International Tax Alert - October 2017

October 2017

U.S. District Court holds that an Anti-Inversion Regulation was Unlawfully Issued

Summary

On September 29, 2017, the District Court for the Western District of Texas Austin Division granted the Plaintiff’s motion for summary judgment in Chamber of Commerce of the United States of America and Texas Association of Business v. Internal Revenue Service, United States Department of the Treasury, John A. Koskinen and Jacob J. Lew, to set aside the “Multiple Domestic Entity Acquisition Rule” in Temp. Reg. §1.7874-8T.
 

Details

In April 2016, the Department of the Treasury and Internal Revenue Service (collectively, “Treasury”), issued the “Multiple Domestic Entity Acquisition Rule,” identifying stock of foreign acquiring corporations that is to be disregarded in determining an ownership fraction relevant to the categorization of a corporation as domestic or foreign for federal tax purposes because the stock is attributable to prior domestic entity acquisitions (the “Rule”). The Rule was simultaneously issued as a temporary regulation effective immediately and as a proposed regulation subject to notice and comment.[1] Shortly after, and as a result of, the issuance of the Rule, Allergan plc and Pfizer Inc. walked away from their proposed $160 billion merger.
 
In August 2016, the Chamber of Commerce of the United States of America and the Texas Association of Business (the “Plaintiffs”) filed a lawsuit asserting that Treasury violated the Administrative Procedures Act (“APA”) by promulgating the Rule. While Pfizer Inc. and Allergan plc are not parties to the lawsuit, Pfizer Inc. is a member of the Chamber of Commerce of the United States of America and the Texas Association of Business and Allergan plc is a member of the Chamber of Commerce of the United States of America and the Greater Waco Chamber of Commerce which is a member of the Texas Association of Business. In the complaint, the Plaintiffs alleged that the issuance of the Rule (1) exceeded Treasury’s statutory jurisdiction, (2) was arbitrary and capricious rulemaking and (3) was in violation of the APA by failing to provide notice and an opportunity for comment. Accordingly, the Plaintiffs requested that the Court set aside the Rule.
 
The defendants in the case filed a motion to dismiss claiming that the Plaintiffs did not have standing and that the Anti-Injunction Act barred the Plaintiff’s suit. The Anti-Injunction Act provides that with 14 specified exceptions, “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.”[2]
 
Ultimately, the District Court held that the Plaintiffs had standing to sue as certain members (i.e., Allergen plc and Pfizer Inc.) would have standing to sue in their own right, and the Plaintiffs alleged an actual, concrete injury, that is fairly traceable to implementation of the Rule, and that would be redressed by a decision setting aside that Rule. The District Court also held that the Plaintiffs were not barred by the Anti-Injunction Act, stating that although the Rule may improve the government’s ability to assess and collect taxes, enforcement of the Rule does not involve the assessment or collection of a tax.
 
In addition, the District Court held that the Rule did not exceed the statutory jurisdiction of Treasury based on the broad authority granted by Congress in the statute and that Treasury did not engage in arbitrary and capricious rulemaking in issuing the Rule. The Court, however, held that the Rule was unlawfully issued stating that the Rule is a substantive or legislative regulation, not an interpretive regulation, and Treasury was therefore not excused from the notice-and-comment procedure required by the APA.  Accordingly, the District Court granted summary judgment in favor of the Plaintiffs to set aside the Rule.
 

BDO Insights

It is unclear at this stage whether Treasury will appeal the District Court’s ruling or what additional action will be taken by Treasury relating to the Rule. The holding, if upheld, could have implications to other substantive or legislative Treasury Regulations that are viewed instead by Treasury as interpretive Treasury Regulations.
 

For more information, please contact one of the following practice leaders:
 
Joe Calianno
Partner and International Tax Technical Practice Leader
National Tax Office 
     Monika Loving
International Tax Practice Leader

 
Natallia Shapel
Partner 
  Annie Lee
Partner

 
Chip Morgan
Partner
  Robert Pedersen
Partner

 
William F. Roth III
Partner
National Tax Office
  Jerry Seade
Principal

 
Sean Dokko
Senior Manager
National Tax Office
 
[1] Temp. Reg. §1.7874-8T(j) and Prop. Reg. §1.7874-8.
[2] IRC §7421(a).