Future Inversion Rules May Snag on Regulatory Check by Congress

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By Aaron E. Lorenzo 

Oct. 1 — Treasury Department officials shouldn't take too long to propose any additional rules to discourage corporate mergers called inversions, given reversal possibilities down the road, rare as they may be.

Acting sooner rather than later would help guard against such regulations being set aside by a new administration unsympathetic to the rules and contrarians in Congress, said Sally Katzen, a visiting professor at New York University's law school and a senior adviser at the Podesta Group.

Though it is far from common practice, a final rule can be undone through the Congressional Review Act as long as lawmakers have sufficient votes to pass a disapproval resolution along with White House support.

That is unusual considering it has only happened once—to eliminate a regulation issued late in President Bill Clinton's last term to require new ergonomic rules for office workers.

But the carryover possibility into a new session of Congress can't be ignored, said Curtis Copeland, special counsel at the Administrative Conference of the United States.

Treasury should keep the process in mind regardless of rarity, said Katzen, who was administrator of the Office of Information and Regulatory Affairs from 1993 until 1998 under Clinton.

“It is possible that a Republican would be elected president in 2016, along with a Republican-controlled Senate and a Republican-controlled House,” she told Bloomberg BNA. “They could then use the CRA, as George W. Bush did in 2001 to overturn the Clinton administration's ergonomics rule.”

Summer of 2016

So Treasury might not want to wait until after the summer of 2016 to finalize any extra rules against inversions, in which U.S. companies merge with foreign firms and establish a new parent company abroad in a lower-tax jurisdiction.

Treasury already has proposed rules to curb tax-free access to U.S. companies' earnings held overseas and maneuvers to skirt ownership requirements by altering a company's size to receive tax benefits from an inversion. The department explained the scope of the changes in a fact sheet and Notice 2014-52 issued Sept. 22.

And Treasury might do more.

The department left open the door for further rules, possibly related to the practice of earnings stripping, in which companies can deduct interest payments on loans from their parent corporation to lower their tax obligations.

Katzen's caution notwithstanding, she said it isn't necessary to go overboard in planning contingencies for a disapproval resolution yet because the practice is so rare and President Barack Obama hasn't exactly reached his waning days in office. Another former federal regulator agreed.

Midnight Regulating.

“A president shouldn't have to stop work two years before his term is over,” said Susan Dudley, the director of George Washington University's Regulatory Studies Center and OIRA's administrator from 2007 until 2009 under Bush.

Administrations from both parties often wait until late in their terms to issue controversial rules, a practice referred to as midnight regulating. Various data sets have proven the phenomenon.

However, that kind of timing exposed the Clinton-era ergonomics regulation to reversal. The schedule worked for Bush after Clinton's second term expired.

When Obama followed Bush into the White House, Democrats controlled both chambers in Congress, but the CRA was not invoked again.

Dudley told Bloomberg BNA that she and then White House Chief of Staff Joshua Bolten directed agency heads to set their priorities in the final two years of the Bush administration to avoid midnight regulations. Under a Bolten memo, rules were to be proposed no later than June 1, 2008, and finalized by Nov. 1 to achieve that goal.

Carryover Period

To lessen lawmakers' opportunity to reach back under the CRA, regulators might want to finalize rules even earlier, Dudley said, perhaps as early as June of a president's final year in office, the same time frame Copeland suggested.

In September 2008, while working for the Congressional Research Service, Copeland co-authored a report that identified June 7 as the median starting point for carryover periods during second sessions of Congress since the CRA was enacted in 1996.

For a disapproval resolution to qualify for expedited consideration in both chambers of Congress, it must be submitted within 60 working days after Congress receives the rule or the Federal Register publishes it. But if lawmakers adjourn a session before the 60-day mark and that adjournment marks the end of a Congress, the full 60-day periods for action restart on the 15th day of the next session.

“This is why Treasury might want to make sure that any rule is final before 60 working days before the next Congress is adjourned,” if Treasury wanted to minimize vulnerability to a clawback—even if the possibility is unlikely, Katzen said.

Dudley and Copeland agreed.

“Sixty days can be six months,” Dudley said, “especially at the end of an administration when everybody tends to go out of session earlier.”

Sledgehammer

In a 2008 CRS report, Copeland identified several Bush administration regulations as controversial in the eyes of many members of Congress.

Among them were an Environmental Protection Agency rule to slow the timeline in which older power plants must install new anti-pollution equipment, Department of Interior rules related to coal mining deposits and the Endangered Species Act, and Justice Department rules that critics said would soften citizens' safeguards against law enforcement information gathering and weaken accessibility standards under the Americans with Disabilities Act.

But none were subjected to a CRA-related resolution of disapproval. Dudley said lawmakers understand the weight such an act would carry, because passing a disapproval resolution under the CRA would bluntly shut the door to agencies issuing similar regulations in the future and preclude regulators from working around the edges to fine-tune a rule.

“If there's a regulation that people thought wasn't stringent enough and they wanted to overturn because it wasn't regulatory enough, the CRA doesn't really solve that because it says the agency can't do anything,” Dudley said. “It's a sledgehammer rather than a scalpel to just change one aspect of the way a regulation was written.”

Pressure Point

But Copeland said just the threat of passage of a resolution of disapproval, or passage in one chamber only, could have an impact.

Dozens have been introduced and a few have passed on one side of the Capitol or the other since the CRA was enacted, and those actions have forced dialogue between an agency and Congress, Copeland said. In some cases, it could have led regulators to reopen the proposal, comment and review process around a rule.

“It sort of draws attention to that rule and can marshal resources that might not otherwise be marshaled,” Copeland told Bloomberg BNA.

No such steps have been taken yet on Treasury's initial anti-inversion rules.

But they drew a rebuke from House Ways and Means Committee Chairman Dave Camp (R-Mich.) when the department issued the proposals last month. However, his spokeswoman didn't respond when asked if Camp would consider introducing a resolution of

To contact the reporter on this story: Aaron E. Lorenzo in Washington at aaron@bna.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bna.com