In a letter dated December 19, five senators urged the IRS to strengthen proposals to deter tax-motivated corporate inversions. Senators Carl Levin, D-Mich., Jack Reed, D-R.I., Mazie Hirono, D-Hawaii, Tammy Baldwin, D-Wis., and Richard Durbin, D-Ill., called for the IRS to take action to stop companies, such as Burger King, from establishing holding partnership structures designed solely for tax avoidance.
“We commend your recent action to stop some of the most unjustified aspects of tax inversions, and we believe your actions are an important step toward eliminating the corporate inversion tax loophole,” wrote the lawmakers. “There are many ways Treasury and the IRS can act to reduce the utility of the inversion loophole, and we strongly encourage you to do so.”
The Burger King-Tim Horton merger is the first to employ such a novel structure, and some experts have suggested that the structure could be widely adopted by other companies in inversion transactions. In addition, the senators urged Treasury and the IRS to take further action to discourage the practice of “earnings stripping,” and to stop “hopscotch loans,” and to work with other federal agencies to ensure that restrictions on awarding federal contracts to inverted corporations are properly enforced.
Regarding the structure designed to avoid gain recognition by shareholders, the senators wrote: “[c]learly, the sole purpose of this special purpose, passthrough limited partnership structure is U.S. tax avoidance.” In addition, the senators urged the IRS to expand the prohibition on hopscotch loans “to cover all foreign entities with a U.S. subsidiary, regardless of whether the entities’ foreign status is the result of an inversion or not.”
The current proposal, announced by the Department of Treasury in September 2014, would cover only companies that are inverted, and among inverted companies, only those that invert after Treasury’s announcement. The senators also encouraged the IRS to work with the Federal Acquisition Regulatory (FAR) Council to determine additional steps to ensure that federal contracts are awarded to U.S. companies rather than inverted corporations.
Jeff Carlson, CCH News Staff
Senators’ Letter to IRS on Inversions