In a surprising twist of events, the Ninth Circuit Court of Appeals withdrew their recent transfer pricing decision against Altera Corp.1 The Ninth Circuit previously upheld Treasury regulations regarding the criteria for a cost-sharing arrangement to be considered qualified and thus avoid an IRS adjustment. Specifically, the Court held that regulations requiring a U.S. company to allocate stock-based compensation costs with its foreign subsidiary were valid. In the Altera case, the cost-sharing agreement was entered into by Altera Corp. and its Cayman Islands subsidiary to share marketing and development costs related to the intangible assets that Altera Corp. licensed to its foreign subsidiary.
The decision was seen as a major win for the IRS, but was negatively viewed by the business community. Many multinational companies relied upon the former U.S. Tax Court decision that invalidated the regulations as being inconsistent with the arms-length standard. Since unrelated parties do not share stock-based compensation costs, it was argued that the requirement to allocate such costs between related entities deviated from transfer pricing principles.
The Ninth Circuit issued a statement that the July 24, 2018 opinions were hereby withdrawn to allow time for the reconstituted panel to confer on the appeal. Judge Stephen Reinhardt, who had voted with the majority, died on March 29, 2018, but had formally concurred in the majority opinion prior to his death. The case now awaits further review before the Ninth Circuit. Stay tuned for further developments on this matter.
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1 Altera Corp. v. Commissioner, Nos. 16-70496, 16-70497 (9th Cir. July 24, 2018).