Notice & Comment

The Chamber of Commerce Has an Anti-Injunction Act Problem, by Daniel Hemel

The Chamber of Commerce filed a lawsuit in federal district court in Texas Thursday seeking to block the Treasury Department’s April 2016 inversion regulations. The Chamber says that the inversion regulations exceed Treasury’s statutory jurisdiction, that the regulations are arbitrary and capricious in violation of the Administrative Procedure Act (APA), and that Treasury failed to follow the APA’s notice-and-comment requirements. The last of these arguments isn’t frivolous: Treasury certainly could have done more to explain why it was implementing the new rules immediately rather than first allowing 30 days for comment. But whatever one thinks of the Chamber’s notice-and-comment argument, it shouldn’t matter: the Chamber’s complaint has a fatal flaw.


The problem for the Chamber is the pesky Tax Anti-Injunction Act (TAIA), 26 U.S.C. § 7421, which reads (in relevant part):

[N]o suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.


The statute lists a number of specific exceptions — none of which even arguably applies here. It establishes a general rule that in order to challenge the assessment or collection of a federal tax, a taxpayer must wait until the IRS actually assesses and attempts to collect the tax, at which point the taxpayer may (a) file a petition in Tax Court challenging the notice of deficiency or (b) pay the tax and then sue for a refund in federal district court or the Court of Federal Claims.


On its face, the TAIA plainly applies to the Chamber’s suit. The Chamber is asking the district court to set aside Treasury’s “Multiple Acquisition Rule,” 26 C.F.R. § 1.7874–8T, which was an element of the April regulations. The Multiple Acquisition Rule says that any stock issued by a foreign corporation in prior acquisitions of U.S. entities over the previous three years shouldn’t be counted when calculating whether a pending acquisition of a U.S. entity qualifies as an inversion. Treasury promulgated the rule pursuant to its regulatory authority under 26 U.S.C. § 7874, which imposes a tax on the “inversion gain” of expatriated entities. A foreign corporation’s acquisition of a U.S. corporation is an inversion for purposes of § 7874 if, after the acquisition, at least 60% of the vote or value of the combined entity is held by former shareholders of the U.S. corporation (among other criteria). “Inversion gain” includes income from the sale of the former U.S. corporation’s stock or property to foreign affiliates over the 10 years following the acquisition (among other items).


So in a nutshell, the Chamber is asking the district court to restrain the IRS from assessing and collecting the § 7874 tax on inversion gain with respect to foreign corporations that fall within the statute’s scope by virtue of the Multiple Acquisition Rule. That sure sounds a lot like a “suit for the purpose of restraining the assessment or collection of any tax.” How, then, does the Chamber plan to get around this?


Friend and JREG Notice & Comment co-blogger Andy Grewal suggests that the Chamber’s strategy might involve the Supreme Court’s 2015 decision in Direct Marketing Association v. Brohl. In Direct Marketing Association, the Court held that the Tax Injunction Act, the state tax equivalent of the TAIA, did not bar a challenge to a Colorado law requiring (mostly out-of-state) retailers to notify Colorado customers of their potential use tax liability and requiring the retailers to report tax-related information to Colorado authorities. The Court emphasized that the Colorado law imposed “notice and reporting requirements” — and not any tax liability — on the retailers.


The Chamber’s suit, by contrast, does not attack any notice or reporting requirements. It attacks the requirement that foreign corporations pay tax on inversion gains after they acquire U.S. entities in qualifying transactions.Direct Marketing Association is inapposite. This is a straight-up challenge to a tax.


Perhaps the Chamber will argue that unless a court addresses the validity of the Multiple Acquisition Rule now, no foreign corporation will acquire a U.S. corporation in a transaction that might trigger the § 7874 tax on inversion gain — the stakes are simply too high for anyone to run that risk. And indeed, Allergan (technically an Irish corporation) and Pfizer (U.S.) called off their merger in April precisely for that reason. But as the Supreme Court said in Enochs v. Williams Packing & Navigation Co., 370 U. S. 1, 6 (1962), and reaffirmed in Bob Jones University v. Simon, 416 U.S. 725, 745 (1974), the TAIA “may not be evaded ‘merely because collection would cause an irreparable injury, such as the ruination of the taxpayer’s enterprise.’” That’s harsh — but so it goes.


Many readers will remember that Chief Justice Roberts danced around a TAIA issue in NFIB v. Sebelius, 132 S. Ct. 2566 (2012), en route to upholding the Affordable Care Act’s individual mandate and limiting the ACA’s Medicaid expansion. The Chief Justice said there that the TAIA didn’t apply because Congress decided to label the individual mandate provision a “penalty” rather than a “tax.” I had qualms about that holding at the time, but in any event it’s of no help to the Chamber here: Congress labeled § 7874 as a “TAX ON INVERSION GAIN OF EXPATRIATED ENTITIES.” Not much ambiguity about that.


In short, the lifespan of the Chamber’s suit should be short: the Chamber’s claims are barred by the TAIA. But while the suit is still alive, let’s revel in the irony. The Chamber is arguing that Treasury promulgated its rule too hastily, without observing the proper procedure. And yet the Chamber is filing its challenge hastily, without . . . (you can finish the sentence).


Cross-posted at Whatever Source Derived.


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