Section 367: A 'Wimp' for Inversions and a 'Bully' for Real Cross-Border Acquisitions

Abstract

Pure inversion transactions involve reorganizing a publicly held U.S. corporation as a subsidiary of a newly formed, publicly held foreign holding company. These transactions avoid the controlled foreign corporation provisions of the Internal Revenue Code and are equivalent to the de facto adoption of a territorial system of taxation. Until and unless Congress decides to repeal or reform the controlled foreign corporation provisions, Congress and the U.S. Treasury should take steps to protect the integrity of these provisions by removing the incentive for companies to engage in pure inversion transactions. Section 367 is an inadequate tool (that is, is a wimp) in dealing with these transactions, and this article sets out a proposal that would be an effective deterrent. This article also argues that section 367 is too intrusive (that is, is a bully) in business-motivated cross-border acquisitive reorganizations involving substantial companies and therefore should be liberalized for these transactions.