It seems to me that one thing that the IRS and Treasury could consider is to revoke or at least suspend the application of the check-the-box regulations to foreign entities, at least in the context of cross border “inversion type” transactions. This action would prevent the application of the elective check-the-box regime to these entities (or to those entities engaged in the described transactions) under regulation section 301.7701-3 and would also potentially re-examine or change the list of per se foreign entities under regulation section 301.7701-2(b)(8).
If this action was taken, there would need to be issued a set of rules describing how foreign entities would be classifed as corporations, partnerships or whatnot for purposes of the Internal Revenue Code as the pre-check the box Kintner regulations have been displaced by the check-the-box regulations. Under the Kintner regulations, there was a tendency for foreign entities to be treated as corporations as some of the old partnership factors were difficult to meet under foreign law. The new rules for foreign entities could incorporate some management and control standards to determine whether the designated entity was foreign or domestic. Yes, this kind of approach would deviate from the approach under the dual status regulations of regulation section 301.7701-5 but it is a possibility. At a minimum, the new rules on foreign entity classification could make it difficult for the foreign entity in the inversion transaction to be treated as a corporation and it could also confuse the treatment of disregarded entities formed under foreign law. In an interim period while the issue is “under study”and before Congress acts, this could slow down the pace of inversions.
Another act the IRS and Treasury could consider taking is to issue regulatory guidance under section 7701 relating to the treatment of a partnership as foreign or domestic based on where the entity is managed and controlled. (See page 317 of the 1997 blue book, JCS-23-97, issued by the Joint Committee on Taxation). This action would tend to treat partnerships formed under foreign law but managed and controlled in the U.S. as domestic partnerships. If more foreign created entities were classified as partnerships, at least in the cross border “inversion type” transaction context, then it would become difficult, at least in the short term, to effect an inversion as is known today.
Of course, there are effective date issues relating to pre-existing foreign created entities and rules would be needed to prevent unintended liquidations of former foreign corporate entities into partnerships. But the rules could be carefuflly crafted to avoid unintended results.
Finally, a temporary regulation relating to anti-avoidance transactions under section 163(j) could be considered. This should help tighten up earnings stripping and help constrain inversions.