United States

District Court says inversion rule invalid

TAX ALERT  | 

In Chamber of Commerce of the United States of America v. IRS, the U.S. District Court for the Western District of Texas held, among other things, that the 2016 anti-inversion regulations (see. T.D. 9761, Reg-135734-14) were not interpretive regulations, as the IRS argued, but instead legislative regulations, and thus were not excused from the notice-and-comment procedure required by the Administrative Procedures Act (APA). Significantly, the court held that publication of a temporary regulation that took immediate effect violated the APA.

The APA provides the general framework for federal agency rulemaking. Under the APA, after giving notice of proposed rulemaking, an agency must provide the public with an opportunity to participate in the rule making, which typically takes the form of written comments. Under the APA, publication of a substantive rule may not be made less than 30 days before its effective date.

Among the issues considered by the court was whether the anti-inversion temporary regulations, which became effective immediately upon issuance, had been issued in accordance with the APA’s notice-and-comment requirements.

The IRS argued that temporary regulations are exempt from the notice-and-comment requirements where such regulations are simultaneously issued as a proposed regulation subject to the notice-and-comment requirements of the APA. Alternatively, the IRS argued that the anti-inversion regulations were “interpretive” because as they clarified terms in the statue and provided additional detail, they did not modify the substantive rules contained in the relevant statute. Interpretive regulations are exempt from the APA’s notice-and-comment procedures.

The court disagreed on both counts, however. First, the court held that the APA does not explicitly exempt temporary regulations from the requisite notice-and-comment period even if proposed regulations are issued. Second, the court held that anti-inversion regulations were not interpretive rules, but were instead substantive or legislative regulations because the regulations changed certain critical calculations central to determining the application of the inversion rules.

Accordingly, the court concluded that the regulations were not issued in adherence to the APA’s requisite notice-and-comment period, and as a result, set the Rule aside.  

While this ruling may certainly have an impact on inversion transactions, it may also have a much broader and more significant impact on other regulations that were also issued in temporary and proposed form, and which were immediately effective upon publication. Such regulations may be invalid based on the court’s reasoning in the Chamber case.

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