FedEx Corp. is threatening a court challenge to the government’s interpretation of how repatriation taxes will affect its profits—and it won’t be alone.
The Treasury Department and Internal Revenue Service will likely face a wave of such challenges, particularly from multinationals, based on conflicting interpretations of ambiguities in the 2017 tax overhaul (Pub. L. No. 115-97), tax professionals said. That’s especially true as a Securities and Exchange Commission rule giving companies a year to offer shareholders “provisional” estimates of the law’s impact on their bottom lines expires Dec. 22.
Public corporations may face shareholder ire if they backtrack on a reported benefit from the tax law.
In a Dec. 18 quarterly filing, FedEx said proposed rules (REG-104226-18) the IRS released in August for the tax overhaul’s one-time levy on accumulated offshore earnings were “inconsistent with our interpretation” of the law. That interpretation had led the logistics giant to report in a July annual filing a $225 million tax benefit from foreign tax credits from overseas operations. FedEx said in the more recent filing that it was so confident in its stance that it intends “to defend this position through litigation, if necessary.”
“It is unusual. It does seem like a shot across the bow,” said Robert J. Kovacev, a tax controversy partner at Norton Rose Fulbright LLP who practices in Washington and San Francisco. “Certainly other companies that have issues with the repatriation regulations will sit up and take notice. It’s a signal that somebody has found something worth fighting about. Maybe this is the time to think about raising your own challenge.”
Companies may have a better chance of success in litigating the government’s post-audit positions than they might have had just a few years ago, as conservative judges are expected to push back on a decades-old standard of deference to administrative authorities in cases involving contested regulations for ambiguous laws.
Treasury and the IRS may not have the resources to handle all this litigation following conclusions from auditors that contradict companies’ stances, said Andrew Silverman, a Bloomberg Intelligence tax policy analyst. They’re still working to pump out regulations for the law, such as final rules for the global intangible low-taxed income and base erosion and anti-abuse tax provisions, a year after its enactment, he said.
FedEx declined to respond to questions and requests to elaborate on its statements regarding its intentions to litigate. The IRS and Treasury didn’t respond to requests for comment.
A 1984 Supreme Court decision in Chevron U.S.A. v. Natural Resources Defense Council established what is known as “Chevron deference” or the “Chevron doctrine.” The court affirmed the standard—deference to contested regulations when the law on which they’re based is ambiguous—in a decision in the 2011 case Mayo Found. for Med. Educ. & Research v. United States.
“It really comes down to the ambiguity of the statute,” and plenty of areas of the 2017 tax law “are pretty ambiguous,” said New York-based tax consultant Robert Willens.
The Supreme Court’s two newest justices, Neil Gorsuch and Brett Kavanaugh, are known critics of the standard, said Patrick Smith, a partner at Ivins, Phillips, & Barker, Chartered in Washington, whose practice focuses in part on challenges to IRS and Treasury regulations.
“It’s certainly not determined that the IRS and Treasury are going to win,” he said. “Taxpayers are in a much better position today than they were maybe 10 years ago.”
FedEx’s threat came days ahead of the expiration of a financial reporting grace period the SEC granted companies in the form of Staff Accounting Bulletin 118, which allowed companies one year after the Dec. 22, 2017, enactment of the tax law to finalize their estimates for its impact on their bottom lines. The commission doesn’t plan to extend the one-year deadline, Sagar Teotia, deputy chief accountant in the Office of the Chief Accountant, said at a conference Nov. 13.
Without the ability to keep the estimated impacts provisional, pressure on companies to please shareholders with accurate disclosures could soon heat up.
“You could imagine shareholder derivative suits all over the place,” Silverman said. Stock prices could fluctuate, he added, because a company may have inadvertently misled shareholders by stating estimates of its tax liabilities that it later had to reverse.
Public corporations can protect themselves by erring on the side of oversharing when it comes to disclosure, said Robert Weber, a partner at Sheppard, Mullin, Richter & Hampton LLP in Los Angeles who specializes in securities class actions and litigation.
“Plaintiff lawyers are very creative,” however, and material declines in a company’s stock price as a result of a change could raise a company’s risk of shareholder litigation, he said.
Rules Still May Change
With the deadline imminent, final regulations for the repatriation provision remain at the White House’s regulatory review office. They arrived Dec. 6 at the Office of Management and Budget, which under an April agreement has the authority to review tax regulations—giving corporate lobbyists another chance to make their voices heard.
There’s a small chance that what comes out of the OMB could be in FedEx’s favor, as the OMB isn’t the only government entity listening to corporations’ pleas.
When finalizing rules, Treasury considers information including comments from taxpayers and tax professionals, and may decide not to fully adopt all the provisions in the proposed regulations, said Cory Perry, international tax senior manager at Grant Thornton LLP’s Washington National Tax Office.
“We have seen this before,” with proposed regulations under tax code Section 385—rules intended to stop multinationals from moving money out of the U.S. via loans to subsidiaries—that “were significantly scaled back when finalized,” he said.
There’s a chance the proposed repatriation rules follow a similar pattern, Perry said, “although I suspect many of the rules may be adopted as proposed.”
—With assistance from Siri Bulusu.
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