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Abstract: 

An inversion is a transaction that results in an existing U.S. company becoming a foreign company or a subsidiary of a foreign parent. The Internal Revenue Service (IRS) and Treasury Department recently issued new guidance addressing inversion structures and related tax benefits, which might have a chilling effect on inversions. The guidance addresses, among other things, the ownership test to avoid classification of an inversion transaction, residence (particularly utilization of third-countries), and multiple-step acquisitions. The guidance’s impact was immediate, resulting in the death of one of the biggest proposed inversions in history. The future vitality of these rules, and of inversions themselves, however, remains to be seen, with litigation pending challenging the validity of the rules. One thing is certain, though: inversions will remain highly controversial. The IRS is likely to audit inversion type transactions that proceed despite the guidance, or that were accomplished prior to its effective date, as evidenced by its newly released practice guide.

Keywords: inversions; TD 9761; Notice 2014-52; Notice 2016-79; IRC § 7874; IRC § 367; IRC § 385; acquisition, ownership, and business activities tests; third country rule; serial inversion and multiple-step acquisition rules; Pfizer-Allergan

Affiliations:  1: Baker & Hostetler LLP; 2: Baker & Hostetler LLP.