Federal lawsuit challenges Treasury’s tax inversion rules

For over three decades, dozens of companies based here in the U.S. — from Medtronic to Burger King — have utilized a strategy known as inversion to reduce their corporate tax liability.

For those unfamiliar with this concept, an inversion occurs when a U.S. company merges with a smaller company located in a more tax friendly nation and essentially re-establishes a new corporate headquarters there. In fact, the majority of inverting companies typically leave their core operations in the U.S. untouched and transfer only their legal tax domicile to the nation of the merger partner.  

Using the above-referenced example, consider Medtronic inverted to Ireland in 2014, while Burger King inverted to Canada just last year.

While the U.S. Department of the Treasury has taken some action over the years to restrain inversions so as to prevent the complete erosion of the nation’s corporate tax base, these actions have become decidedly more aggressive in recent years.

Indeed, back in April, the Treasury Department introduced rules targeting so-called “serial inverters” that would essentially ignore three prior years of inversion-related deals when determining the size of companies for tax purposes, a significant move given that corporate taxation rules are directly related to the size of companies.

This rule is believed to have foiled the merger plans of several major companies, including a planned merger between U.S. drug company Pfizer and Ireland-based drug company Allergan.

In recent developments, both the U.S. Chamber of Commerce and the Texas Association of Business filed a lawsuit in the U.S. District Court for the Western District of Texas last week against the Treasury Department, arguing that it essentially exceed the scope of its powers with its introduction of this rule.

The complaint claims that the Treasury Department violated the Administrative Procedure Act, which sets forth the process agencies are bound to follow when seeking to introduce new regulations. Specifically, the complaint contends the agency had no authority to act given that it did not permit public notice or comment, and that the regulation itself was arbitrary and capricious.

While these arguments based in administrative law make for a compelling case, legal experts have indicated that the Treasury Department will have a compelling case of its own. Indeed, it’s being predicted that its lawyers will argue there is a lack of standing to sue owing to the 1867 Anti-Injunction Act, which essentially declares that a legal challenge cannot be mounted until a tax is actually assessed.

As to why this case was filed in this particular federal district court, legal experts indicate it likely has to do with the fact that it has a documented track record of nullifying government regulations and other administrative actions.

It will be fascinating to see what transpires in this case, stay tuned for updates.        

Consider speaking with an experienced legal professional if you have questions or concerns relating to a business law matter.