The U.S. Chamber of Commerce and the Texas Association of Business have sued the IRS over Treasury Department rules to curtail the use of inversion transactions that can limit tax liabilities for corporations, alleging the government violated rulemaking requirements in the Administrative Procedure Act (APA).
Filing their complaint in the U.S. District Court for the Western District of Texas, the plaintiffs said their suit stems from an April 4, 2016 IRS “temporary” rule to stop otherwise lawful cross-border mergers of private companies—President Obama had tried unsuccessfully in 2014 to pass new limitations on inversions in Congress. The government issued the regulation, known as the Multiple Acquisition rule, to take effect immediately, without prior opportunity for notice or comments, thus violating the APA, the plaintiffs say. “Although seemingly esoteric, this action is a clear case of federal Executive Branch officers and agencies bypassing Congress and short-circuiting legislative debate over a hotly contested issue by unilaterally imposing the Administration’s preferred policy result in violation of clear statutory limits,” they wrote in the suit.
The plaintiffs complain Treasury decreed, without further explanation, that the APA provision that requires agencies to notify regulated parties of a proposed substantive rule so they have a chance to comment before it goes into effect doesn’t apply to this rule.
Typical corporate tax inversions involve a company with foreign subsidiaries engaging with a foreign corporate where the U.S. company becomes a subsidiary of the foreign company, which is usually incorporated in a lower-tax jurisdiction.
The April 4 rules led Pfizer Inc. and Allergen PLC to cancel a planned $160 billion merger that would have relocated the fused company in Ireland. Moreover, the plaintiffs say the rule has limited business opportunities and inhibited American firms from staying competitive on the global stage. They also allege Treasury’s rule was targeted specifically at the Pfizer-Allergen merger.
The U.S. Chamber and others also complain the Multiple Acquisition rule’s provision to disregard in its calculation of ownership percentage requirements needed to allow an inversion, any stock issued by a foreign corporation in prior acquisitions of U.S. companies occurring during three years prior to the signing date of the pending acquisition. “The rule pretends that previous, bona fide acquisitions do not exist in order to change the tax treatment that would unambiguously apply to a later, unrelated transaction …,” the complaint says.
- Nicholas Stern, editorial associate