The latest chapter in the Altera saga sees the company appealing a 2018 Ninth Circuit decision to the Nation’s highest court.
Altera’s request for Supreme Court review comes after a successful IRS appeal of the U.S. Tax Court’s 2015 decision in Altera v. Commissioner. In Altera, the IRS argued the taxpayer erroneously excluded certain stock based compensation (SBC) costs from its qualified cost sharing arrangement (QCSA) with its Cayman Island subsidiary. However, in a unanimous decision, the Tax Court found that the IRS had violated the rulemaking procedures set forth in the Administrative Procedures Act (APA) when drafting the 2003 Treasury regulations pertaining to QCSAs, rendering the regulations invalid. The IRS later appealed the Tax Court’s decision and, in 2018, a panel of three Ninth Circuit Appellate Court judges reversed the lower Court’s findings in a 2-1 decision and concluded the relevant regulations constituted a valid exercise of Treasury’s rulemaking authority, upholding the original Treasury regulations as valid law.
After the Ninth Circuit Court’s reversal, Altera filed a petition for en banc review of the decision, soliciting the opinions of all Ninth Circuit judges. The petition was subsequently denied by the Ninth Circuit and the taxpayer decided to appeal to the Supreme Court.
Altera has long held that the IRS cost sharing regulations represent a position inconsistent with the arm’s length standard. Altera’s petition for writ of certiorari in the Supreme Court cites numerous cases to support that a government agency must acknowledge and explain if it is changing positions and argues the IRS did not do so in issuing the cost sharing regulations. Altera further argues that a reviewing court cannot rely on a new agency interpretation to explain such a change. For these reasons, Altera believes the Ninth Circuit’s decision should be reversed.
Altera’s appeal to the Supreme Court marks the final judicial step in this tumultuous legal battle and a decision by the Court could have wide-reaching implications for taxpayers. While the Supreme Court’s review of Altera could be a potential game changer for taxpayers employing QCSAs, the Court will not likely accept the case. As a result, it is likely that the Ninth Circuit’s decision will be the final word in this litigation. Taxpayers engaged in cost sharing arrangements should continue to monitor ongoing developments on the issue and assess how any changes may impact their situation. A reversal by the Court of the Ninth Circuit’s decision may result in a need for taxpayers to review their financial statement treatment of their QCSAs.