* By invoking 1969 law, Obama could bypass Congress -former Treasury official
* Policy analyst says president unlikely to risk "overreach" accusation
* Treasury Secretary Lew renews call for urgent action by U.S. Congress (Adds analyst comment, background)
By Kevin Drawbaugh
WASHINGTON, July 28 (Reuters) - President Barack Obama could act without congressional approval to limit a key incentive for U.S. corporations to move their tax domiciles abroad in so-called "inversion" deals, a former senior U.S. Treasury Department official said on Monday.
By invoking a 1969 tax law, Obama could bypass congressional gridlock and restrict foreign tax-domiciled U.S companies from using inter-company loans and interest deductions to cut their U.S. tax bills, said Stephen Shay, former deputy assistant Treasury secretary for international tax affairs in the Obama administration.
In an article published on Monday in Tax Notes, a tax professionals' journal, Shay said the federal government needs to move quickly to respond to a surge in inversion deals.
"People should not dawdle," said Shay, now a professor at Harvard Law School, in an interview on Friday.
If the administration takes the steps he discusses, Shay said, some of the many inversion deals said to be in the works might be halted. The regulatory power conferred by the tax code section he has in mind, known as Section 385, would be a "slam dunk" for the Treasury Department, he said.
Height Analytics analyst Henrietta Treyz said on Monday in a note to the investment research firm's clients that Obama likely will not try to use Section 385 as Shay recommends, partly for fear of being accused of "executive overreach."
Treasury Secretary Jacob Lew published an opinion column in The Washington Post on Monday that urged Congress to act soon to stem inversions. "We must confront this problem now," he wrote.
A sharp increase in inversion deals is causing alarm in Washington, with Obama last week urging lawmakers to act soon on anti-inversion proposals from him and other Democrats. But Republican opposition has blocked any action in Congress.
Meantime, investment bankers and tax lawyers are promoting inversions, with U.S. drugstore chain Walgreen Co one of several companies evaluating such a transaction.
Medical technology group Medtronic Inc, of Minnesota, and drug maker AbbVie Inc, of Illinois, are in the midst of deals to invert to Ireland.
The biggest appeal of inversions for U.S. multinationals is putting foreign profits out of the U.S. Internal Revenue Service's reach. Another is making it easier to do so-called "earnings stripping." This involves making loans from a foreign parent to a U.S. unit, which can deduct the interest payments from its U.S. taxable income. Plus, the foreign parent can book interest income at its home country's lower tax rate.
Section 385 empowers the Treasury secretary to set standards for when financial instruments are debt, eligible for interest deductibility, or when they are ineligible equity.
If a company has loaded debt into a U.S. unit above a certain level, the government could use Section 385 to declare the excess as equity and ineligible for deductions, Shay said. (Editing by Eric Walsh and Andrew Hay)