Donald A. Manzullo (R-IL), Chair of the House Committee on Small Business, raised interesting separation of powers and administrative law issues in an 8-page letter to the Treasury and IRS challenging their compliance with the Regulatory Flexibility Act in promulgating guidance for qualified intermediaries in § 1031 exchanges:

The Department of Treasury (Treasury) and the Internal Revenue Service (IRS or Service) issued a proposed rule modifying the tax treatment of of funds held by qualified intermediaries under § 468B of the Internal Revenue Code, 71 Fed. Reg. 6231 (Feb. 7, 2006).  Treasury and the IRS prepared an initial regulatory flexibility analysis (IRFA) pursuant to section 603 of the Regulatory Flexibility Act, 5 U.S.C. §§ 601-12 (RFA). Id. at 6234 [FN1]  While  this represents a substantial change from the typical policy of Treasury and the Service, these efforts at compliance with the requirements of the RFA simply do not satisfy the analytical requirements mandated by Congress.  Treasury and the Service should withdraw the proposed rule until it has collected sufficient data to prepare an adequate IFRA as mandated by the RFA.  Failure to do so may result in challenges to the compliance of Treasury and the IRS, and the courts enjoining enforcement of the regulations against small businesses until Treasury complies with the RFA….

In sum, Treasury and the IRS recognize that the proposed rule requires RFA compliance.  However, the complete lack of analysis by Treasury and the Service demonstrates that they have little interest in complying with the RFA — a position the agency has taken since the enactment of the statute in 1980.  Treasury and the Service should take this opportunity to change course and begin compliance with the RFA.

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FN1:  Treasury and the IRS also determined that the regulation was not a significant rulemaking under Executive Order 12,866 which requires agencies to perform a cost-benefit analysis on any regulation that will have an annual effect on the economy of more than $100 million or represents an important policy question.  71 Fed. Reg. at 6234.  This conclusion is simply incorrect. Under the Executive Order, a significant regulatory action includes one that affects an identifiable sector of the economy.  E.O. 12,866, § 3(f)91), reprinted in  58 Fed. Reg. at 51,738.  Clearly, qualified intermidiaries constitute a sector of the economy.  I strongly urge Treasury and the IRS to perform the analysis mandated by the Executive Order.

(Hat Tip:  Brad Borden.)