Altera v. Commissioner

926 F.3d 1061 (2019)

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Altera v. Commissioner

United States Court of Appeals for the Ninth Circuit
926 F.3d 1061 (2019)

Facts

Altera Corporation (Altera) (plaintiff) and various Altera subsidiaries manufactured and sold computer circuit parts. In 1997, Altera entered into a cost-sharing agreement with a foreign subsidiary (Altera International) in which Altera and Altera International pooled resources and shared in the costs of researching and developing new technologies. Altera also gave Altera International a license to use Altera’s intangible property in exchange for a royalty. Pursuant to an agreement with the Internal Revenue Service (IRS), Altera was required to share stock-based compensation costs with Altera International from 1997 to 2003. After the validity of the IRS’s cost-sharing regulations was challenged in another case on the grounds that the language of the cost-sharing regulations was ambiguous and that the IRS exceeded its authority in implementing the regulations, Altera and Altera International decided to stop sharing stock-based compensation costs. Between 2004 and 2007, Altera and Altera’s US-based subsidiaries (plaintiffs) did not include stock-based compensation costs when filing income tax returns during those years. The IRS issued deficiency notices asserting that Altera and Altera’s subsidiaries owed more taxes. Altera and the subsidiaries filed suit, asking the Tax Court to review and overturn the alleged deficiencies. The Tax Court ruled in favor of Altera and the subsidiaries, finding that the IRS’s allocation of income and expenses between Altera and the subsidiaries failed to satisfy the arm’s-length standard because the IRS did not consider comparable transactions between unrelated business entities under similar circumstances. The IRS appealed, arguing that allocating the costs of stock-based employee compensation in proportion to the income enjoyed by each controlled taxpayer satisfied the arm’s-length standard.

Rule of Law

Issue

Holding and Reasoning (Thomas, C.J.)

Dissent (O’Malley, J.)

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