The IRS once again is targeting inversions, and this time there have been immediate tangible results.

The IRS issued temporary regulations on Monday targeting inversion transactions.  An inversion occurs where a foreign corporation “acquires” a US corporation, such that the US corporation moves offshore to a more tax-advantageous location.  The result is a significant reduction in tax rates.  The foreign acquiring corporation typically is dwarfed in size by the US corporation.

To maximize the tax benefits of an inversion, the former shareholders of the US corporation need to hold less than 60% of the stock of the foreign parent post inversion (otherwise there is a tax on the inversion).   One of the key provisions of the temporary regulations is a three year look-back period pursuant to which parent stock attributable to prior inversions or acquisitions of US company stock is disregarded.   In other words, the foreign parent cannot do multiple inversions to build up its size so that it can acquire larger and larger companies.    This three year look-back rule makes it harder for inversions to satisfy the less than 60% ownership requirement .

This provision has already shut down one pending inversion – as Pfizer just announced that it will not go through with its proposed inversion with Allergan.