On July 22, 2019, Altera Corporation & Subsidiaries (“Altera”) filed a petition for a rehearing en banc in the United States Court of Appeals for the Ninth Circuit. Altera, a semiconductor company which now operates as a subsidiary of Intel, has been in a dispute with the Internal Revenue Services (“IRS”) over its non-inclusion of stock-based compensation (“SBC”) costs in the payments made under its intangible development qualified cost sharing arrangement (“CSA”).
This petition follows the June 7, 2019, 2:1 majority decision issued by a three-judge panel of the Ninth Circuit which overturned the earlier Tax Court decision. The majority opinion from the Ninth Circuit panel found that Treasury had met the requirements of the Administrative Procedures Act (“APA”) in promulgating the 2003 CSA SBC Regulations (“2003 Regulations”) and therefore those regulations were valid, enforceable, and the IRS proposed adjustments to Altera were appropriate. In the rehearing petition, Altera argues that the 2003 Regulations were “not meant to address intangible property yet to be created.”
Altera outlines the following arguments for why the Court should grant its petition for a rehearing en banc:
- Altera argues that the panel’s decision permitted the IRS to “cast aside the settled arm’s-length standard.” According to the petition, the panel concluded that the arm’s-length standard is “fluid” and does not require consideration of unrelated party behavior despite federal regulations (§1.482-1(b) through (c)) which state the opposite.
- The panel’s decision “validates bad rulemaking.” The requirements of the APA mandate notice-and-comment rulemaking for regulations that have the force of law so that regulated parties have “fair notice” and can provide input to help the agency develop a well-reasoned, workable rule. Altera argues that the panel’s decision misapplies the APA by allowing the IRS to assess taxes based on reasoning that does not appear in the administrative record and was never subject to public scrutiny.
- The panel’s decision is irreconcilable with Xilinx and prevents the uniform application of tax laws. The Xilinx case raises the same issue as the Altera case regarding whether related companies engaged in a joint venture of intangible development must include the value of SBC in the pool of costs to be shared under a CSA. However, the Xilinx court applied different reasoning than the panel and concluded the government could not require related parties to share SBC costs when unrelated parties operating at arm’s length would not do so. Altera argues that the panel allowed the IRS to do away with the arm’s-length standard in favor of its own belief about what costs should be shared and that the Court should grant a rehearing en banc to reconcile these divergent decisions.
- The stock-based compensation issue has recurred twice in the Court over the past ten years. As evidenced by many interested parties filing amicus briefs, the treatment of stock-based compensation in cost sharing agreements is “exceptionally important.” Altera emphasizes that this issue affects a wide range of US companies, and given the importance of the case, the Court should grant a rehearing en banc.
Altera Corporation’s full petition for rehearing en banc is available here.
Read Transfer Pricing Times – July 2019