Article featured on Thomson Reuters' Taxnet Pro, November 2019.

On November 11, 2019, the U.S. Tax Court of Appeals for the Ninth Circuit released a court order denying an en banc rehearing of the case Altera Corp. v. Commissioner following Altera’s petition filed on July 22, 2019. In this court order, various judges expressed dissent suggesting that this ruling decision may cause international controversy.

Background

In our article, “Altera: Around and Around We Go!”, we recommended that companies should continue to monitor any updates that may arise as well as begin refining their qualified cost-share arrangement (“QCSA”) as they awaited news in this long saga.

Following the July 7, 2018 decision, Altera filed a petition seeking an en banc rehearing of the case. This petition was supported by “a coalition of thirty-three U.S. corporations representing more than $4.6 trillion in market capitalization.”[1] Although the petition was supported by prominent industry participants, there were numerous amicus curiae briefs filed expressing support for the IRS. Ultimately, the petition was denied but not without dissent.

Decision of the Panel

On November 11, 2019, the panel reached a decision to deny this rehearing as the petition failed to receive a majority of the votes. Three judges, Judge M. Smith, Judge Callahan and Judge Bade, disagreed with the decision to deny the rehearing. In opposition of the decision, the judges agreed that the Department of Treasury violated the Administrative Procedure Act in their implementation of a 2003 tax rule. The rule was only developed as an appellate litigation position, and was “never subject to notice and comment.”[2]

The disagreeing judges believe that the 2019 decision to uphold this rule was based on a “novel interpretation of the relevant statute” and the decision “tramples on the reliance interests of American businesses, threatens the uniform enforcement of the Tax Code, and drastically lowers the bar for compliance with the Administrative Procedure Act.”[3] The controversy surrounding this case is with the panel majority’s interpretation of 482 regulations. In this interpretation, the panel majority allows for an abandonment of the arm’s length standard, favoring the use of purely internal standards to make cost and income allocations.

A&M Taxand Take

The key question is whether this decision brings an end to the Altera case, or if we will see further litigation of this issue. The current position means that the inclusion of stock option expense in cost sharing arrangements is now the law in the Ninth Circuit, a jurisdiction that houses many influential tech companies. This decision may still cause further controversy as businesses continue with uncertainty regarding the interpretation of the arm’s length standard outside of the Ninth Circuit with billions of dollars at stake. Not only will this decision upset domestic and tax laws, but it could have “potentially far-reaching consequences” as courts have generally accepted interpretations of tax law.[4] After this taxpayer-unfavorable outcome, it is uncertain whether Altera will continue the legal battle and bring the case to the Supreme Court.

[1] Altera Corporation & Subsidiaries v. Commissioner of Internal Revenue, Brief of Cisco Systems, Inc. and Thirty-Two Other Affected Companies as Amici Curiae In Support of Appellee’s Petition for Rehearing En Banc, page 1.

[2] Altera Corporation & Subsidiaries v. Commissioner of Internal Revenue, Court Order No. 16-70496, page 7.

[3] Ibid, page 7-8.

[4] Ibid, page 27.