The United States Court of Appeals for the Ninth Circuit denied a rehearing en banc in the Altera case, which involves the semiconductor company’s dispute with the IRS over whether stock-based compensation should be included in cost-sharing agreement intangible development costs.
During the 2004-2007 taxable years, Altera shared certain costs with one of its foreign subsidiaries pursuant to a research and development cost-sharing agreement. Relying on the Tax Court’s 2005 decision in Xilinx, the companies did not share the costs of stock-based compensation. After Altera filed consolidated income tax returns for these years, Treasury issued notices of deficiency on the grounds that it had to re-allocate over $100 million in income from the foreign subsidiary to Altera to account for the unshared costs of stock-based compensation. Treasury asserted that this reallocation was necessary.
Earlier, The Tax Court was so uncomfortable with the process of how the IRS promulgated the regulations that it struck down the applicable regulations in a unanimous vote of the full court. In June 2019, however, the Ninth Circuit panel reversed the decision of the Tax Court in a 2-1 vote, which means that the Ninth Circuit panel held that the IRS did not violate the Administrative Procedure Act when it wrote the regulations for stock-based compensation. In reaction, Altera filed a petition for a rehearing before the Ninth Circuit’s full roster of judges, which now has been denied. This leaves Altera with the decision to press on to the US Supreme Court or to accept the decision.
Consequences for other companies
In June 2019, a coalition of 33 US corporations, representing more than $4.6 trillion in market capitalisation, urged the Court to grant rehearing en banc. According to Circuit Judge Smith, who dissented from the denial of a rehearing, the Decision causes harmful practical consequences, threatens the uniform enforcement of the Tax Code and invites an effective circuit split. In addition, it ignores the reasonable reliance of businesses on the arm’s length standard and subjects those businesses to double taxation. He said it lowers the bar for compliance with the Administrative Procedure Act, and sends a signal that executive agencies can bypass proper notice-and-comment procedures through post-hoc rationalisation.