SE Texas Record

Tuesday, November 12, 2019

Lawsuit states that IRS and U.S. Treasury overstepped their authority in merger regulation

By Noell Wolfgram Evans | Aug 24, 2016

Law money 12

AUSTIN -- On Aug. 4, the U.S. Chamber of Commerce and the Texas Association of Business filed suit against the U.S. Internal Revenue Service and the U.S. Department of the Treasury, along with the respective heads of those organizations, John Koskinen and Jacob Lew. 

The issue centers around the desire for private corporations in Texas (and elsewhere) to lawfully merge with companies across the border.

In July, the IRS and the U.S. Treasury issued a temporary but immediate rule that halted mergers such as this. This ruling, known as the multiple acquisition rule, is meant to curtail a somewhat popular U.S. business practice of mergers with foreign companies. The practice, known as an inversion, has the U.S. company purchase a (usually) smaller company and “transfer” their corporate headquarters to the country of the purchased company. This is generally done on paper alone and is undertaken as a way for the U.S. company to achieve a tax savings.

| Western District of Texas

While the chamber and business association aren’t, at this time, arguing the rule, what they are arguing against is the legality for how it came into existence. In the filed complaint, the chamber and business association argue that the rule is a violation of the Administrative Procedure Act (APA), since it was enacted without input from Congress and without other debate. The APA details the steps that a federal agency needs to undergo in regards to the desire to amend their regulations.

As evidence that this action did not follow those APA guidelines, the chamber and business association point to a similar 2004 law enacted by Congress that added Section 7874 to the Internal Revenue Code. That 2004 act stated, in part, that a U.S. company could essentially not look for an overseas partner, with the specific attempt to evade or avoid, tax responsibilities. The act itself: “disqualifies inversions for tax purposes only if the foreign company’s shareholders do not retain a meaningful stake in the new foreign parent corporation.” This provision to the IRS Code has been debated and contested since it was initially enacted. However, Congress has been unable, or unwilling, to change it.

The Obama Administration has asked agencies to look for regulations that could be enacted, without Congressional approval, which would put a stop to what the administration believes are corporate inversions being set up with the only real purpose being to create a corporate opportunity to limit a tax burden.

This suit is the first one to challenge the legislation surrounding corporate inversions.

A U.S. treasury spokeswoman said in a statement to the Reuters News Agency that “...its action was based on strong policy interests and clear legal authority and that the department would continue to defend the regulations to slow the erosion of the U.S. corporate tax base.”

Full Disclosure: The U.S. Chamber of Commerce owns the Southeast Texas Record.

The case The U.S. Chamber of Commerce and the Texas Association of Business v. The Internal Revenue Service and the United States Treasury Department is being heard in the Western District of Texas under Civil Action No. 1:16-cv-944. Judge Lee Yeakel is presiding.

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Organizations in this Story

U.S. Internal Revenue ServiceU.S. Department of the TreasuryU.S. Chamber of CommerceTexas Association of Business