Altera Corp. v. Comm'r
145 T.C. No. 3
Tax Ct.2015Background
- Altera U.S. (Delaware) and Altera International (Cayman) entered a qualified R&D cost‑sharing agreement (QCSA). During 2004–2007 Altera U.S. granted stock‑based compensation (SBC) to employees and did not include SBC in the QCSA cost pool; Altera International paid cost‑sharing amounts under the agreement.
- IRS issued section 482 allocations for 2004–2007 increasing Altera International’s payments to reflect inclusion of SBC under Treasury’s 2003 cost‑sharing regulation (final rule), section 1.482‑7(d)(2), which requires QCSA participants to share SBC costs and prescribes valuation methods.
- Petitioner (Altera) challenged the final rule as arbitrary and capricious under the Administrative Procedure Act (APA); respondent (Commissioner/Treasury) defended the rule as consistent with the arm’s‑length standard and entitled to deference (Chevron) or valid under State Farm review.
- The Tax Court held the final rule is a legislative rule subject to APA notice‑and‑comment because Treasury intended it to have the force of law and invoked general rulemaking authority under I.R.C. §7805(a).
- On the merits the Court found Treasury lacked empirical support in the administrative record, failed to respond to significant contrary comments, and adopted a uniform rule without justifying why all QCSAs should be treated identically; accordingly the rule violated State Farm’s reasoned‑decisionmaking requirement and was invalidated.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the 2003 SBC cost‑sharing regulation is a legislative rule (subject to APA §553) | Altera: final rule has force of law and is legislative, so notice‑and‑comment obligations apply | Commissioner: agrees rule has force but did not press interpretive/legislative distinction in briefing | Court: rule is legislative (Treasury intended force of law via §7805(a)); APA §553 applies |
| Standard of review — Chevron deference or State Farm arbitrary‑and‑capricious | Altera: rule must satisfy State Farm reasoned‑decisionmaking | Commissioner: rule valid under Chevron or State Farm | Court: standard choice immaterial; Chevron step 2 incorporates State Farm; rule must survive reasoned‑decisionmaking review |
| Sufficiency of administrative record supporting Treasury's conclusion that arm’s‑length parties would share SBC | Altera: Treasury offered no empirical evidence; commentators showed unrelated parties do not share SBC; Treasury failed to respond | Commissioner: Treasury reasonably relied on legislative history, arm’s‑length/commensurate‑with‑income principle, and agency experience; alternative justifications exist | Court: Treasury failed to examine relevant data, adduced no record evidence supporting sharing of SBC, and offered unsupported assertions—rule lacks factual basis and is arbitrary and capricious |
| Failure to respond to comments and harmless‑error argument | Altera: Treasury ignored significant, contrary comments and evidence; errors are prejudicial | Commissioner: later developments (FASB/IASB/OECD) and alternative rationales make defects harmless | Court: Treasury failed to respond meaningfully to significant comments; later developments are irrelevant to the record; harmless‑error inapplicable — rule vacated |
Key Cases Cited
- Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (agency must engage in reasoned decisionmaking)
- Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (two‑step deference to agency statutory interpretation)
- Xilinx Inc. v. Commissioner, 125 T.C. 37 (T.C. 2005) (prior Tax Court treatment of SBC in cost‑sharing context)
- Xilinx Inc. v. Commissioner, 598 F.3d 1191 (9th Cir. 2010) (appellate affirmation of Tax Court reasoning about SBC)
- Judulang v. Holder, 565 U.S. 42 (2011) (Chevron step 2 incorporates arbitrary‑and‑capricious principles; analytic alignment)
- American Mining Congress v. Mine Safety & Health Admin., 995 F.2d 1106 (D.C. Cir. 1993) (rule has force of law when Congress delegated power and agency intends to exercise it)
- Home Box Office, Inc. v. FCC, 567 F.2d 9 (D.C. Cir. 1977) (agency must respond to significant comments)
- Mayo Foundation for Medical Education & Research v. United States, 562 U.S. 44 (2011) (Chevron applies to Treasury rulemaking after notice‑and‑comment)