Overview
IRS Issues Final Section 7874 Inversion Regulations: Today, the Treasury Department and the IRS issued final regulations to address transactions that are structured to avoid sections 7874 and 367 and certain post-inversion tax avoidance transactions. The regulations finalize, with some modification, the temporary and proposed regulations issued on April 8, 2016. The temporary regulation was invalidated in Chamber of Commerce of the United States v. Internal Revenue Serv., No. 1:16-CV-944–LY (W.D. Tex. Sept. 29, 2017), appeal docketed, No. 17-51063 (5th Cir. Dec. 1, 2017) for lack of prior notice and comment.
The regulations address certain transactions structured to avoid the purposes of section 7874, providing rules for (i) identifying domestic entity acquisitions and foreign acquiring corporations in certain multiple-step transactions; (ii) calculating the ownership percentage and, more specifically, disregarding certain stock of the foreign acquiring corporation for purposes of computing the denominator of the ownership fraction; (iii) determining when certain stock of a foreign acquiring corporation is treated as held by a member of the expanded affiliated group (EAG); and (iv) determining when an EAG has substantial business activities in a relevant foreign country.
Greg Kidder, a partner in Steptoe's Washington office, stated: "The final inversion regulations suggest that Treasury continues to believe that, following Tax Reform, there are opportunities for US companies to engage in transactions to become foreign companies. Except for certain modest changes, the final regulations are generally consistent with the proposed regulations. Those regulations were quite expansive and addressed the Obama administration’s views of problems from an imperfect statute. That the Trump administration chose to keep those regulations largely intact is notable. It will be interesting to see how this use of regulatory authority will affect the discussion about the general scope of Treasury’s regulatory authority for Tax Reform provisions, many of which are also considered flawed."