U.S. Effort to Halt Corporate Tax-Avoidance Mergers Targeted by Chamber of Commerce Lawsuit

Friday, August 05, 2016
Thomas Donohue, president of U.S. Chamber of Commerce (photo: David Bohrer, U.S. Chamber)




By Liz Moyer and Leslie Picker, New York Times


The U.S. Chamber of Commerce filed a lawsuit (pdf) Thursday to block new rules issued by the Obama administration that prevent U.S. corporations from merging with foreign-based companies and moving their headquarters abroad to save on taxes.


The business group, along with the Texas Association of Business, filed the lawsuit in federal court in Austin, Texas, saying the administration was overstepping its authority in issuing the rules. It is the Obama administration’s third attempt to curtail the practice of corporate inversions.


The latest rules, issued in April, took aim at a planned $152 billion merger of Pfizer, the U.S. drug giant, with the Ireland-based pharmaceutical company Allergan. The companies scuttled their merger plans shortly after the rules were released.


Both Pfizer and Allergan are members of the Chamber of Commerce.


“If the defendants’ rule is permitted to stand, it is not just mergers that will suffer — it is the rule of law, and the certainty and stability required for effective commerce, markets and economic growth, that are truly threatened by the defendants’ unauthorized and unlawful action,” the plaintiffs said in their filing.


The lawsuit, against the IRS; its commissioner, John A. Koskinen; the Treasury Department; and its secretary, Jacob J. Lew, contends that the administration’s actions circumvented both Congress and public comments.


“Although it might seem esoteric, this action is a clear case of federal executive branch officers and agencies bypassing Congress and short-circuiting legislative debate over a hotly contested issue,” the lawsuit says.


Corporate inversions are not a new tactic, but they have increased in recent years, notably in mergers of drug companies as well as big U.S. brands such as Burger King, which merged with Tim Hortons in 2014 and moved to Canada.


By filing in Texas rather than in Washington, where the Chamber of Commerce is based, the business groups may be betting they have a better chance of finding a sympathetic judge.


“We regularly join with state and local trade associations who have affected members,” Blair Holmes, a spokeswoman for the Chamber of Commerce, said in a statement. “The Texas Association of Business was interested in joining in this litigation with the U.S. Chamber.”


Republicans have fought the Treasury’s new rules. Rep. Kevin Brady, R-Texas, who is chairman of the House Ways and Means Committee, has called them “damaging.”


“This case is a direct result of regulations that will make it harder for America to compete,” he said in statement. “What our job creators and workers need is a tax code built for growth — one that encourages businesses to invest and create jobs at home.”


Treasury officials have tried since 2014 to clamp down on inversions by chipping away at their tax advantage, while acknowledging that Congress needs to change tax laws for any real momentum. The latest rules focus on the relative shareholder ownership of the merging companies, making it harder for so-called serial inverters, as Allergan could be categorized. The rules also put restrictions on intracompany loans that helped lower the tax bills of U.S. subsidiaries of foreign companies.


The lawsuit targets the Treasury’s multiple acquisition rule, which is aimed at serial inverters. The Treasury rule effectively ignored the shares issued by Allergan and its multiple predecessor companies in a series of mergers in the last few years, negating the tax advantages of its proposed merger with Pfizer. The lawsuit says the companies have been subjected to a “regulatory disability” because of the new rules and argues that they are not a good-faith interpretation of tax laws on corporate inversions.


Lawyers point to precedents in which courts have struck down federal agency interpretations that they determined to be “unreasonable,” as the Supreme Court laid out in a 1984 case (pdf ) involving Chevron. In 2012, the Supreme Court used this Chevron standard to strike down the IRS interpretation of rules in a case (pdf) involving Home Concrete & Supply.


“The fact that the regulations appear to have been tailored to target the Pfizer-Allergen transaction rather than a specific policy goal strengthens the Chamber’s argument,” said Sam Lichtman, a tax partner at Haynes and Boone, a law firm in New York.


To Learn More:

Chamber of Commerce v. IRS, et al. (U.S. District Court for Western District of Texas, Austin Division) (pdf)

New Treasury Dept. Rules Torpedo Pfizer-Allergan Tax-Avoidance Merger (by Linda A. Johnson, Associated Press)

Treasury Dept. Sets New Rules to Stop Companies from Moving Headquarters Abroad to Avoid Paying U.S. Taxes (by Martin Crutsinger, Associated Press)

Another Way for Corporations to Avoid Paying Taxes (by Steven Davidoff Solomon, New York Times)


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