Page 14 - Altera And Cost-Sharing Requirements Under Section 482 By Jerald David August

January/February 2016
BUSINESS ENTITIES 17
opment as well as Reg. 1.482-7(g)(2), which limits the buy-in payment to preexisting intangibles. The Service arbitrarily, in the court’s view, inflated the value of short-lived intangibles by treating them as having perpetual use- ful life and taking into account income relating to future products created under the research and development agreement. Having discounted if not rejecting much of the government’s case, the court found that the taxpay- er’s use of the CUT (comparable uncontrolled transactions) method to calculate the buy-in payment was, under the facts, the best method to determine the buy-in payment subject to certain adjustments.55 The con- trolled transaction was the contribu- tion by VERITAS US of its software to its Irish subsidiary in exchange for a buy-in payment.
Understanding Altera
It is now time to take a closer look at the Altera decision, which was briefly summarized at the beginning of this discussion. Altera Corp. developed, manufactured, marketed, and sold pro- grammable logic devices (PLDs) and related hardware and programming software. As part of its efforts to expand its footprint in foreign markets, in 1997 Altera entered into two agreements with
Altera International (AI), a wholly- owned Cayman Islands subsidiary. One agreement was a technology licensing agreement whereby AI agreed to pay royalties to Altera for a seven-year peri- od, i.e., 1997-2003. At the end of 2003, AI would own a fully paid-up license to use the pre-cost-sharing intangible property in its territory.
The second agreement was a research & development CSA whereby Altera (USA) and AI agreed to pool their recourses to conduct research and development using the pre-cost-shar- ing intangible property. The CSA relat- ed to activities commencing in 1997 and was to continue through 2007.
Proposed Tax Deficiencies. For the tax years in issue, 2004-2007, the gov- ernment proposed substantial defi- ciencies in tax against Altera (USA) on the basis that SBC costs to its employees were not part of the CSA with AI.56 During the period 2004- 2007, AI made substantial payments under the CSA ranging from a low of $130 million in 2004 to a high of $192.7 million in 2007. In as much as CSA omitted the sharing of SBC costs of Altera in the cost-shared fund, the government proposed substantial defi- ciencies in federal income tax against Altera by increasing AI’s CSA payments for the four year period by an average of $20 million per annum.
Altera Corp. challenged the notices for deficiency issued by the Service. The parties then moved for party sum- mary judgment under Tax Court Rule 121(b). Agreeing that there was no gen- uine dispute of any material fact pre- sented in the cross-motions for partial summary judgment, the court felt it could issue a ruling. It proceeded to hold the 2003 CSA Regulation to be arbitrary and capricious.
Majority Opinion
Judge Marvel, in writing the majority opinion, went directly to APA Section 553 in taking notice of the rule that in promulgating regulations through infor- mal rulemaking, an agency must go through a process of publishing a notice, inviting comments through the forms of written or oral presentation, and then incorporate in the rules a con- cise general statement of their basis and purpose. Such requirements do not apply to interpretative rules or when the agency for “good cause” finds that “notice and public procedure” for the particular rulemaking exercise are “impracticable, unnecessary, or con- trary to the public interest.”57 In other words, interpretative rules explain pre- existing substantive law.58 Legislative regulations, in contrast, “create rights, impose obligations, or effect a change in existing law” and have the force of law. Congress delegates its legislative pow- er to a federal agency provided the agency intends to exercise that power in promulgating the rule.
Based on the precedent in the Ninth Circuit, which is the jurisdiction in which an appeal from Altera would lie, the Tax Court stated that:
we can infer that an agency intends for a rule to have the force of law...where: (i) in the absence of the rule, there would not be an adequate legislative basis for enforcement action; (ii) when the agency has explicitly invoked its general legisla- tive authority; or (iii) when the rule effectively amends a prior legislative rule or changes existing law. (cita- tions omitted). Deciding whether a
COST-SHARING