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Could your company be impacted by IRS inversion rule changes?

A lawsuit was recently filed by the U.S. Chamber of Commerce (joined by a Texas corporate advocacy and lobbying group, the Texas Association of Business) against an entity it accuses of usurping the rights of domestic businesses and restricting their right to make legitimate business decisions that could cut down on tax liability. This entity isn't, as some might assume, a foreign power or monopoly that could impact the rights of American corporations.

It is, surprisingly, a fellow domestic body actually tasked with regulating American taxpayers: the Internal Revenue Service (IRS).

The Chamber's lawsuit claims that the IRS made unilateral, sweeping changes to so-called Multiple Acquisition Rule that have, in the past, allowed foreign companies to merge with domestic ones for the purposes of lowering domestic tax liability.

The rule changes, implemented earlier this year, have already had one very high-profile casualty: the planned $160 billion merger of American pharmaceutical giant Pfizer with Irish-based Allergan. The deal between the two companies broke down almost immediately after the IRS announced the end of a decade-long policy that allowed "inversion" of domestic companies to foreign entities, thus lowering their American tax base on globally earned profits.

Did the IRS overstep its authority?

In recent legislative sessions, IRS representatives have repeatedly championed laws that would close inversion loopholes such as the Multiple Acquisition Rule and others allowed under Section 7484 of the Internal Revenue Code. When Congress repeatedly failed to act, the IRS apparently took it upon itself to internally close those loopholes, something that this lawsuit claims is beyond its authority.

In its defense, the IRS argues that its actions are "based on strong policy interests and clear legal authority." President Barack Obama apparently agrees with the action (his office has publicly supported change to the inversion rules in prior years), giving a speech just hours after the Pfizer/Allergan merger was called off. In that speech, Obama praised the IRS for acting to limit the ability of companies to engage in something known as "mail-box inversions." These happen when the foreign entity that acquires a domestic one is simply a shell corporation that exists to secure corporate residency in a known tax haven.

Regardless of the IRS apparently having presidential support for this action, the Chamber and Texas Association of Business nevertheless argue that it was beyond the scope of the IRS' authority to act in such a way. Since the lawsuit was so recently filed, only time will tell if a judge agrees that the IRS did actually overstep their legal bounds when enacting these changes, and if that ruling will have an impact on the inversion rules.

Until then, the IRS' new regulations regarding inversion could very well have an impact on planned moves for your business. If that's the case, or you have any other tax-related issues, contact an experienced business tax attorney in your area.

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