Taxpayer seeks en banc review of Ninth Circuit cost sharing decision
The story of Altera v. Commissioner is a long one. By all accounts, it only looks to get longer.
In Altera, the IRS argued the taxpayer’s failure to include stock based compensation (SBC) in the cost pool allocated to its Cayman Island subsidiary, under the company’s qualified cost sharing arrangement (QCSA), reduced its U.S. income to the tune of nearly nine figures. Treasury regulations issued in 2003 required controlled parties to share such SBC costs under QCSAs, but Altera argued that those regulations violated the Administrative Procedure Act and were arbitrary and capricious and, therefore, invalid.
In 2015, the Tax Court unanimously sided with Altera, effectively invalidating the cost sharing regulations, and concluded that in issuing the regulations, the Treasury Department:
- Failed to rationally connect the choice it made with the facts found
- Failed to respond to significant comments when it issued the final rule
- Failed to recognize that its conclusion that the final rule is consistent with the arm's-length standard is contrary to all of the evidence before it
Last year, the Ninth Circuit court of appeals overturned the Tax Court’s unanimous decision determining that the government acted within its authority and did not violate the Administrative Procedure Act. Last month, a Ninth Circuit panel of three judges confirmed the decision, siding with the government.
Still, the story does not end there.
Altera filed a petition this week for the court to revisit the panel decision. Specifically, the taxpayer requested an en banc review, meaning the hearing would include all Ninth Circuit judges (not just a three judge panel). Altera is arguing that the full court will reverse its stance back to the original Tax Court decision, allowing Altera (and other taxpayers) to exclude stock options from cost-sharing arrangements.
In the filing, Altera indicates the issue has both exceptional public importance and potentially conflictive consequences. “The issue affects companies across the United States, to the tune of billions of dollars,” Altera states. “The panel’s decision upends settled law, creates an intra-circuit conflict, and threatens the uniform enforcement of the tax laws.”
While it remains to be seen whether the en banc request is granted, taxpayers with current cost sharing arrangements and taxpayers considering future cost sharing arrangements should monitor the developments to ensure appropriate alignment and continued execution until the Altera saga ends. If the court denies the en banc request, Altera could appeal to the Supreme Court.