Page 9 - Altera: Why the Government Can't Count on Chevron Step Two

With that to consider, one might easily expect the government to lose on appeal. After all, the Ninth Circuit is faced with the same issue, a fighting regulation (or at least a do-over regulation), and with a far more probing view of the APA and its impact on tax regulations. It may thus be difficult for the court of appeals to identify any clearly erroneous finding of fact or error of law. And even if Chevron step two could be decoupled from State Farm, which the Tax Court said is essentially the same standard, the trial court found the rulemaking to be arbitrary and capricious. It would thus fail under either State Farm or Chevron step two.
Nevertheless, it has been suggested the commen- surate with income standard enacted into law in 1986 would permit bona fide CSAs for the develop- ment of intangibles to require that related parties take all R&D costs into account, including stock- based compensation.47 One commentator argues that the Tax Court sidestepped whether the statu- tory commensurate with income standard and its legislative history allowing ‘‘all costs’’ CSAs pro- vided a firm foundation for validating the regula- tion. All Treasury was doing, a fortiori, was interpreting the arm’s-length standard, the argu- ment goes. In contrast, in Altera, the unanimous Tax Court stated that the arm’s-length standard was not preempted by the commensurate with income stan- dard. Instead, the arm’s-length standard must al- ways be applied by looking at what unrelated parties would do, it said.
47See e.g., Richard W. Skillman, ‘‘Problems With Altera,’’ Tax Notes, Jan. 18, 2016, p. 347.
Undoubtedly, the depth of review and analysis provided by the Tax Court in Altera has broader implications for the issuance of regulations by Trea- sury and the IRS. If the Ninth Circuit simply affirms per curiam or summarily holds that it agrees with the Tax Court on all points, Treasury and the IRS might want to reconsider whether they first engage in a notice and comment period before issuing proposed or temporary regulations. This would pose a problem because taxpayers often need guid- ance before the long and arduous notice and com- ment process can be undertaken and completed — let alone proceed smoothly without someone trying to challenge the rulemaking in court.48
As for the current regulation, which still requires the sharing of all stock-based compensation costs in a qualified CSA, many taxpayers may continue to follow the rule as written. Those who have not been complying with the regulation may attempt to adjust their tax reserve computation and ASC 740-10 disclosures, as well as uncertain tax position disclosures, in response to the Tax Court’s decision in Altera.
48See Lee A. Sheppard, ‘‘Challenging Unwritten Inversion Regulations,’’ Tax Notes, Feb. 22, 2016, p. 853; Andrew Velarde, ‘‘Validity, Scope of Foreign Goodwill Regs Challenged at Hear- ing,’’ Tax Notes, Feb. 15, 2016, p. 774 (one commentator was quoted: ‘‘Treasury’s failure to comply with the APA not only raises procedural validity questions but also jeopardizes the level of Chevron deference that might ultimately be accorded to these final regs, if and when issued’’); Ryan Finley, ‘‘Altera Opens Up Options for Cost-Sharing Arrangements,’’ Tax Notes, Feb. 15, 2016, p. 779; and Michael L. Schler, ‘‘The Arm’s-Length Standard After Altera and BEPS,’’ Tax Notes, Nov. 30, 2015, p. 1149.
COMMENTARY / SPECIAL REPORT
TAX NOTES, June 6, 2016
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