Altera And Cost-Sharing Requirements Under Section 482: Another Tax Court Rebuke to the IRS

By Jerald David August
Business Entities
January - February 2016 Edition

In Altera Corp., the Tax Court, per the majority opinion issued by Judge L. Paige Marvel, invalidated the 2003 final regulations on cost-sharing arrangements (CSAs).Following a brief introduction to Altera, this article will examine the application of the principles contained in the transfer pricing rules, and in particular, the regulations pertaining to cost-sharing agreements (for intangibles) and the government’s prior defeats in this area in Xilinx, Inc. and VERITAS Software. The discussion will then focus in depth on the Tax Court’s Altera decision and the impact that it will have on CSAs. The court’s emphasis on the fact that the IRS did not have a sufficient factual basis to include SBCs as an element of what a CSA must take into account poses challenges to the issuance of “legislative” regulations currently under consideration and also into the future. Indeed, another consequence of the Tax Court’s analysis invalidating the CSA regulation with respect to SBCs is whether other legislative regulations previously issued also suffer from the same infirmity. This article will be continued with the publication of a future second part focusing on the legislative rule-making process and the burden that the IRS must carry to prove that a particular regulation was not arbitrary and capricious, and compare that burden with the issuance of interpretative regulations.

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