Corporate restructurings are on hold while companies wait to see what Congress does with a provision in a pending tax bill.

The pending bill would repeal a tax incentive for US companies to export. The World Trade Organization declared the export incentive illegal and authorized the European Union last year to collect retaliatory duties until the US repeals it. The European Union began collecting duties of 5% on $4 billion a year in US imports last March. The duties are increasing by 1% a month until they reach 17% next March.

In the meantime, both houses of Congress have voted to repeal the export tax incentive, but the bills each house passed are so different that it is not clear Congress will be able to reconcile them before the session ends in October.

The export tax bill the Senate passed would give the IRS broad authority to deny tax benefits in corporate restructurings retroactively to February last year.

The IRS already has authority under section 269 of the US tax code to deny tax benefits that a company secures by acquiring control of another corporation in cases where the principal purpose of the acquisition is to secure a tax benefit that would not otherwise have been available. “Control” means at least 50% by vote or value. The IRS can also disallow tax benefits from an acquisition by one corporation of property of another corporation in a transaction where the principal purpose is to secure tax benefits.

However, there are two exceptions where section 269 is not invoked currently. The IRS does not invoke it where the transferor corporation was already under common control with the acquirer. It is also not invoked where the taxpayer had other means to secure the same tax benefits.

The Senate bill would eliminate both exceptions in liquidations of subsidiary corporations into a parent company and in other intragroup reorganizations. The change would apply retroactively to transactions after February 13, 2003.

Keith Martin