Page 15 - Altera And Cost-Sharing Requirements Under Section 482 By Jerald David August

rule is interpretative or legislative, a court in review is not required to accept the agency’s characterization.59
The court next discussed Adminis- trative Procedures Act section 705(2)(A) which states that a court must “hold unlawful and set aside agency action, findings, and conclu- sions” that the court finds to be arbi- trary, capricious, an abuse of discretion or otherwise not in accordance with law.” The standard for review is “nar- row” and a court may not substitute its judgment for that of the agency.60 There must be a rational connection between the facts contained in the record for the rulemaking and the choice made by the agency. 61
Following State Farm. Quoting from the Supreme Court’s State Farm deci- sion, the Tax Court stated:
Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to con- sider, entirely failed to consider an important aspect of the problem, offered an explanation for its deci- sion that runs counter to the evi- dence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.62
Chevron Test. Setting out the stan- dard it must abide by for an agency rulemaking, the Tax Court cited the Supreme Court’s landmark Chevron case.63 Chevron requires a two-part test. First a court must determine whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. Under Chevron Step 2, a court must defer to the agency’s authoritative interpretation of an ambiguous statute unless it is arbitrary or capricious in substance, or mani- festly contrary to the statute. 64
In Altera, the parties disagreed on whether the 2003 CSA regulation was a legislative versus an interpretative rule.
If legislative, as the taxpayer contended, then the APA Section 553(b) notice and comment requirements were required. If it was only an “interpretative rule,” the taxpayer further argued it would not have the force and effect of law and would not be binding on the court. 65 The Service argued that the rule was interpretative but had the force of law. The Service did not argue this issue in its brief or at oral argument. The Service maintained that since it complied with the notice and comment requirements, the validity of the regulation should not be before the court.
Legislative Rather than Interpre- tive Rule. The Tax Court determined that it was indeed a legislative rule. The court cited two reasons for this conclusion:
1. The parties stipulated and the court
agreed that the adjustments being proposed can only be sustained on the 2003 CSA regulations.
2. In issuing the final rule, the IRS invoked its general legislative rule- making authority under 26 U.S.C. Section 7805(a).
The court then noted that there was not “good cause” present to avoid the
56 Altera U.S. granted stock options and other forms of SBC to certain employees. Certain of the employees of Altera U.S. who performed research and development activities subject to the R&D CSA received stock options or other stock-based compensation. While such employ- ees’ cash compensation was included in the cost pool under the CSA, their SBC was not included.
57 Administrative Procedures Act (APA), 5 U.S.C. section 553(b).
58 Hemp Indus. Ass’n. v. DEA, 333 F.3d 1082 (CA-9, 2003).
59 Id.; See also Gunderson v. Hood, 268 F.3d 1149 (CA-9, 2001).
60 State Farm, note 6, supra; see also Judulang v. Holder, 132 S.Ct. 476 (2011); Citizens to Pres. Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971).
61 State Farm, note 6, supra.
62 Id.
63 Note 7, supra; Mayo Foundation for Medical
Education & Research v. U.S., 562 U.S. 44 (2011). Mayo clarified parts of the Chevron doctrine of judicial deference to regulations.
64 The opinion provided further qualifications that Chevron deference applies even where an agency adopts a construction that conflicts with a prior judicial construction of the statute. See National Cable & Telecommunications Ass’n v. Brand X Internet Services, 545 U.S. 967 (2005). However, where a precedential case holds that a
notice and comment rules based on APA Section 553. Therefore, it ruled that it had to decide whether the IRS met its obligations under APA Sec- tions 553(b) and (c) in issuing the final rule. In considering the primary rule or principle involved in transfer pricing matters, the Tax Court looked at Reg. 1.482–1(b)(1), which provides that “[i]n determining the true tax- able income of a controlled taxpayer, the standard to be applied in every case is that of a taxpayer dealing at arm’s length with an uncontrolled tax- payer.” Citing its decision in Xilinx, the court reiterated that the arm’s- length standard always requires an analysis of what unrelated entities do under comparable circumstances. Sim- ilarly, in promulgating the final rule the Service explicitly considered whether unrelated parties would share stock-based compensation costs in the context of a QCSA.66 The IRS neces- sarily decided an empirical question when it concluded that the final rule was consistent with the arm’s-length standard.
While the government argued that in issuing legislative regulations the IRS is
statute unambiguously evidences congressional intent contrary to the agency’s construction of the statute, the prior judicial construction controls. U.S. v. Home Concrete & Supply, LLC, 132 S. Ct. 1836, 109 AFTR 2d 2012-1692 (2012).
65 Shalala v. Guernsey Memorial Hosp., 514 U.S. 87 (1955). Most IRS regulations will be interpretative since they provide rules that fit within gaps in the legislation or have a prior existence in the law.
66 See TD 9088, 8/25/2003 (“Treasury and the IRS believe that if a significant element of that com- pensation consists of stock-based compensation, the party committing employees to the arrange- ment generally would not agree to do so on terms that ignore the stock-based compensa- tion.”).
67 Note 64, supra.
68 See Chenery Corp., 332 U.S. 194at 196;
Carpenter Family Investments, LLC v.
Commissioner, 136 TC 373.
69 The Tax Court stated that is has expressly
‘[r]ecogniz[ed] the importance of maintaining a uniform approach to judicial review of adminis- trative action.’ Mayo Found., 562 U.S. at 55 (quoting Dickinson v. Zurko, 527 U.S. 150, 154 (1999) (alteration in original)); see also Dominion Resources, Inc., 681 F.3d 1313, 1319, 109 AFTR 2d 2012-2316 (CA-F.C., 2012) (invali- dating the associated-property rule in Reg. 1.263A–11(e)(1)(ii)(B) under State Farm).
70 TD 9088, 8/25/2003.
COST-SHARING
18 BUSINESS ENTITIES
January/February 2016