Inversions

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On Friday, December 15, the U.S. House of Representative and Senate conferees reached agreement on the Tax Cuts and Jobs Act (H.R. 1) (the “Final Bill”), and released legislative text, an explanation, and the Joint Committee on Taxation estimated budget effects (commonly referred to as the “score”).  Next week the House and Senate are each expected to pass the bill, and it is expected to be sent to the President for signature the following week.  As the conferees actually signed the conference text, changes (even of a limited and/or technical nature) are extremely unlikely at this point.

The Final Bill largely follows the Senate bill, but with certain important differences.  We outline some of the most significant differences between the Final Bill, the earlier House bill, and the Senate bill.  We then discuss in detail some of the most significant provisions of the Final Bill.  The provisions discussed are generally proposed to apply to tax years beginning after December 31, 2017, subject to certain exceptions (only some of which are noted below).  While we discuss some of these provisions in detail, we do not address all restrictions, exclusions, and various other nuances applicable to any given provision.

In the early hours of Saturday morning, the U.S. Senate passed the Tax Cuts and Jobs Act (H.R. 1) (the “Senate bill”), just over two weeks after the U.S. House of Representatives passed its own version of the same legislation (the “House bill”).  Members of the House and Senate will next convene in conference to attempt to reconcile the House and Senate versions of the legislation.  Identical versions of the bill must be passed by simple majorities in both the House and the Senate before the bill, and signed by President Trump, before such legislation will become law.

The final Senate bill, although similar to the bill passed by the Senate Finance Committee on November 16, contains several important changes.  We outline some of the most significant changes below, followed by a list of some of the major outstanding points of difference between the House and Senate bills as passed by the respective chambers.  We then discuss in detail some of the most significant provisions of both bills.

The Treasury Department and the Internal Revenue Service have issued additional guidance about so-called “inversion” transactions. Generally, an inversion transaction results where a U.S. corporation (“U.S. Target”) is acquired by a non-U.S. corporation (“Non-U.S. Acquirer”), but with the U.S. Target’s historic shareholders continuing as significant equityholders of the Non-U.S. Acquirer after closing. The U.S. federal income tax consequences of inversion transactions vary based on a number of factors, including the extent of the U.S. Target shareholder’s continuing equity stake, but in the broadest possible sense, an inversion can have the result of reducing the U.S. Target’s gross income subject to U.S. corporate tax post-inversion. These transactions are not new – a number of statutory provisions have been enacted by the U.S. Congress (notably, Sections 367 and 7874), and various regulatory projects and other administrative guidance have been issued by the Treasury Department and I.R.S. to address these transactions since the early 1990s. However, notwithstanding the government’s efforts, inversion transactions continue.

The latest round of guidance is Notice 2015-79 (the “2015 Notice,” issued November 20, 2015), expanding on the inversion guidance in Notice 2014-52 (the “2014 Notice”). The principal purpose of the 2015 Notice, like the 2014 Notice, is the announcement of future proposed regulations broadly intended both to make inversions harder to accomplish in a tax-preferred manner and to restrict the benefits of certain U.S. post-inversion structuring transactions. These future proposed regulations will have effective dates that are designed to foreclose immediately, as a practical matter, the future use of the structures and techniques described.