US appeals court in Altera deems IRS cost sharing regs valid

In a big win for the IRS, the US Court of Appeals for the Ninth Circuit on July 24 has reversed the US Tax Court’s decision in Altera v. Commissioner, determining that IRS cost sharing regulations on the treatment of stock-based compensation are valid.

 

The decision concerns Treas. Reg. § 1.482-7A(d)(2), which requires employee stock compensation costs to be added to amounts allocated between cost-sharing agreement participants. In 2015 challenge brought by Altera, the Tax Court had concluded that the transfer pricing regs were invalid under the Administrative Procedure Act because Treasury did not adequately refute arguments advanced by commentators during the notice-and-comment period.

 

In a 2-1 opinion, though, the Ninth Circuit disagreed.

 

“We conclude that the challenged regulations are not arbitrary and capricious but rather a reasonable execution of the authority delegated by Congress to Treasury,” the Court said.

 

The Court said that the thrust of the commentators’ objection was that Treasury misinterpreted § 482 because unrelated parties do not share employee stock-based compensation costs. That disagreement does not make rulemaking process defective, though, the Court said.

 

The decision is being hailed by academics, including those that joined in amicus briefs to the Ninth Circuit.

 

Leandra Lederman a Professor at Indiana University Maurer School of Law, who joined in an amicus brief signed by six tax professors, said the decision reached the right outcome.

 

“Treasury did consider and respond to the comments it received on the regulation; it simply had a different approach to the substance of the regulation than the taxpayers commenting did,” Lederman wrote in her blog.

 

New York University Law School professor Daniel Shaviro, who joined a separate amicus brief signed by 19 tax professors, also praised the appellate court ruling, calling the overturned Tax Court decision “egregious and embarrassing.”

 

Shaviro said in his blog that the Tax Court’s decision would have encouraged taxpayers to engage in an aggressive strategy of making bogus arguments during a tax regulation’s notice and comment period in an effort to get the regulation later struck down as arbitrary.