Altera Corp. v. Commissioner, No. 16-70496 (9th Cir. 2019)
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At issue was the validity of the Treasury regulations implementing 26 U.S.C. 482, which provides for the allocation of income and deductions among related entities. The Ninth Circuit reversed the tax court's decision that 26 C.F.R. 1.482-7A(d)(2) was invalid under the Administrative Procedure Act (APA).
The panel held that the Commissioner did not exceed the authority delegated to him by Congress under section 482. In this case, section 482 did not speak directly to whether the Commissioner may require parties to qualified cost-sharing arrangements (QCSA) to share employee stock compensation costs in order to receive the tax benefits associated with entering into a QCSA, and the Treasury reasonably interpreted section 482 as an authorization to require internal allocation methods in the QCSA context and concluded that the regulations are a reasonable method for achieving the results required by the statute. Therefore, the panel held that the regulations were entitled to deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). The panel also held that the regulations at issue were not arbitrary and capricious under the APA.
Court Description: Tax. The panel reversed a decision of the Tax Court that 26 C.F.R. § 1.482-7A(d)(2), under which related entities must share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified cost-sharing arrangements, was invalid under the Administrative Procedure Act. At issue was the validity of the Treasury regulations implementing 26 U.S.C. § 482, which provides for the allocation of income and deductions among related entities. The panel first held that the Commissioner of Internal Revenue did not exceed the authority delegated to him by Congress under 26 U.S.C. § 482. The panel explained that § 482 does not speak directly to whether the Commissioner may require parties to a QCSA to share employee stock compensation costs in order to receive the tax benefits associated with entering into a QCSA. The panel held that the Treasury reasonably interpreted § 482 as an authorization to require internal allocation methods in the QCSA context, provided that the costs and income allocated are proportionate to the economic activity of the related parties, and concluded that the regulations are a reasonable method for achieving the results required by the statute. Accordingly, the regulations were entitled to deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). ALTERA CORP. V. CIR 3 The panel next held that the regulations at issue were not arbitrary and capricious under the Administrative Procedure Act. Dissenting, Judge O’Malley would find, as the Tax Court did, that 26 C.F.R. § 1.482-7A(d)(2) is invalid as arbitrary and capricious.
This opinion or order relates to an opinion or order originally issued on July 24, 2018.
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