Washington, DC - The U.S. Chamber of Commerce and the Texas Association of Business Friday filed a legal challenge to the IRS’s immediately effective Multiple Acquisition Rule, which attempts to prevent certain corporate mergers that are otherwise permitted under the inversion rules under Section 7874 of the Internal Revenue Code. 

The administration asked Congress to give it the authority to eliminate corporate inversions. When Congress would not do so, Treasury and the IRS ignored the clear limits of the tax code to target entirely lawful transactions.

“Treasury and the IRS ignored the clear limits of a statute, and simply rewrote the law unilaterally. This is not the way government is supposed to work in America,” said U.S. Chamber President and CEO Thomas J. Donohue.

As explained in the complaint, inversions are the natural consequence of America’s misguided policy of imposing high taxes on corporations, and then trying to export those taxes to income earned globally. “Instead of breaking the rules to punish companies engaged in lawful transactions, Washington should just do its job and comprehensively reform the tax code,” Donohue stated. “The real solution is tax reform that lowers rates for all businesses, allowing American companies to compete globally and the United States to attract foreign investment.”

Section 7874 sets a specific numerical threshold governing combination transactions between U.S. and foreign companies:  so long as the shareholders of a foreign company own more than 40 percent of the combined entity’s stock, the transaction will not be treated as an inversion subject to this statutory provision.  In order to circumvent this numerical threshold, the rule, which was made immediately effective, artificially ignores any stock owned by the foreign shareholders that came from prior acquisitions of a U.S. company within the three years before a merger.  As a result, the rule disallows some mergers that clearly satisfy the 40 percent threshold.

“Treasury and the IRS rewrote the Internal Revenue Code and steamrolled over the Administrative Procedure Act, which requires that an agency provide interested parties with notice and an opportunity to comment before a rule becomes effective,” explained Lily Fu Claffee, chief legal officer of the U.S. Chamber. “Treasury and the IRS admitted to skipping over any prior notice or opportunity to comment on their Multiple Acquisition Rule, but offered no justification for dodging their legal obligations in this way. Treasury and the IRS should not act as if they are above the basic rules that govern all federal agencies.”

The lawsuit was filed in the U.S. District Court for the Western District of Texas.