Order 13789 (Apr. 21, 2017), which ostensibly seeks to eliminate tax regulations that impose undue financial burdens on taxpayers or add undue complexity to the federal tax laws. Similar deregulatory efforts for environmental regulations have actually occurred.8
The Congressional Review Act9 allows Congress to overturn final federal rules that are issued months before the end of an administration. Republicans have sought even broader authority to prevent midnight rules, although it’s unclear those goals will remain for a transition to a Democratic administration.10 Of course, rushed final regulations are also less likely to satisfy the requirements of the Administrative Procedure Act and thus more likely to be invalidated.
Statements by government officials indicate that regulations for early next year are indeed on the horizon.11 Peter Blessing, IRS associate chief counsel (international), said on a November 5 webcast regarding regulations on previously taxed earnings and profits that it “looks like we are still not going to have anything out for the end of the year, but very soon after that.”
Presidential transitions bring extreme changes usually starting the day after the election results are in and continuing through the date of a new president’s inauguration. The current GSA Administrator Emily Murphy has refused to acknowledge the Biden-Harris victory and allow the transition team to begin its work.12 Trump refuses to concede the election and his campaign is still contesting various state results, including those with Republican Senate victories.
The transfer of power has not yet begun. Given the current administration’s crowning achievement is the TCJA, I think it’s likely we’ll see some aggressive actions in the tax arena relating to the TCJA. Whether those responsible for this guidance remain in Treasury when issued has yet to be seen.13
FOOTNOTES
1 P.L. 88-277, as amended.
2 Bush v. Gore, 531 U.S. 98 (2000).
3 Juliann Avakian Martin, “1993: A Dismal Year for Tax Guidance,” Tax Notes, Jan. 17, 1994, p. 275.
4 David C. Garlock, “A Primer on the New Proposed (Almost) Regulations for Contingent Debt Instruments,” Tax Notes, Mar. 1, 1993, p. 1225.
5 Jonathan Curry, “Biden Win May Revive Grudge Match Over OIRA’s Role in Tax,” Tax Notes Federal, Nov. 9, 2020, p. 985.
6 Statement by David J. Kautter, Chares P. Rettig, and Michael J. Desmond, “4th Quarter Priority Guidance Plan Update Is Released” (Sept. 2, 2020).
7 HHS, “HHS Proposes Unprecedented Regulatory Reform Through Retrospective Review” (Nov. 4, 2020).
8 See Nadja Popovich, Livia Albeck-Ripka, and Kendra Pierre-Louis, “The Trump Administration Is Reversing More Than 100 Environmental Rules. Here’s the Full List,” The New York Times, Nov. 10, 2020.
9 5 U.S.C. sections 801-808.
10 See, e.g., S. 34. Midnight Rules Relief Act of 2017.
11 See Andrew Velarde, “PTEP Regs Not Coming Until Next Year,” Tax Notes Federal, Nov. 9, 2020, p. 1000.
12 Michael D. Shear, Maggie Haberman, and Michael Crowley, “Trump Appointee Stands Between Biden’s Team and a Smooth Transition,” The New York Times, Nov. 9, 2020.
13 Monte A. Jackel, “Is a New Treasury and IRS Transition on The Way?” Jackel Tax Law, Nov. 8, 2020.
END FOOTNOTES