Altera Corp. v. Commissioner
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2020’s Key Tax Controversy Developments

In the face of the pandemic and all the challenges that came with 2020, tax controversy marched on. In this article, we explore several important cases, including one of the most closely watched Supreme Court cases, CIC Services LLC v. Internal Revenue Service, which raises important questions regarding the scope of the Anti-Injunction Act and impacts the ability of taxpayers to engage in preenforcement challenges to regulations.

We also look into the latest updates in the transfer pricing area, changes to the Compliance Assurance Process, what to expect during the audit of a campaign issue and more.

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Altera Corporation Files Answering Brief in Commissioner’s Ninth Circuit Appeal of Altera

In Altera Corp. v. Commissioner, 145 T.C. No. 3 (July 27, 2015), the Tax Court, in a unanimous reviewed opinion, held that regulations under Section 482 requiring parties to a qualified cost-sharing agreement (“QCSA”) to include stock-based compensation costs in the cost pool to comply with the arm’s-length standard were procedurally invalid because Treasury and the IRS did not engage in the “reasoned decisionmaking” required by the Administrative Procedures Act and the cases interpreting it. The Commissioner of Internal Revenue (“Commissioner”) appealed this holding to the Ninth Circuit Court of Appeals, Dkt. Nos. 16-70496, 16-70497. The Commissioner filed his opening brief on June 27, 2016. Two groups of law school professors filed amicus briefs in support of the Commissioner’s position. On September 9, 2016, Altera Corporation (“Altera”) filed its answering brief with the Ninth Circuit.

Altera begins with the observation that the Commissioner “has remarkably little to say” about the Tax Court’s rationale in holding the QCSA regulation invalid. According to Altera, the Commissioner either did not respond to the salient points in the Tax Court’s analysis or, more often, actually admitted that those points were correct. Instead, the Commissioner advanced a “new, litigation-driven position” that Section 482’s “commensurate with income” requirement is an independent “internal standard” that “does not require consideration of transactions between unrelated parties.” Indeed, Altera notes, the Commissioner now argues “that the arm’s-length standard may be applied without considering any facts at all.” Thus, rather than engage with the Tax Court’s reasoning, the Commissioner “mistakenly accuses the Tax Court of overlooking an argument that is missing from the administrative record.”

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Law School Professors File Amicus Briefs in Support of Commissioner’s Position in Altera

Two groups of law school professors have filed amicus briefs with the US Court of Appeals for the Ninth Circuit in support of the government’s position in Altera Corp. v. Commissioner, Dkt Nos. 16-70496, 16-70497. Read more on the appeal of Altera here and the US Supreme Court’s opinion addressing interplay between the Administrative Procedure Act (APA) procedural compliance and Chevron deference here. Each group argues that Treas. Reg. § 1.482-7 represents a valid exercise of the Commissioner’s authority to issue regulations under Internal Revenue Code (Code) Section 482 and that the US Tax Court (Tax Court) erred in finding the regulation to be invalid under section 706 of the APA.

One group of six professors (Harvey Group) first notes its agreement with the arguments advanced by the government in its opening brief. In particular, the Harvey Group concurs with the argument that “coordinating amendments promulgated with Treas. Reg. § 1.482-7(d)(2) vitiate the Tax Court’s analysis in Xilinx that the cost-sharing regulation conflicts with the arm’s-length standard.” It then goes on to note its agreement with the government’s argument that “the ‘commensurate with the income’ standard … contemplates a purely internal approach to allocating income from intangibles to related parties.”

Having thus supported the government’s commensurate-with income-based arguments, the Harvey Group argues that the regulation in question is, in any event, consistent with the general arm’s-length standard of Code Section 482. It does so based principally on the proposition that “[s]tock-based compensation costs are real costs, and no profit-maximizing economic actor would ignore them.” However, that said, “there are material differences between controlled and uncontrolled parties’ attitudes, motivations and behaviors regarding stock-based compensation.” Thus, according to the Harvey Group, the Tax Court erred when it concluded that “Treasury necessarily decided an empirical question when it concluded that the final rule was consistent with the arm’s-length standard,” because “[n]o empirical finding that uncontrolled parties do, or might, share stock-based compensation costs is required to support Treasury’s regulation.” Accordingly, the Tax Court’s reliance on State Farm and the cases following it was a “key misstep” by the Tax Court.

