District Court finds anti-inversion regulation invalid

On Sept. 29, 2017, in Chamber of Commerce of the United States of America v. IRS, No. 1:16-cv-00944 (W.D. Tex. 2017), , the District Court for the Western District of Texas held that one of the anti-inversion regulations under Section 7874 is unlawful because the IRS and Treasury did not comply with the notice-and-comment requirements of the Administrative Procedures Act (APA).

The court, however, found the IRS and Treasury did not engage in an arbitrary and capricious rulemaking, nor did the government exceeded its statutory jurisdiction when issuing the anti-inversion regulation in question.

The court’s analysis was confined to Treas. Reg. Sec. 1.7874-8T. This anti-inversion regulation is commonly referred to as the “serial inverter” rule. The serial inverter rule identifies stock of a foreign acquirer that is to be disregarded because it was attributable to U.S. acquisitions occurring during a three-year period before the applicable acquisition. Unlike some of the other anti-inversion regulations concurrently issued with the serial inverter rule in April 2016, Treas. Reg. Sec. 1.7874-8T was previously unannounced and was not showcased in any prior notices.

The APA governs the way in which administrative agencies of the federal government may promulgate regulations. The APA provides that, unless certain exceptions apply, a 30-day notice period is required providing interested persons an opportunity for comment (i.e., the notice-and-comment procedures). The district court found that the anti-inversion regulation was not exempt from the notice-and-comment procedures, and that it was a substantive or legislative regulation, not an interpretive regulation.

The court’s decision may have broader implications on the approach the IRS and Treasury take when issuing future regulations, as well as on existing regulations promulgated in a similar fashion to the regulation analyzed in the decision.

Contact: David Sites
Partner, Washington National Tax Office
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Cory Perry
Tax – Exp. Manager, Washington National Tax Office
T +1 202 521 1509

David Zaiken
Managing Director, Washington National Tax Office
T +1 202 521 1543

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