A federal appeals court should revisit a closely watched tax case dealing with stock-based compensation in cost-sharing agreements, according to a Silicon Valley-based manufacturer and the U.S. Chamber of Commerce.
Altera Corp., which is owned by Intel, continues to fight the Internal Revenue Service’s position that the company should have included stock options among the costs in a cost-sharing agreement with its foreign subsidiary. Altera petitioned the U.S. Court of Appeals for the Ninth Circuit to hold an en banc rehearing after a panel of Ninth Circuit judges ruled in favor of the IRS.
That ruling is already having an impact on other companies: Facebook Inc. in July said it incurred a more than $1 billion tax expense in the second quarter of 2019, in part due to the Altera decision.
Xilinx Inc., a publicly-traded technology company based in San Jose, said in a July 31 brief that the panel’s decision would hurt its global research and development work.
“Xilinx continues to use cost sharing for global research and development, and that research and development would be substantially adversely affected if this Court does not invalidate the 2003 amended cost sharing regulation at issue in Altera,” the company said.
The U.S. Chamber of Commerce, in an Aug. 1 brief backing Altera, said a ruling in favor of the government could mean “substantial negative consequences for the Nation’s business community and thus the national economy.” The Chamber, which bills itself as the world’s “largest business federation,” emphasized the need to hold the government to procedural obligations when it issues regulations.
‘Arm’s Length’ Standard
The issue in the Altera case deals with Internal Revenue Code Section 482, under which related entities—such as those within a multinational company—need to assign what are called “arm’s length” prices to the property they transfer to each other. This means the prices should mirror what they would have been if the parties weren’t part of one multinational company or otherwise related.
Traditionally, the arm’s length price was calculated by looking at “comparable transactions under comparable circumstances,” where these transactions happened between unrelated parties. But some experts say finding this kind of comparable transaction can be hard, especially when it comes to company-specific intangible property.
The Ninth Circuit panel in Altera ruled that Congress permitted Treasury to forgo analyzing a comparable transaction to find an arm’s length price when there were not “actual comparable transactions.”
Xilinx argued in its brief that the panel’s decision in Altera should be reversed because the court’s 2010 decision in Xilinx v. Commisioner commands a different result. Is also said evidence shows unrelated parties don’t share stock-based compensation costs in cost-sharing arrangements.
The case is Altera Corp. v. Commissioner, 9th Cir., No. 16-70496, amicus brief filed 8/1/19.