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Aug. 10 — The first lawsuit filed against hotly criticized rules to block transactions that move corporations' tax homes overseas to cut U.S. tax bills may face an uphill climb, even as more companies say deals fell apart because of the regulations.
Arguments that the Treasury Department didn't have the authority to issue the anti-inversion rules may be a long shot, attorneys told Bloomberg BNA. There may be a stronger case, they said, that the regulations didn't live up to a law requiring that taxpayers get a good chance to tell the government what they think about guidance before it goes final.
That is where it could change the landscape for tax rules going forward, attorneys said.
“This could be a really fascinating sort of battle over the government's ability to issue tax regulations,” Thomas A. Humphreys, a tax partner with Morrison & Foerster LLP, told Bloomberg BNA.
The lawsuit filed Aug. 4 by the U.S. Chamber of Commerce and the Texas Association of Business asserts that Treasury and the Internal Revenue Service went too far with the anti-inversion rules, derailing deals and harming the organizations' members (151 DTR K-2, 8/5/16).
As an example of that harm, the action cites a merger between Pfizer Inc. and Allergan Plc that collapsed days after the rules (T.D. 9761, REG-135734-14) were issued (67 DTR G-4, 4/7/16).
The lawsuit, filed in the U.S. District Court for the Western District of Texas, doesn't identify any other companies where inversions went off the tracks, citing only harm to unidentified members.
A spokeswoman for the chamber declined to comment Aug. 10. In announcing the legal action Aug. 4, chamber President and Chief Executive Officer Thomas J. Donohue said the government “ignored the clear limits of the statute, and simply rewrote the law unilaterally.”
Without referring specifically to the lawsuit, Treasury said the same day that it would defend the rules, citing big concerns as more companies try to cut their taxes through complex inversion structures.
The business groups said Treasury didn't have the authority to issue the rules and didn't meet the requirements of the Administrative Procedure Act (APA), which requires the government to give taxpayers enough time to comment on rules and to show that it carefully considered the input in any final guidance.
The case comes after the Internal Revenue Service lost a big APA case, Altera Corp. v. Commissioner, in 2015.
The Chamber and the Texas group took aim at a provision known as the “multiple acquisition rule,” which they said does great harm, because taxpayers had no warning of it.
The rule is intended to keep foreign companies from inflating their size prior to an inversion to get maximum tax benefits from the deal. It disregards any stock issued by a foreign corporation in prior acquisitions of U.S. companies during the three years before the signing date of a pending acquisition.
The immediate effective date of the rule violates the APA, the lawsuit said.
That fact could be more convincing to a judge than the authority question, Jeff Paravano, managing partner at Baker & Hostetler LLP, said.
“This was clearly a surprise and quite a significant change,” he said. “If I were a judge, I would focus on APA compliance.”
Paravano said it might be “much more difficult” to argue that Treasury is exceeding what he called “fairly broad” authority to combat inversions under tax code Section 7874.
Attorneys differed on how challenging it might be to overcome likely Treasury actions to stop the lawsuit in its tracks, based on the idea that no tax has yet been assessed under the rules.
Both Brian Kittle, a tax partner with Mayer Brown LLP, and John Harrington, a partner with Dentons US LLP, said they expect Treasury to assert the Anti-Injunction Act. That statute essentially says “until you pay, you can't sue,” Kittle said.
However, he said the business groups could still get what he called “organizational standing” to sue. Their members have “a good argument that they've been directly harmed or will suffer imminent harm,” he said.
Harrington said that argument might not be convincing to a court, with the regulations not yet in final form. Without a clearly defined dispute, it might be tough to show harm “because companies didn't do things,” he said.
The landscape ahead could be changed for tax and other regulations, attorneys said. The Administrative Procedure Act could spell trouble across the board—and more cases will be coming down the pike.
The Tax Court's 2015 Altera decision, striking down 2003 rules requiring the cost sharing of stock options under the APA, “really did open the door to these kinds of challenges,” Harrington said
Historically, the agency has argued that its regulations are interpretive, not legislative, and thus not subject to the APA. However, Paravano said, that stance might not be effective for much longer. “To me the distinction between interpretive and legislative regulations is pretty much gone,” he said.
Morrison's Humphreys said that in the current lawsuit, the government has “some risk” in trying to argue the inversions regulations are interpretive.
The case goes beyond tax issues or IRS authority, Kittle said. This lawsuit “wasn't about tax,” he said. “It was about the balance of power and the role of the executive branch.”
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