Law School Case Brief
Altera Corp. & Subsidiaries v. Commissioner - Nos. 16-70496, 16-70497, 2018 U.S. App. LEXIS 20524 (9th Cir. July 24, 2018)
Broadly, 26 C.F.R. § 1.482-7A provides that costs are shared by parties to a qualified cost-sharing arrangement, a controlled cost-sharing arrangement that meets the standards of the cost-sharing regulations and thus enables the participants to avoid an IRS adjustment. 26 C.F.R. § 1.482-7A(a)(3) incorporates and attempts synthesis with the arm's length standard. A qualified cost sharing arrangement produces results that are consistent with an arm's length result if, and only if, each controlled participant's share of the costs (as determined under 26 C.F.R. § 1.482-7A(d)) of intangible development under the qualified cost sharing arrangement (QCSA) equals its share of reasonably anticipated benefits attributable to such development. 26 C.F.R. § 1.482-7A(d)(2) provides that parties to a QCSA must allocate stock-based compensation between themselves.
In May of 1997, Altera Corp. entered into a cost-sharing agreement with one of its subsidiaries, Altera International, Inc., a Cayman Islands corporation ("Altera International"), which had been incorporated earlier that year. Altera granted to Altera International a license to use and exploit Altera's preexisting intangible property everywhere in the world except the United States and Canada. In exchange, Altera International paid royalties to Altera. The parties agreed to pool their resources to share R&D costs in proportion to the benefits anticipated from new technologies. At issue is Altera's tax liability for the years 2004 to 2007. During the relevant period, Altera and its subsidiaries designed, manufactured, marketed, and sold programmable logic devices, electronic components that are used to build circuits. Each year from 2004 to 2007, the IRS notified Altera that the cost-sharing payments did not satisfy the new regulations. But when Altera challenged these regulations, the Tax Court unanimously held that the explanation Treasury offered in the preamble accompanying the new regulations was insufficient to justify those regulations under State Farm.
Is 26 C.F.R. § 1.482-7A(d)(2) wherein related entities must share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified cost-sharing arrangements and thus avoid an IRS adjustment valid?
The Court reversed a decision of the Tax Court that 26 C.F.R. § 1.482-7A(d)(2), under which related entities must share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified cost-sharing arrangements and thus avoid an IRS adjustment, was invalid under the Administrative Procedure Act. The panel reasoned that the Commissioner of Internal Revenue did not exceed the authority delegated to him by Congress under 26 U.S.C. § 482, that the Commissioner's rule-making authority complied with the Administrative Procedure Act, and that therefore the regulation is entitled to deference under Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837, 104 S. Ct. 2778, 81 L. Ed. 2d 694 (1984).
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