The United States Court of Appeals for the Ninth Circuit on Friday reversed the Tax Court’s decision in Altera, finding that IRS regulation § 1.482-7A(d)(2) was not arbitrary and capricious under the Administrative Procedure Act. These regulations require related entities to share the cost of employee stock compensation in a cost-sharing arrangement (CSA) for the CSA to be considered a qualified cost-sharing arrangement (QCSA).
The following is a summary of the case, prepared by court staff:
The panel reversed a decision of 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, was invalid under the Administrative Procedure Act.
At issue was the validity of the Treasury regulations implementing 26 U.S.C. § 482, which provides for the allocation of income and deductions among related entities.
The panel first held that the Commissioner of Internal Revenue did not exceed the authority delegated to him by Congress under 26 U.S.C. § 482. The panel explained that § 482 does not speak directly to whether the Commissioner may require parties to a QCSA to share employee stock compensation costs in order to receive the tax benefits associated with entering into a QCSA. The panel held that theTreasury reasonably interpreted § 482 as an authorization to require internal allocation methods in the QCSA context, provided that the costs and income allocated are proportionate to the economic activity of the related parties, and concluded that the regulations are a reasonable method for achieving the results required by the statute. Accordingly, the regulations were entitled to deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).
Judge O’Malley dissented, agreeing with the Tax Court that 26 C.F.R. § 1.482-7A(d)(2) is invalid as arbitrary and capricious.
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