Page 17 - Altera And Cost-Sharing Requirements Under Section 482 By Jerald David August

Cost-Sharing
(Continued from page 19) or reim- bursed. The Service responded to these comments by stating that “[t]he uncon- trolled transactions do not share enough characteristics of QCSAs involving the development of high- profit intangibles to establish that par- ties at arm’s length would not take stock options into account in the context of an arrangement similar to a QCSA.”71
Similar to Xilinx Position. The court found that the IRS was right back to the position it argued in Xilinx. There, the court found that the Service had no sat- isfactory answer to explain why unre- lated parties would share the exercise spread or grant date value of stock-based compensation. The Tax Court went beyond this point however, and in Xil- inx invalidated the 1995 regulation with- out relying on transactions that were identical or substantially similar to
CSAs. It relied on the CUT method as well as other evidence. Indeed, in Xilinx the court examined a broad spectrum of evidence in determining that unrelated parties would not share SBC costs.
The Service went back to the draw- ing board after its defeat in Xilinx and chose to ignore or otherwise respond to the numerous relevant and signifi- cant comments of the commentators. In its decision in Altera the Tax Court opined that the Service’s failure to ade- quately respond to commentators frus- trates its review of the final rule and was prejudicial to affected entities. More- over it found that the final rule was con- trary to the evidence before the IRS. Indeed, the Service did not provide any evidence that would support its belief that unrelated parties to QCSAs would generally share SBCs.
Conclusion
In granting taxpayer’s motion for sum- mary judgment, 72 the Tax Court stated:
Because the final rule lacks a basis in fact, Treasury failed to rationally connect the choice it made with the facts found, Treasury failed to respond to significant comments when it issued the final rule, and Treasury’s conclusion that the final rule is consistent with the arm’s- length standard is contrary to all of the evidence before it, we conclude that the final rule fails to satisfy State Farm’s reasoned decisionmaking standard and therefore is invalid.
The Tax Court, therefore, placed the Service on notice that in issuing tax reg- ulations it is subject to the same proce- dures on rule-making as other federal agencies. With respect to legislative (tax) regulations, the IRS must have empiri- cal data and expert commentary, etc., to support its positions and underlying rationales. It must also take into account comments submitted as part of the APA process.
Altera Corp.’s decision both on CSAs and transfer pricing in general, as well as its potentially broader impact on leg- islative regulations, may inspire corpo- rate taxpayers to rethink their uncertain tax position filings and FIN 48 tax reserves, tax accruals, and related filings in a variety of contexts, including CSAs.73 I
71 See Chenery Corp., note 69, supra., Carpenter Family Investments., LLC, note 69, supra..
72 Judges Thornton, Colvin, Foley, Halpern, Vasquez, Gale, Goeke, Holmes, Paris, Kerrigan, Buch, Lauber, Nega, and Ashford joined in Judge Marvel’s opinion. Two judges, Morrison and Pugh, did not participate.
73 See, in general, August, “The Uncertain State of Uncertain Tax Positions,” 13 BET 4 (May/June 2011); August, “Mandatory Disclosure of Uncertain Tax Positions on Income Tax Returns Filed by Corporate Taxpayers: the IRS’s New Weapon,” 25 Practical Tax Lawyer 7 (Winter 2011); Seraganian, “Schedule UTP and Evidentiary
Privilege in the Tax Law,” 21 J. Int’l Tax 30 (September 2010); August and Grimes, “The Discovery Status of Tax Accrual Workpapers After Textron,” 12 BET 10 (January/February 2010); August, “Understanding FIN 48: Accounting for Uncertainty in Income Taxes,” 10 BET 30 (May/Jun 2008); August, “Attorney- Client Privilege and Work-Product Doctrine,” 10 BET 4 (Jul/Aug 2008); August and August, “Understanding FIN 48, Accounting For Uncertainty In Income Taxes, And Resulting Implications Under Sarbanes-Oxley,” 22 Practical Tax Lawyer 19 (Summer 2008); August and Grimes, “Ability of IRS to Discover Tax Accrual and FIN 48 Workpapers,” 10 BET 4 (Nov/Dec 2008).
COST-SHARING
48 BUSINESS ENTITIES
January/February 2016