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Altera Asks Ninth Circuit to Revisit Landmark Tax Case

July 22, 2019, 9:30 PM

Altera Corp. is asking the Ninth Circuit to revisit a dispute with the IRS over taxes on assets shifted overseas, the latest development in a case that could have billion-dollar implications for multinational companies.

The Intel-owned company is seeking an en banc review of a June 7 decision from a Ninth Circuit panel, which sided with the government. The three-judge panel found the Internal Revenue Service was able to require Altera to include stock option compensation to employees in a cost-sharing arrangement with its foreign subsidiary.

A reversal from the Ninth Circuit would mean Altera Corp. could exclude stock options from a previous cost-sharing agreement. But if the ruling stands, tech companies that share the costs of intellectual property with their offshore units won’t be able to deduct the full cost of the stock option payment from their taxable income.

“The issue affects companies across the United States, to the tune of billions of dollars,” Altera said in its July 22 petition. “The panel’s decision upends settled law, creates an intra-circuit conflict, and threatens the uniform enforcement of the tax laws.”

It remains to be seen whether the Ninth Circuit will grant the en banc rehearing request. If the court denies the request, Altera could appeal to the U.S. Supreme Court.

Stephen E. Shay, a senior lecturer at Harvard Law School who focuses on international tax issues, said he doesn’t think the case merits an en banc review.

“There is nothing new, unique, or obviously flawed in the panel’s application of the APA that would justify en banc review,” he said, referring to the Administrative Procedure Act.

The lawsuit is one of several touching on transfer pricing, where values are assigned to property that’s exchanged between two related entities, such as a parent corporation and its subsidiary. Major companies in litigation with the Internal Revenue Service over transfer pricing include Inc., Facebook Inc., and the world’s largest medical device manufacturer, Medtronic PLC.

Congress has been concerned in recent decades with how multinational companies could avoid U.S. taxes by shifting their revenue to one of their foreign subsidiaries in a lower-taxing jurisdiction.

The Case

The case looks at what Altera Corp. owed in taxes from 2004 to 2007, before Intel acquired the company. The IRS said Altera’s taxable income during those years should have been more than $80 million higher than what Altera reported to the IRS.

The Ninth Circuit panel upheld Treasury Department regulations on how companies allocate costs and income through “qualified cost-sharing agreements,” where two parties share the income generated from certain property in exchange for sharing the costs of developing the property.

Altera argued that the IRS violated the Administrative Procedure Act when it issued cost-sharing rules in 2003 that required related parties to share the costs of stock option compensation. The APA details the requirements federal agencies must follow when creating new regulations.

Altera argued that Treasury didn’t adequately justify its position that employee stock-option compensation is a cost.

But the Ninth Circuit panel said the IRS didn’t need to respond because the comments were irrelevant after Treasury’s decision to forgo analyzing comparable transactions. It also said that stock options should be treated as accounting costs, saying that “in the past, this issue may have been disputed,” but “it is uncontroversial today.”

“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 panel said.

Going Forward

A reversal of the June ruling could mean major changes for some multinational companies.

For instance, Shay said some companies that included stock-option compensation costs in their cost-sharing agreements also provided for this amount to be reversed if Treasury’s regulations were struck down by a court.

“So for those companies there is potential for a substantial windfall if they can get the decision reversed,” Shay said.

The case is one of a handful dealing with the broader issue of transfer pricing, where the financial stakes could rise even higher.

“Transfer pricing cases are often significant because many of these involve a great deal of money, often in the billions of dollars in tax liability,” said Blaine Saito, a Climenko Fellow at Harvard Law School who focuses on tax issues.

The case could influence global trends, said Ruth Mason, a professor at the University of Virginia School of Law.

She pointed to how there are “130 countries negotiating in Paris about how to change the allocations rules in tax treaties,” including on whether to rely more on formulas and less on what an uncontrolled party is doing.

“So acknowledgment that it’s OK to use other reliable, fleshed-out methods is important,” she said.

The case is Altera Corp. v. Commissioner, 9th Cir., No. 16-70496, petition for rehearing 7/22/19.

To contact the reporter on this story: Aysha Bagchi in Washington at

To contact the editors responsible for this story: Patrick Ambrosio at; Colleen Murphy at