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Altera Case Loss Doesn’t Mean End of Litigation Fight (Corrected)

June 7, 2019, 10:06 PMUpdated: June 10, 2019, 5:04 PM

Intel’s subsidiary Altera Corp. failed again to win reversal of a federal appeals court decision that would require a company’s domestic and international units to share the cost of employee stock-based compensation in cost-sharing arrangements—a decision that could mean higher tax bills for tech companies.

Silicon Valley giants like Facebook Inc. and Alphabet Inc.'s Google have been watching the case for years since it first went to the U.S. Tax Court. If the ruling stands, the companies may need to change their cost-sharing structures and won’t be able to deduct the full cost of stock compensation from their U.S. taxable income.

“There is a significant amount of money at stake for taxpayers involved in cost sharing who compensate employees with stock options, especially tech companies,” said Ryan J. Kelly, a partner at Alston & Bird LLP and former attorney-adviser in the IRS Office of Associate Chief Counsel (International).

The litigation “will most certainly continue,” he said.

Intel didn’t respond immediately to a request for comment.

Last year, Apple Inc. said in an Aug. 1 quarterly report that it would begin sharing the expenses of stock-based compensation with its foreign subsidiaries after the U.S. Court of Appeals for the Ninth Circuit’s July 2018 opinion that backed the IRS’s 2003 cost-sharing regulations, reversing a 2015 U.S. Tax Court ruling.

The Ninth Circuit heard the case again in October, however, with Judge Susan P. Graber—a new member of the three-judge panel to replace deceased Judge Stephen R. Reinhardt, who died between oral arguments and issuance of the July 2018 opinion.

The new ruling, issued June 7, came as no surprise to tax practitioners.

The 2-1 decision further held that the IRS didn’t violate the Administrative Procedure Act when it wrote the regulations for stock-based compensation. Altera had argued the agency violated the APA by ignoring stakeholder testimony that unrelated parties don’t share the cost of stock-based compensation. The Tax Court agreed, but the Ninth Circuit reversed it on that issue too.

“In sum, we disagree with the Tax Court that the 2003 regulations are arbitrary and capricious under the standard of review imposed by the APA,” the court ruled. “While the rulemaking process was less than ideal, the APA does not require perfection.”

‘Treading the Same Ground’

The Ninth Circuit’s latest ruling treads the same ground as the original, tax practitioners said.

The main takeaway from the opinion is that it’s reasonable for the Treasury Department to require companies to include stock-based compensation costs in their shared pool of expenses with their foreign units because it’s a cost that companies measure and include in their financial accounts, said Barbara Mantegani, a tax attorney and the founder of Mantegani Tax PLLC.

“It is clear that a stock-based compensation is no less of a cost than cash compensation or the more typical taxable fringe benefits,” Mantegani said. “And so in the context of this particular structure it is not unreasonable for the Treasury to require participants to include that type of cost in the cost pool, and it does not matter whether third parties in different types of cost sharing arrangements do it or don’t do it.”

This majority opinion would also make it harder to challenge regulations issued prior to the Tax Court’s Altera ruling, said Patrick J. Smith, a partner at Ivins, Phillips & Barker, Chartered in Washington.

“It displays an attitude that is very generous to agencies, certainly very generous to the IRS and Treasury in terms of not requiring an adequate explanation as to why they’re doing what they’re doing,” Smith said.

The court said Treasury gave sufficient notice of what it was planning to do and its reasoning.

“In sum, we cannot find a failure in Treasury’s refusal to consider comments that proved irrelevant to its decisionmaking process,” the court said.


Based on October 2018 oral arguments in the rehearing of the case, Kelly said, “It was widely believed that Judge Graber would take a position similar to Judge Reinhardt’s position in the Ninth Circuit’s opinion that was withdrawn.”

Graber made it clear that she agreed with the government’s position “that a cost agreement should be considered a transfer or a license of an intangible within the meaning of the commensurate-with-income standard,” Smith said, referring to language in tax code Section 482.

The IRS contended that Section 482 allows the agency to use a commensurate-with-income method to allocate expenses, rather than using a comparability analysis of the arm’s-length standard.

The arm’s-length standard is the foundation of intercompany pricing used to ensure that parties under the same multinational group transact similarly to independent parties. The commensurate-with-income method allows the government to look at past transfer pricing transactions and compare the actual resulting value with what the company paid at the time.

“It is reasonable that Treasury would understand that Congress intended for it to depart from analysis of comparable transactions as the exclusive means of achieving an arm’s length result,” the opinion said.

What’s Next?

“I’d be surprised if this was the last we’re going to hear on this case,” Smith said.

Kelly and Smith said they expect Altera will likely file a petition for a rehearing before the Ninth Circuit’s full roster of judges, in light of Judge Kathleen M. O’Malley’s “very strong dissent.”

If the outcome of the full roster of judges is the same as that of the three-judge panel, then Altera could file a petition with the U.S. Supreme Court, Kelly said.

But that is unlikely because the issue doesn’t involve any split between circuit courts, Smith said.

The IRS declined to comment. Donald Falk, a partner at Mayer Brown in Palo Alto, Calif., and lead attorney for Altera, didn’t respond to a request for comment.

The case is Altera Corp. v. Commissioner, 9th Cir., No. 16-70496, 6/7/19.

(Clarifies in the first two paragraphs that the Ninth Circuit decision applies to cost-sharing arrangements.)

To contact the reporters on this story: Carolina Vargas in Washington at; Sony Kassam in Washington at

To contact the editors responsible for this story: Meg Shreve at; Kathy Larsen at