Altera Corp. v. Cir
926 F.3d 1061
9th Cir.2019Background
- Altera (U.S. parent) and Altera International (Cayman subsidiary) entered a qualified cost‑sharing arrangement (QCSA) to share R&D costs and benefits; dispute concerns whether stock‑based employee compensation must be shared for tax allocation under 26 U.S.C. § 482 and related Treasury regs.
- Treasury issued 2003 amendments (codified at 26 C.F.R. § 1.482‑7A(d)(2)) treating stock‑based compensation as a cost that QCSA participants must share in proportion to reasonably anticipated benefits.
- IRS audited Altera for tax years 2004–2007 and reallocated income under the 2003 regs, increasing Altera’s taxable income; Altera challenged the regulation in Tax Court.
- The Tax Court (en banc) invalidated § 1.482‑7A(d)(2) as arbitrary and capricious under the APA, holding the arm’s‑length standard requires a comparability analysis to uncontrolled transactions.
- Ninth Circuit majority reversed: held § 482 ambiguous on this point, Treasury’s interpretation (permitting internal, commensurate‑with‑income allocation and treating stock‑based compensation as a shared cost) is reasonable under Chevron; also rejected the Tax Court’s State Farm procedural attack.
- Judge O’Malley dissented, arguing Treasury failed to provide adequate notice/reasoning for abandoning the comparability‑centered arm’s‑length approach and that Xilinx controls to bar reallocating stock‑comp costs absent comparable uncontrolled transactions.
Issues
| Issue | Altera's Argument | Commissioner’s Argument | Held |
|---|---|---|---|
| Whether § 482 permits Treasury to require sharing of employee stock‑based compensation in QCSAs | § 482/arm’s‑length requires comparability to uncontrolled transactions; regs exceed statutory authority by treating stock options as shared costs without comparables | § 482 ambiguous; Congress intended commensurate‑with‑income rule for intangibles and delegated methodology to Treasury, including internal allocation when comparables are unavailable | Court: § 482 silent on this specific issue; Treasury’s internal, proportional allocation approach is a permissible Chevron construction; regs valid |
| Whether Treasury reasonably concluded stock‑based compensation is a cost to be shared | No evidence unrelated parties would share stock‑comp costs; Xilinx found comparables do not support sharing | Stock‑based compensation is an element of compensation/R&D cost (supported by accounting/tax norms); comparables cited by commenters were not sufficiently similar to QCSAs | Court: Treasury gave a rational basis (legislative history, accounting practice, policy reasons) for treating stock‑comp as a cost |
| Whether Treasury lawfully dispensed with comparability analysis in QCSA context | Treasury lacked reasoned explanation and failed to address significant comments demonstrating uncontrolled parties do not share such costs; APA notice/comment deficient | Congress and Treasury recognized comparability is often unavailable for high‑profit intangibles; agency reasonably relied on commensurate‑with‑income policy and legislative history | Court: agency acted within reasoned decisionmaking; significant comments were not decisive because they did not show comparables were truly comparable; no APA violation |
| Precedential effect of Xilinx (9th Cir.) on Altera’s case | Xilinx requires comparability; thus stock‑comp cannot be reallocated absent comparable uncontrolled transactions | Xilinx addressed earlier regs and different conflict; 2003 amendments reconcile prior tension and permit internal method | Court: Xilinx does not control this appeal; it did not address the 2003 regulatory framework now at issue |
Key Cases Cited
- Chevron U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837 (1984) (framework for judicial deference to agency statutory interpretations)
- Motor Vehicle Mfrs. Ass’n v. State Farm, 463 U.S. 29 (1983) (arbitrary and capricious/ reasoned decisionmaking standard for agency rulemaking)
- Commissioner v. First Security Bank of Utah, 405 U.S. 394 (1972) (purpose of § 482: place controlled taxpayer on parity with uncontrolled taxpayer)
- Xilinx, Inc. v. Commissioner, 598 F.3d 1191 (9th Cir. 2010) (prior panel dealing with share‑cost issue under earlier § 482 regs; court distinguished it from 2003 amendments)