Taxation and State Taxation -- 2017

Chamber of Commerce v. Internal Revenue Service   (W.D. Tex.)

Challenging IRS inversion limitations

The Chamber filed a lawsuit challenging the Department of the Treasury’s (Treasury) and the IRS’s Temporary “multiple domestic entity acquisition rule” (Final Rule). The rule imposes higher costs on certain “inversions”, which occur when an American company conducts a cross-border merger with a foreign company and becomes the foreign company’s subsidiary.

By making the Final Rule effective immediately, the Treasury and the IRS prevented the affected industry from commenting on the new rule, disregarding Administrative Procedure Act (APA) language that requires parties be given the opportunity to comment. Manufacturers must have the ability to comment because the rule exacerbates uncertainty in tax law and undermines the ability to compete and succeed in the global marketplace.

The suit argues that the Final Rule should be set aside under the APA because it (1) exceeds Treasury’s authority, (2) is arbitrary and capricious in failing to address or explain the agency’s position change, and (3) was made immediately effective without notice and comment. The Treasury seeks insulation from judicial review of the Final Rule, claiming that the Anti-Injunction Act (AIA) bars pre-enforcement challenges.

The NAM filed an amicus brief arguing that (1) the United States cannot insulate itself from a pre-enforcement review under the AIA, (2) the Treasury has promulgated a rule that is beyond the scope of its regulatory authority, and (3) under the APA’s language there is not “clear and convincing evidence” of congressional intent to protect the Treasury or IRS from court action. The court ruled that: (1) the claims were not barred by the AIA because the plaintiffs were not seeking to restrain the assessment or collection of tax; instead, plaintiffs were merely challenging the Final Rule to enable informed decisions to be made on future business transactions; (2) Congress provided the Treasury and the IRS broad authority to issue regulations, thus determining that the agencies had not violated their authority; and (3) the Treasury and the IRS violated the APA by not providing industries affected with notice and opportunity to comment on the proposed regulation. The court interpreted the language of the APA to mandate that even temporary rules, like the Final Rule, are subject to notice and comment requirements.

Related Documents:
NAM amicus brief  (November 8, 2016)


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