In Chamber of Commerce of U.S. v. IRS (September 2017), a U.S. District Court in the Western District of Texas struck down a U.S. Treasury Department (Treasury) temporary regulation that expanded existing rules designed to prevent U.S. companies from redomiciling outside of the U.S. for tax purposes (referred to as the "anti-inversion rules"). The court did not address the substance of the specific anti-inversion rule; rather, it invalidated the temporary regulation on the basis that the Treasury violated the procedural rules set forth under the Administrative Procedures Act (APA).
Pursuant to the APA, Treasury regulations must satisfy a "notice and comment" period prior to becoming effective. During this period (typically 30 days), the Treasury must publish notice of the proposed regulation and allow the public to provide feedback. In this case, the court rejected the Treasury's argument that temporary regulations were exempt from such APA requirement and held that, because the Treasury issued the temporary regulation with an immediate effective date in April 2016, the notice and comment procedures of the APA were violated and the temporary regulation was invalid.
Why Is This Significant?
This opinion is significant because it is the first instance in which a federal court has nullified a Treasury regulation due to the Treasury's failure to comply with administrative law. While this U.S. District Court case ruling lacks binding precedential value, it could be an indication that the Treasury will be subject to greater scrutiny going forward. In light of the sweeping U.S. tax reform that is currently on the table, this increased administrative accountability may curtail the Treasury's consistent effort over recent years to target aggressive tax planning in the context of international M&A transactions and structuring.
How Can Venable Help?
Tax reform continues to be a key focal point with respect to U.S. and global legislative initiatives. Venable's international tax team can knowledgably navigate these areas of evolving tax law to provide our clients with strategic and timely tax planning solutions.