Professor Thompson testifies at Treasury/IRS hearing on interest-stripping rules

UNIVERSITY PARK, Pa. – Penn State Law professor Samuel C. Thompson Jr. testified on July 14 in a hearing jointly sponsored by the IRS and the U.S. Treasury Department at IRS headquarters in Washington, D.C. The hearing addressed the legality and scope of recent Treasury Department and IRS proposed regulations dealing with the distinction between debt and equity under Section 385 of the Internal Revenue Code. The regulations, which were issued in April, are designed, inter alia, to curtail corporate tax inversions.

Inversions are transactions in which a U.S. firm merges with a smaller foreign firm, with the purpose of moving the headquarters of the U.S. firm to a foreign jurisdiction. Inversions can result in significant U.S. tax reductions, including reductions through interest stripping, a tactic in which a U.S. company uses interest payments to a foreign affiliate to lower the U.S. company’s U.S. taxes.

The regulations would make it more difficult for U.S. companies to issue debt to foreign affiliates in both inversion and non-inversion transactions. By restricting such debt, the regulations would make it harder for corporations to reduce their U.S. taxes through interest stripping after an inversion and in certain other transactions. As an illustration of the significance of these and other anti-inversion regulations issued at the same time, within days of the issuance, Pfizer, citing the regulations, called off its planned inversion with Ireland’s Allergan. This would have been the largest inversion ever completed. 

Thompson’s testimony, which expanded on his written comments on the regulations, focused, inter alia, on the appropriateness of the regulations and whether the Treasury had the authority to issue the regulations at all. Of 18 speakers at the hearing, Thompson was the only one who argued that the rules reflect sound tax policy and are authorized by Section 385. He also suggested some modifications to the rules.   

“Treasury has clear and unambiguous authority” to issue the regulations, Thompson said.

Thompson is director of Penn State Law’s Center for the Study of Mergers and Acquisitions and teaches Business Planning for Mergers and Acquisitions, Corporate Tax through the Lens of Mergers and Acquisitions, International Tax, Basic Federal Income Taxation, and Contracts. He is the author of 16 books and more than 75 articles on corporate and international tax, corporate governance, securities law, and antitrust law.    

Media Coverage of Thompson’s Testimony

Bloomberg News: “Treasury Corporate-Debt Rules Exceed Authority, Tax Lawyers Say”

The Hill: “Biz groups press IRS to withdraw proposed offshore tax rules”

Tax Notes Today: “Little Dialogue, Lots of Venting at Debt-Equity Reg Hearing”

BNA’s Daily Tax Report: “Debt-Equity Rules Face Attacks, Possible Legal Challenges”

CCH Tax Day Report: “Witnesses Attack Earnings Stripping Regulations at IRS Hearing”