Part 20 – The failure of Treasury to comply with the requirements of the "Regulatory Flexibility Act" make the Sec. 965 @USTranstitionTax subject to judicial review

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If you don’t want to reach this post, then just watch the above video.

If you do want to read the post …

Part A – What is the purpose of the “Regulatory Flexibility Act”

In “people speak”: The purpose of the “Regulatory Flexibility Act” is to ensure that when making regulations the U.S. Government makes a distinction between large corporations (for example Apple) owned by millions and shareholders and small corporations (for example Joe The Plumber) owned by Joe himself.

The text of “Regulatory Flexibility Act” is here. The purpose of the “Regulatory Flexibility Act” is to require that:

In “Congress speak”: Congressional Findings and Declaration of Purpose

(a) The Congress finds and declares that —

(1) when adopting regulations to protect the health, safety and economic welfare of the Nation, Federal agencies should seek to achieve statutory goals as effectively and efficiently as possible without imposing unnecessary burdens on the public;
(2) laws and regulations designed for application to large scale entities have been applied uniformly to small businesses, small organizations, and small governmental jurisdictions even though the problems that gave rise to government action may not have been caused by those smaller entities;
(3) uniform Federal regulatory and reporting requirements have in numerous instances imposed unnecessary and disproportionately burdensome demands including legal, accounting and consulting costs upon small businesses, small organizations, and small governmental jurisdictions with limited resources;
(4) the failure to recognize differences in the scale and resources of regulated entities has in numerous instances adversely affected competition in the marketplace, discouraged innovation and restricted improvements in productivity;
(5) unnecessary regulations create entry barriers in many industries and discourage potential entrepreneurs from introducing beneficial products and processes;
(6) the practice of treating all regulated businesses, organizations, and governmental jurisdictions as equivalent may lead to inefficient use of regulatory agency resources, enforcement problems and, in some cases, to actions inconsistent with the legislative intent of health, safety, environmental and economic welfare legislation;
(7) alternative regulatory approaches which do not conflict with the stated objectives of applicable statutes may be available which minimize the significant economic impact of rules on small businesses, small organizations, and small governmental jurisdictions;
(8) the process by which Federal regulations are developed and adopted should be reformed to require agencies to solicit the ideas and comments of small businesses, small organizations, and small governmental jurisdictions to examine the impact of proposed and existing rules on such entities, and to review the continued need for existing rules.

(b) It is the purpose of this Act [enacting this chapter and provisions set out as notes under this section] to establish as a principle of regulatory issuance that agencies shall endeavor, consistent with the objectives of the rule and of applicable statutes, to fit regulatory and informational requirements to the scale of the businesses, organizations, and governmental jurisdictions subject to regulation. To achieve this principle, agencies are required to solicit and consider flexible regulatory proposals and to explain the rationale for their actions to assure that such proposals are given serious consideration.

Further detail on the “Regulatory Flexibility Act” – in a “nutshell” – is available here:

RFA_in_a_Nutshell2010

Conclusion: In developing regulations for the Sec. 965 “transition tax” Treasury is required to consider the fact that “Joe The Plumber” is different from Apple. Furthermore, Treasury must consider the fact that “Joe The Plumber” may be a owned by a “U.S. Person who actually lives outside the United States for whom “Joe The Plumber” is actually a local corporation.

Fact: In developing the Sec. 965 regulations Treasury did NOT follow the requirements of the “Regulatory Flexibility” and specifically explained why Treasury did NOT follow those requirements.

Part B – The rationale provided by Treasury for NOT following the requirements of the “Regulatory Flexibility Act”

The “explanation” AKA “excuse” is described by Americans Abroad in it’s submission as follows:
ACA (“American Citizens Abroad“) comments on the relevance of “Regulatory Flexibility Analysis”)

Quoting Treasury, the ACA submission includes:

The proposed regulations, under the section dealing with “Regulatory Flexibility Analysis” (RFA), state as follows.

The Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply because the regulations do not
impose a collection of information on small entities. Any burden on small entities in these regulations stems from the collection of information requirements in proposed §§ 1.965-2(d)(2)(ii)(B), 1.965-2(f)(2)(iii)(B), 1.965-3(b)(2), 1.965-3(c)(3), 1.965-4(b)(2)(i), 1.965-7(b)(2), 1.965-7(b)(3)(iii)(B), 1.965-7(c)(2), 1.965-7(c)(3)(iv)(B), 1.965-7(c)(3)(v)(D), 1.965-7(c)(6)(i), 1.965-7(d)(3), 1.965-7(e)(2), 1.965-7(f)(5), and 1.965-8(c). It is hereby certified that these collection of information requirements will not have a significant economic impact on a substantial number of small entities. Accordingly, an initial regulatory flexibility analysis is not required. This certification is based on several facts. First, the average burden is five hours, which is minimal, particularly in comparison to other regulatory requirements related to owning stock in a specified foreign corporation. Second, the requirements apply only if a taxpayer chooses to make an election or rely on a favorable rule. Third, the collections of information apply to the owners of specified foreign corporations. Because it takes significant resources and investment for a foreign business to be operated in corporate form by a United States person, specified foreign corporations will infrequently be small entities. Moreover, because the collection of information requirements apply to the owners of specified foreign corporations rather than the specified foreign corporations themselves, a specified foreign corporation that was a small entity would not be subject to the collections of information. Fourth, the collection of information requirements in this regulation apply primarily to persons that are United States shareholders of specified foreign corporations. The ownership of sufficient stock in specified foreign corporations in order to constitute a United States shareholder generally entails significant resources and investment, such that businesses that are United States shareholders are generally not small businesses. Pursuant to section 7805(f), this notice of proposed rule making has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Part C – How the ACA submission dismantles Treasury’s explanation for why the “Regulatory Flexibility Act” does not apply

ACA’s opinion differs here because, fundamentally, this does not take notice of the fact that many businesses owned by Americans abroad are affected. With Americans abroad, businesses are commonly owned by the individuals who happened to be US citizens. Whether the entity is a corporation, under US tax principles, or not is almost a matter of happenstance. The conclusion that the collection of information requirements in the regulations will not have significant economic impact on a substantial number of small entities ignores the reality that Americans abroad frequently own and operate businesses, often small businesses. An American chef, actually a dual national American and Norwegian, owning a restaurant in Bergen, Norway, might have paid little or no attention to the form of the entity, which, if it included this or that characteristic, would for US tax purposes be treated as an association taxable as a corporation. Omit a characteristic, such as anything cutting off personal liability for the owner, and the entity will not be treated as a corporation but something else, maybe a sole proprietorship or maybe a partnership if there are others involved. The point is there are many businesses, typically small businesses, owned by Americans abroad and whether they are technically, under US tax rules, characterized as a corporation is hard to say and jumps around on a case-by case basis. For sure, substantial numbers of small entities are affected.
As for the point that collections of information apply only to owners of specified foreign corporations, and “[b]ecause it takes significant resources and investment for foreign business to be operated in corporate form by United States person, specified foreign corporations will infrequently be small entities”, this demonstrates the problem nicely: Foreign corporations owned by Americans abroad exist in abundance. They are an everyday fact of life.

Similarly, as to the point “the collection of information requirements in this regulation apply primarily to persons that are United States shareholders of specified foreign corporations. The ownership of sufficient stock in specified foreign corporations in order to constitute a United States shareholder generally entails significant resources and investment such that businesses that are United States shareholders are generally not small corporations.” This misses the point that in the Americans abroad community many individuals own small businesses directly or sometimes through entities.

Treasury Department should revisit the issue whether the Regulatory Flexibility Act applies. In doing so, it should recognize that large numbers of American taxpayers abroad are affected by the regulations. Many of these are small entities and their owners. The proposed regulations will have significant economic effects for them.

ACA-submission-treasury-transition-tax-regs-181008-1-final-002-

Part D – Conclusion …

By simply deciding that the “Regulatory Flexibility Act” simply does NOT apply in the context of the Sec. 965 regulations, Treasury has violated the law.

To put it simply:

When a law has been passed that requires an administrative agency to undertake specific tasks, that agency cannot simply decide that the law does not apply to that agency.

John Richardson – Follow me on Twitter @Expatriationlaw

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