Tax rules that killed Allergan-Pfizer deal may be hard to challenge – Reuters

7 months ago Comments Off on Tax rules that killed Allergan-Pfizer deal may be hard to challenge – Reuters

U.S. tax rules are more difficult to sue over than other regulations that emanate from Washington, presenting a challenge to anyone considering a lawsuit over an Obama administration plan to discourage deals known as inversions, tax lawyers say.

Business trade groups have frequently gone to court since President Barack Obama took office in 2009 to try to block rules about the environment, health or labor unions, but taxes are different because of a law that generally bars suits until a tax is assessed, the lawyers said in interviews this week.

The U.S. Treasury Department unveiled a package of measures on Monday designed to counter a wave of tax-evading acquisitions in which U.S. corporations move offshore, largely for tax benefits.

The measures have already felled the $160 billion merger of U.S. drugmaker Pfizer Inc and Ireland-based Allegan Plc.

It was not clear whether either company or anyone else would sue the Treasury Department. The companies did not immediately respond to requests for comment about a potential lawsuit.

The head of the largest U.S. business lobbying group, U.S. Chamber of Commerce President Tom Donohue, floated the possibility on Wednesday when he told CNBC that he had asked people, “What is the scope of their authority, and is it something you’d sue about?”

Donohue said, though, that a potential lawsuit would take a long time and corporations would need to deal with the regulations “for a while.”

A Chamber spokeswoman, Blair Holmes, said later in an email that it was too early to decide about a possible lawsuit.

Another trade group chief, Organization for International Investment President Nancy McLernon, also would not rule out a legal challenge.

Treasury Department staff had taken steps to ensure their plan had a strong basis in law and believed that their authority to act was clear, a spokeswoman said.

One huge advantage for the government is procedural. An 1867 law called the Anti-Injunction Act says that in general no legal challenge can be brought against a tax until it is assessed. In 2011 and 2012, the law threatened to derail lawsuits against Obama’s healthcare overhaul.

Under the act’s bar, a company such as Pfizer would need to move forward with a merger, file a tax return, and then be assessed by the Internal Revenue Service before it could sue, lawyers said, and it is not clear whether shareholders could stomach the uncertainty for so long.

“For better or worse, there really aren’t timely ways of challenging a tax regulation like this,” said Edward Kleinbard, a professor who specializes in tax law at the University of Southern California.

Patrick Smith, a tax lawyer in Washington who is a partner at the law firm Ivins, Phillips & Barker, wrote in a tax journal last year that the courts could be open to a faster, more aggressive alternative. He said any business contemplating an inversion might be able to sue in federal district court under the Administrative Procedure Act, as someone would sue over other regulations.

Such an approach is untested, however. “It’s novel thinking that’s basically unchartered territory,” Smith said.

Beyond procedural hurdles, a plaintiff would face a steep climb trying to argue that the Treasury Department exceeded its legal authority, tax lawyers said.

For one set of proposed regulations aimed at a practice known as earnings stripping, the Treasury Department is relying on a section of the tax code enacted in 1969. Congress intended the section to give the department broad authority, according to research by Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, although a plaintiff could try to argue the opposite.

Another question would be whether temporary regulations issued on Monday addressing serial acquisitions by a non-U.S. company would – in the case of Allergan – be unlawfully retroactive. Tax lawyers said, though, that the government could reasonably argue that the rules apply only to a deal that has not closed, such as the Allergan-Pfizer merger.

As with all regulations, federal agencies have some leeway to make reasonable interpretations of the law, lawyers said.

“In the past, the courts have tended to give significant deference to Treasury on how to interpret and apply their code,” said Adam Rosenzweig, a law professor at Washington University in St. Louis.

(Reporting by David Ingram in New York; Additional reporting by Andy Sullivan in Washington and Rama Venkat Raman in Bangalore; Editing by Steve Orlofsky and Nick Zieminski)

Tax rules that killed Allergan-Pfizer deal may be hard to challenge – Reuters