Taking Stock Of Challenges To The TCJA And Its Regulations

• Jurisdiction: United States,Federal
• Law Firm: Steptoe & Johnson
• Subject Matter: Tax, Income Tax, Transfer Pricing
• Author: Ms Amanda Pedvin Varma, Steven R. Dixon and Shree Sharma
• Published date: 20 June 2023

The Tax Cuts and Jobs Act¹ (TCJA) was hastily enacted and ushered in a sea change to how the U.S. imposes tax on international operations; it was inevitable that litigation would follow. Recent important decisions in FedEx and Liberty Global provide an ideal opportunity to take stock of where things stand with at least some of the many challenges to the TCJA and its implementing regulations.

GOVERNMENT VICTORIES IN EARLY CHALLENGES

At the outset, we should note that a few of the earliest challenges are close to being resolved in the government's favor. One challenge came from a couple— Charles and Kathleen Moore—who challenged the constitutionality of the §965 transition tax (as applied to their closely held corporation) on the grounds that it violated both the Apportionment Clause (because the transition tax is imposed on unrealized amounts and therefore is not an income tax exempt from that Clause) and the Due Process Clause under the Fifth Amendment (because by imposing tax on amounts already earned, the transition tax is retroactive).² The Moores lost on their constitutional challenges in district court and then the Ninth Circuit; they filed a petition for certiorari in February 2023.³

Two other challenges came from Monte Silver, an Israeli-based lawyer who challenged the Treasury Regulations on transition-tax reporting and GILTI under the APA—the former because they allegedly violated two relatively obscure rulemaking statutes (the Regulatory Flexibility Act (RFA) and the Paperwork Reduction Act), the latter on the grounds that they violated just the RFA.⁴ Silver's challenge to the transition tax regulations survived a motion to dismiss under the Anti-Injunction Act (AIA) and even got some traction on a motion for reconsideration, but ultimately Silver could not show that he would face transition-tax liability and lost at district court. The D.C. Circuit affirmed per curiam and the Supreme Court denied his cert petition. Silver's challenge to the GILTI regulations is on a similar trajectory— Silver lost on AIA grounds in district court and is now appealing that loss to the D.C. Circuit.

Those government victories indicated little about how other TCJA challenges would fare. Two district courts have now invalidated Treasury Regulations promulgated under the TCJA, albeit on meaningfully different grounds.

LIBERTY GLOBAL: PROCEDURAL GOVERNMENT LOSS ON REGULATION WITH SUBSTANTIVE PROBLEMS

One glitch in TCJA was what has come to be known colloquially as the...