Legislation and Comment: the Making of the § 199a Regulations

• Jurisdiction: United States,Federal
• Publication year: 2019
• Citation: Vol. 69 No. 2

Legislation and Comment: The Making of the § 199A Regulations

Shu-Yi Oei

Leigh Osofsky

LEGISLATION AND COMMENT: THE MAKING OF THE § 199A REGULATIONS

Shu-Yi Oei^* Leigh Osofsky^**

ABSTRACT

In 2017, Congress passed major tax legislation at warp speed. After enactment, it fell to the Treasury Department to write regulations clarifying and implementing the new law. To assure democratic legitimacy in making regulations, administrative law provides that an agency must issue a notice of proposed rulemaking, followed by an opportunity for the public to comment (so-called "notice and comment"). But, after the 2017 tax overhaul, many sophisticated actors did not wait until the issuance of a notice of proposed rulemaking to comment, instead going to the Treasury Department immediately with comments designed to influence the regulations.

In this Article, we examine empirically this phenomenon of post-enactment commenting by studying the making of the Internal Revenue Code Section 199A regulations—some of the most important regulations implementing the 2017 tax reform. We examined the inputs into the regulatory process from legislative enactment through the regulations' finalization. We find extensive engagement by sophisticated parties and industry groups prior to the official notice-and-comment period, which helped shape and anchor rulemaking outcomes. Subsequent comments submitted in the official notice-and-comment period led to technical and other discrete changes but did not fundamentally change the initial rulemaking approach. Throughout the rulemaking process, there was little direct, public-interested engagement.

Our study underscores how unorthodoxies in the legislative process bleed into the rulemaking process. Hasty legislation puts pressure on administrative law notice-and-comment procedures, exacerbating problems of unequal access and transparency already endemic to rulemaking, and potentially compromising

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democratic legitimacy. We propose solutions that may help ameliorate these problems and improve governance.

INTRODUCTION ............................................................................................. 211

I. BACKGROUND ................................................................................... 217

A. Hasty Legislation: The Case of § 199A .................................... 217
B. Regulatory Processes: Theory vs. Practice .............................. 220

II. THE MAKING OF THE § 199A REGULATIONS ..................................... 224

A. Mentions of Pre-Notice Commentary in the Notice of Proposed Rulemaking ............................................................... 227

1. Treasury References to Comments Received...................... 227
2. Treasury Requests for Additional Comments ..................... 230

B. Finding and Describing the Pre-Notice Comments.................. 231

1. Direct Commentary ............................................................ 233

a. Industry Interests ......................................................... 234
b. Professional Associations ............................................ 237
c. Other Voices ................................................................ 238
d. Pre-Notice Meetings .................................................... 238

2. Indirect Commentary .......................................................... 239

C. Notice and Comment ................................................................ 242

1. Comments Received in the Official Comment Period......... 242

a. Topics and Commenters .............................................. 243
b. Relationship between Pre-Notice Engagements and Official Public Comments ............................................ 246

2. Late Comments ................................................................... 249
3. The Public Hearing ............................................................ 250

D. The Final Regulations .............................................................. 251
E. Summary: Understanding the § 199A Story ............................. 253

III. ANALYSIS AND IMPLICATIONS........................................................... 255

A. Regulatory Spillovers from Unorthodox Legislative Processes .................................................................................. 255
B. Administrative Practice Implications: Managing Tradeoffs and Risks ................................................................................... 258
C. Suggested Improvements to Administrative Practices.............. 264

1. Pre-Notice Transparency ................................................... 264
2. Equalizing Pre-Notice Access ............................................ 265
3. Consideration of Indirect Commentary.............................. 266
4. Equalizing Access in the Post-Notice Period..................... 269
5. Limitations and Responses ................................................. 269

CONCLUSION................................................................................................. 271

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INTRODUCTION

In December 2017, Congress passed a major overhaul of the Internal Revenue Code (the "Code") at warp speed.¹ The hastiness of the process meant that the new legislation contained numerous errors, poorly designed provisions, and ambiguities.² Once the public furor surrounding legislative passage had died down, it fell to the Treasury Department ("Treasury") to issue regulations clarifying and implementing the new law.³

Administrative law provides that, to make regulations, an agency must issue a notice of proposed rulemaking, followed by an opportunity for the public to comment.⁴ These so-called "notice-and-comment" procedures are meant to infuse the unelected agency's rulemaking with democratic legitimacy.⁵ But, in the wake of the 2017 tax legislation, many sophisticated actors did not wait until Treasury had issued a notice of proposed rulemaking in order to comment. Rather, they went to Treasury right away with comments designed to influence the regulations.⁶

In this Article, we study the regulatory aftermath of the 2017 tax reform by conducting an empirical examination of the making of the Code Section 199A

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regulations.⁷ Section 199A is a new tax deduction for pass-through entities and sole proprietors and is widely regarded as one of the most important provisions enacted in the 2017 tax legislation.⁸ Hence, its potential problems and ambiguities were widely analyzed and criticized in the lead-up to enactment,⁹ and, after enactment, scholars and practitioners eagerly awaited proposed regulations clarifying and interpreting the statute.¹⁰ Finally, on August 8, 2018, Treasury released its highly anticipated notice of proposed rulemaking.¹¹ That release kicked off the notice-and-comment period, the official opportunity for the public to comment on the proposed regulations. As required by the Administrative Procedure Act (APA), the official notice-and-comment period lasted at least 30 days (in this case lasting until October 1, 2018),¹² and Treasury held a public hearing on the proposed regulations on October 16, 2018.¹³ On January 18, 2019, Treasury released the § 199A final regulations and issued corrected final regulations on February 1, 2019.¹⁴ Our study examines the

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making of the § 199A regulations from the time of legislative enactment through their January 18, 2019 finalization.

In its August 8, 2018 notice of proposed rulemaking, Treasury took the unusual step of explicitly acknowledging comments it had received from taxpayers and practitioners prior to the official notice-and-comment period and repeatedly referred to those comments in explaining the positions it took in the proposed regulations.¹⁵ Based on our review of previous proposed regulation preambles, this appears to be a new phenomenon.¹⁶ Treasury did this even though these early-received comments were not made publicly available on regulations.gov, in contrast to comments received during the official comment period. By examining these Treasury acknowledgements, and by mining private subscription databases, government databases, and the tax press to locate comments that had been submitted early, we were able to gain insight into a critical part of the regulatory process often hidden from view: the influences on Treasury in the post-enactment period, prior to release of the notice of proposed rulemaking and the start of notice and comment. In this way, we were able to examine empirically how the rulemaking process actually unfolded and what voices tried to shape the regulations by commenting immediately after the legislation.

Our study yielded some distinctive observations about influence into the regulatory process prior to as well as during notice and comment:

First, our study provided a window into regulatory influences prior to notice and comment. In its notice of proposed rulemaking, Treasury repeatedly referred to and gave weight to comments it had already received to justify positions it took, even though the official notice-and-comment period had not actually begun. These pre-notice-and-comment comments (hereinafter referred to as "pre-notice comments") were mostly from industry players, trade groups, and professional organizations of sophisticated tax professionals. The existence of these comments and Treasury's mentions of them are important: Traditional administrative law scholarship regards the official public notice-and-comment period as a key means of legitimizing the power of unelected agencies to write

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regulations.¹⁷ Notice-and-comment procedures are supposed to infuse rulemaking with democratic legitimacy that may be lost if unelected agencies are left to make rules without public observation and input. But administrative law scholars have also increasingly noted the importance of the pre-notice period as a time when regulated parties try to influence rulemaking.¹⁸ Our findings show that—as has...