New Temporary Inversion Regulations

istock-tax-blog-cliffBy:  Amanda Wilson

The IRS once again is targeting inversions, and this time there have been immediate tangible results.

The IRS issued temporary regulations on Monday targeting inversion transactions.  An inversion occurs where a foreign corporation “acquires” a US corporation, such that the US corporation moves offshore to a more tax-advantageous location.  The result is a significant reduction in tax rates.  The foreign acquiring corporation typically is dwarfed in size by the US corporation.

To maximize the tax benefits of an inversion, the former shareholders of the US corporation need to hold less than 60% of the stock of the foreign parent post inversion (otherwise there is a tax on the inversion).   One of the key provisions of the temporary regulations is a three year look-back period pursuant to which parent stock attributable to prior inversions or acquisitions of US company stock is disregarded.   In other words, the foreign parent cannot do multiple inversions to build up its size so that it can acquire larger and larger companies.    This three year look-back rule makes it harder for inversions to satisfy the less than 60% ownership requirement .

This provision has already shut down one pending inversion – as Pfizer just announced that it will not go through with its proposed inversion with Allergan.

Beware Transferee Liability

Magnifying Glass and TaxBy:  Amanda Wilson

One of the great features of corporations is that liability in the corporation generally does not extend to its shareholders, including tax liability.  Like any rule, though, there is almost always an exception.   In this case, the exception can be brutal.

Section 6901 imposes transferee liability on (i) shareholders of dissolved corporations and (ii) parties to a Section 368 reorganization (for example, on the surviving corporation resulting from a merger).  The transferee liability is automatic – there is no requirement that the transfer of the assets to the shareholder or new corporation be improper.  Section 6901 not only imposes full liability on the transferee for the corporation’s tax liability, it adds an extra year to the statute of limitations, giving the IRS more time to go after the transferee.

So if you are considering acquiring, reorganizing with or dissolving a corporation, do not ignore the risk of transferee liability.  The risk can be substantial, as shown by yesterday’s Tax Court decision Tricarichi v. Commissioner.  In that case, the Tax Court found that the sole shareholder of a dissolved corporation was liable for the corporation’s $21.2 million of unpaid taxes.


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