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IRS official: Controversial Treasury rules should survive legal challenge
The Treasury Department's controversial rules aimed at discouraging companies from moving offshore to avoid U.S. taxes should be able to withstand legal challenges, the Internal Revenue Service (IRS) associate chief counsel says.
Treasury finalized rules on Oct. 13 that will change the tax treatment of certain intercompany debt under the tax code section 385 to curb a practice called earnings stripping, which is often used when a larger company is seeking to merge with a smaller foreign company so it can take advantage of lower tax rates overseas.
Despite the department's attempt to address significant concerns from the business community when the rules were first proposed in April, tax attorneys and practitioners said Treasury will still face litigation over claims that the administration violated the federal rulemaking law called the Administrative Procedure Act (APA).
To protect themselves from such a challenge, Treasury detailed its reasons for designing the final regulations in a lengthy preamble to a 518-page document.
"The preamble now needs to be our best shot at defending [the rules] and the choices that we made," IRS Associate Chief Counsel (International) Marjorie Rollinson said during a panel Friday at an American Bar Association Taxation Section and Tax Executives Institute conference.
The 380-page preamble addresses the "145 unique comments" out of the 29,000 Treasury and the IRS received on the proposed section 385 rules, according to Rollinson.
"It is going to be very, very interesting to see how this plays out ... because I'm quite sure we are going to be legally challenged," she said.
Treasury released the rules under tax code section 385 as part of the Obama administration's broader regulatory effort to crack down on corporate inversions.
The business community and some members of Congress pushed back, saying the rules are a blunt instrument that would harm companies' standard intercompany financing operations, including those of U.S. businesses that only deal with domestic transactions, as well as financial institutions and other heavily regulated industries.
Now, the final rules extend the reporting deadlines and provide significant relief for many U.S. multinational companies, but not for businesses owned by foreign companies.
Other criticism addressed the administration's fast-track process in issuing the rules. Senate Finance Committee Chairman Orrin Hatch (R-Utah) and member Dean Heller (R-Nev.) have requested the administration to provide more transparency on its rulemaking process.
IRS officials also said spending time fighting litigation over the section 385 rules would diminish IRS's other efforts, including one to promote voluntary reporting of overseas earnings.
The IRS boasted reaching milestones in its offshore efforts to collect a total of $10 billion under the agency's voluntary disclosure program, according to an Oct. 21 release.
"Ultimately if we are spending time litigating APA issues we're spending less time litigating the merits of [the other] cases," Thomas Kane, division counsel in the IRS large business and international division said, adding that the IRS has been facing budget constraints over the past few years.
"That's not optimal from trying to figure out what the tax law is and promoting voluntary compliance," he said.
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