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US vs Altera Corp, July 2018, U.S. Court of Appeal, Nos 16-704996

Posted on July 24, 2018 | By Courts of the US | No comments

Category: Cost Contribution Arrangements, Legality - Legitimacy - Constitutional | Tag: Altera, CCA/CSA, Cost Sharing Arrangement (CSA), Employee stock options, Qualified cost-sharing arrangements

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The US Court of Appeal reversed a decision from the Tax Court that 26 C.F.R. § 1.482-7A(d)(2), under which related entities must share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified cost-sharing arrangements and thus avoid an IRS adjustment, was invalid under the Administrative Procedure Act.

The Court of Appeal ruled that the Commissioner of Internal Revenue had not gone beyond the authority delegated under 26 U.S.C. § 482, and that the Commissioner’s rule-making authority complied with the Administrative Procedure Act.

The Opinion was shortly after (August 7, 2018) withdrawn by the Court of Appeal – see below.

A new Decision was issued June 7, 2019

The Annulment issued August 7, 2018:

Related Guidelines

TPG2022 Chapter VIII paragraph 8.23For the purpose of determining whether a CCA satisfies the arm’s length principle – i.e. whether each participant’s proportionate share of the overall contributions to the CCA is consistent with the participant’s proportionate share of the overall expected benefits – it is necessary to measure the value of each participant’s...

TPG2022 Chapter VIII paragraph 8.22Whatever the method used to evaluate participants’ relative shares of expected benefits, adjustments to the measure used may be necessary to account for differences between the respective shares of expected and actual benefits received by the participants. The CCA should require periodic reassessment of contributions vis-à-vis the revised share of...

TPG2022 Chapter VIII paragraph 8.21If an arrangement covers multiple activities, it will be important to take this into account in choosing an allocation method, so that the value of contributions made by each participant is properly related to the relative benefits expected by the participants. One approach (though not the only one) is to...

TPG2022 Chapter VIII paragraph 8.20To the extent that a material part or all of the benefits of a CCA activity are expected to be realised in the future and not solely in the year the costs are incurred, most typically for development CCAs, the allocation of contributions will take account of projections about the...

TPG2022 Chapter VIII paragraph 8.19The relative shares of expected benefits might be estimated based on the anticipated additional income generated or costs saved or other benefits received by each participant as a result of the arrangement. An approach that is frequently used in practice, most typically for services CCAs, would be to reflect the...

TPG2022 Chapter VIII paragraph 8.18In cases where CCA activities are outsourced, an arm’s length charge would be appropriate to compensate the entity for services or other contributions being rendered to the CCA participants. Where the entity is an associated enterprise of one or more of the CCA participants, the arm’s length charge would be...

TPG2022 Chapter VIII paragraph 8.17As described in the previous paragraphs, it is not necessary for the CCA participants to perform all of the CCA activities through their own personnel. In some cases, the participants in a CCA may decide to outsource certain functions related to the subject activity to a separate entity that is...

TPG2022 Chapter VIII paragraph 8.16To the extent that specific contributions made by participants to a CCA are different in nature, e.g. the participants perform very different types of R&D activities or one of the parties contributes property and another contributes R&D activities, the guidance in paragraph 6.64 is equally applicable. This means that the...

TPG2022 Chapter VIII paragraph 8.15A party would also not be a participant in a CCA if it does not exercise control over the specific risks it assumes under the CCA and does not have the financial capacity to assume these risks, as this party would not be entitled to a share in the output...

TPG2022 Chapter VIII paragraph 8.9As indicated in paragraph 8.4, there is no difference in the analytical framework for analysing transfer prices for CCAs compared to analysing other forms of contractual relations. The guidance in Section D of Chapter I is relevant to the analysis of all transactions between associated enterprises, and applies to identify...

Supplemental Guidance

US vs Altera Corp, June 7, 2019, U.S. Court of Appeal, Nos 16-70496 and 16-70497A US multinational challenged IRS regulations requiring related entities to include employee stock compensation in qualified cost-sharing arrangements. The Tax Court had struck down the rule as invalid under the Administrative Procedure Act, but the US Court of Appeal reversed that decision in 2019, holding that Treasury reasonably interpreted its...

Altera asking the US Supreme Court for a judicial review of the 2019 Decision from the U.S. Court of Appeals concerning the validity of IRS regs. on CCAsAltera petitioned the US Supreme Court in 2020 to review the Ninth Circuit's divided ruling upholding IRS regulations requiring related companies to include stock-based employee compensation in cost-sharing arrangements when transferring intangibles abroad. Altera challenged the regulation as arbitrary and capricious under the APA and argued the Court of Appeals...

US vs Altera Corp, June 2020, Supreme Court – review denied, Case no 19-1009Altera sought Supreme Court review of the Ninth Circuit's 2019 ruling upholding Treasury regulations requiring employee stock option costs to be included in cost-sharing arrangements. The Supreme Court denied certiorari in June 2020, as fewer than four Justices agreed to hear the case. The Ninth Circuit decision in favour of...

US vs Seagate Technology, December 2000, United States Tax CourtThe IRS challenged Seagate Technology's failure to include employee stock option costs in net revenue calculations under its cost-sharing agreement with foreign subsidiaries. Seagate argued the IRS lacked awareness of actual arm's length circumstances regarding stock option compensation. The United States Tax Court sided with the IRS, confirming that such...

US vs. Xilinex Inc, August 2005Xilinx disputed an IRS determination that employee stock option costs for foreign subsidiary R&D staff must be included in its Section 482-7 cost-sharing agreement. The US Tax Court ruled in favour of the taxpayer in 2005, finding that arm's length unrelated parties would not allocate such costs in the manner...

US vs Microsoft, May 2017, US District CourtMicrosoft challenged IRS summonses in a transfer pricing dispute involving a Puerto Rico IP subsidiary used to shift income. The IRS engaged outside law firm Quinn Emanuel to assist the audit, which Microsoft argued was an improper delegation of authority. The US District Court disagreed, ruling the IRS had a...

US vs Xilinx Inc, March 2010, U.S. Court of Appeal, Nos. 06-74246, 06-74269A US corporation challenged an IRS allocation requiring related companies in a cost-sharing arrangement to include employee stock option compensation in shared R&D costs. The Tax Court found the IRS position arbitrary and capricious, as unrelated arm's length parties would not share such costs. The US Court of Appeal affirmed...

US vs Medtronic, September 2025, U.S. Court of Appeal, Opinion No 23-3063 and 23-3281Medtronic applied the comparable uncontrolled transaction method to set royalty rates between its US parent and Puerto Rico manufacturing subsidiary for use of intangible property. The IRS challenged the allocation, arguing too much profit remained offshore. After Tax Court proceedings and a prior 2018 remand, the US Court of Appeals...

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