The Harvey Group also proposes that, should the Ninth Circuit find that the term “arm’s length standard” or the meaning of the “coordinating regulations” is ambiguous, the government’s interpretation embodied in Treas. Reg. § 1.482-7 should be afforded Auer deference. Read more on deference principles in tax cases and the unique challenges of Auer deference. Auer deference is a special level of deference that can apply when an agency interprets its own regulations, although there are several limitations on its use.  Finally, if the Ninth Circuit decides that the regulations “have an infirmity,” the Harvey Group argues that “[t]he best remedy is to remand to Treasury for further consideration.”

A second group of nineteen professors (Alstott Group) similarly agrees with the government’s arguments to the Ninth Circuit. The Alstott Group argues that the 1986 addition of the “commensurate with income” standard [...]

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Commissioner Files Opening Brief in Ninth Circuit Appeal of Altera

In Altera Corp. v. Commissioner, 145 T.C. No. 3 (July 27, 2015), the Tax Court, in a unanimous reviewed opinion, held that regulations under Section 482 requiring parties to a qualified cost-sharing agreement (QCSA) to include stock-based compensation costs in the cost pool to comply with the arm’s-length standard were procedurally invalid because the US Deparment of Treasury and the Internal Revenue Service (IRS) did not engage in the “reasoned decisionmaking” required by the Administrative Procedures Act and the cases interpreting it. For a discussion of the Tax Court’s Altera opinion, see our prior On the Subject. The Commissioner of Internal Revenue (Commissioner) appealed this holding to the Ninth Circuit Court of Appeals; he filed his opening brief on June 27, 2016.

According to the Commissioner, the Tax Court’s holding was based on several related errors: (1) the Tax Court mistakenly concluded that promulgation of the QCSA regs required the IRS to engage in an “essentially empirical” analysis; (2) this led the court to apply the wrong standard; (3) in its analysis, the court relied heavily on its holding in Xilinx, Inc. v. Commissioner, 125 T.C. 37 (2005), that analysis of QCSAs must comport with the arm’s-length standard, meaning that a taxpayer can defend a QCSA by reference to comparable behavior between unrelated parties; and (4) the Tax Court failed to take into account that the finalization of the new QCSA regulations worked a “change in the legal landscape,” which should have altered the court’s analysis of the new regulations’ validity. Moreover, “the coordinating amendments [to the existing QCSA regulations] supersede [the Ninth Circuit’s] understanding of the arm’s-length standard as reflected in its own Xilinx opinion.” (more…)




Tax Court Announces New Chief Judge and Special Trial Judge

On March 24, 2016, the Tax Court announced that Diana L. Leyden has been selected as a Special Trial Judge scheduled to assume her duties in June 2016. Ms. Leyden most recently has been the Taxpayer Advocate in the New York City Department of Finance, but previously spent over 15 years as the Director of the Low Income Taxpayer Clinic at the University of Connecticut School of Law. She received the American Bar Association Tax Section Janet Spragens Pro Bono Award in 2005 for her work on behalf of low-income taxpayers. Ms. Leyden, who previously clerked at the Tax Court and spent several years in private practice, should be a welcomed addition to the bench. The Tax Court’s press release can be found here.

As previously announced by the Tax Court on February 29, 2016, Judge L. Paige Marvel will begin serving a two-year term as Chief Judge of the Tax Court beginning June 1, 2016. Judge Marvel was appointed to the Court in 1998. Prior to joining the Court, she focused on federal and state tax matters and controversies. As readers of this blog may know, Judge Marvel was the authoring Judge of the Court’s recent fully-reviewed opinion in Altera Corp. v. Commissioner, 145 T.C. No. 3 (July 27, 2015), which struck down cost-sharing regulations under the Administrative Procedure Act. The Tax Court’s press release can be found here.




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