Altera Corporation v. Commissioner, 145 T.C. No. 3 (2015)

Background

Altera Corporation v. Commissioner, 145 T.C. No. 3 (2015)

This court case is significant to taxpayers who engage in cost-sharing arrangements with foreign affiliates.

Cost-sharing arrangements (CSA) authorize a U.S. entity and its foreign affiliate to co-develop intellectual property and split the associated research and development (R&D) costs so that it is tax-efficient for both parties. For many years, the IRS and taxpayers have been debating whether, in addition to other compensation, the value of stock options and other stock-based corporations (SBC) provided to relevant employees must be added in the costs to be shared by the parties in a CSA. In 2003, the IRS settled the debate by declaring that all parties in a CSA must share any relevant SBC costs.

Basic Facts

Altera U.S., was a participant in a CSA with an offshore subsidiary, Altera International. Altera U.S. provided SBC to employees who performed R&D activities, although the CSA did not include the value of the SBC. Based on the 2003 regulations,the IRS set out to increase Altera International’s cost-sharing payments to Altera U.S. in the amount of Altera International’s proportionate share of the SBC, which increased Altera U.S.’ taxable income. Altera U.S. believed that the regulations were invalid and disputed the allocation.

Court’s Decision

The Tax Court ruled in favor of Altera U.S. and struck down the Regulation under the principles of Motor Vehicle Manufacturers Association of the United States, Inc. v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29 (1983), and sections 553 and 706(2)(A) of the Administrative Procedure Act (APA). The court stated that the IRS failed to satisfy the notice and comment requirements imposed by the APA in their entirety.

If the decision is upheld and finalized, Altera will have a significant impact on CSA and transfer pricing.

Click here to view the full court case.