Altera Claims Are Stronger After Conservation Easements Ruling

The US Court of Appeals for the Ninth Circuit’s decision in Altera v. Commissioner reversed a unanimous Tax Court opinion that the Section 482 regulation requiring sharing of stock-based compensation costs was invalid. The discussion of stare decisis in Valley Park Ranch inspired us to consider the options available to both Ninth Circuit and rest of world taxpayers who, like us, believe the Tax Court got it right in Altera.

Taxpayers don’t have to feel like they’re stuck with the Ninth Circuit decision even if they’re in the Ninth Circuit. For taxpayers outside the Ninth Circuit, Valley Park Ranch offers prime territory to consider lodging an Altera claim.

Ninth Circuit Taxpayers

In Altera, the Ninth Circuit first considered whether the cost-sharing regulation satisfied Chevron. After answering yes, it considered whether the regulation satisfied the notice and comment provisions of the Administrative Procedure Act. The logical order of analysis was clearly off in its decision.

An agency rule must be set aside if it violates the requirements of the APA regardless of whether it is substantively valid. When the Ninth Circuit did consider whether the regulation satisfied APA procedural requirements, it improperly construed the agency record to exclude the Treasury’s reliance on the arm’s-length principle—the fundamental standard for evaluating all transfer pricing relationships—effectively ignoring the Tax Court’s APA analysis.

How can a taxpayer in the Ninth Circuit obtain a different result? Select a year in which the tax payment for complying with the cost-sharing regulation at issue in Altera is manageable. Pay the tax and then file a refund claim based on the Tax Court decision in Altera.

The IRS should readily disallow your refund claim as a Ninth Circuit taxpayer. Even if the IRS sits on your claim, you can file your suit six months later. Consider then filing a complaint in the US Court of Federal Claims, decisions of which are appealed to the Federal Circuit—not the Ninth Circuit.

The courts of the Federal Circuit handle complex cases and render nationally significant tax decisions. The US is represented in the Court of Federal Claims by attorneys in a dedicated civil trial section of the US Department of Justice Tax Division. In our experience, those attorneys are fair, competent, and worthy opponents.

We understand the IRS is showing renewed interest in asserting Section 6676 penalties for excessive refund claims. Given the resounding support for a refund claim in the Tax Court, no such penalty could be imposed on substantive grounds. But as with any computation of any item on a return, due care should be given to amount of the refund sought.

Other Taxpayers

What if you are a taxpayer outside the Ninth Circuit and have been faithfully adhering to the stock-based compensation rules, but you chafe every time you include that cost-sharing line item in the return? The Tax Court has a 15-0 decision invalidating the regulation. You are tempted one year to reject the regulation, file Form 8275-R, and gird yourself for Tax Court. But that Ninth Circuit decision still restrains you.

Valley Park Ranch is a clear pronouncement: Don’t let a lone circuit decision stop you. In Valley Park Ranch, the Tax Court was asked to reconsider its prior opinion in Oakbrook Land Holdings, in which the Tax Court upheld the validity of Treas. Reg. Section 1.170A-14(g)(6)(ii), governing donation of conservation easements.

In another case, Hewitt v. Commissioner, the Eleventh Circuit rejected the Tax Court’s reasoning in Oakbrook and held that the regulation was invalid because the Treasury failed to consider several substantive comments prior to finalizing the rule. The Sixth Circuit later affirmed the Tax Court’s decision in Oakbrook.

How was the Tax Court in Valley Park Ranch to deal with the circuit dispute? First, it cited the Golsen rule that where there is precedent in the court of appeals to which an appeal would be made, the Tax Court will follow that precedent.

The court then made clear that it was only bound by Tenth Circuit decisions because appeal in the Valley Park Ranch case would be to the Tenth Circuit. The Tax Court explicitly stated that it wasn’t bound to follow either the Sixth or Eleventh Circuit decisions.

That is a great point for taxpayers outside the Ninth Circuit. Regardless of what the IRS might tell you during audit, the Tax Court isn’t bound by the Ninth Circuit Altera decision in cases appealable to other circuits. And Valley Park Ranch makes this abundantly clear even to the point where the Tax Court rejected the circuit opinion that affirmed its prior decision in Oakbrook.

So the question becomes whether the Tax Court would be inclined to abandon its 15-0 decision in Altera in light of the Ninth Circuit decision. The short answer is: We think not.

In Valley Park Ranch, the court rejected its prior decision in Oakbrook and instead embraced the reasoning of the Eleventh Circuit in Hewitt that the regulation was invalid. The Tax Court determined that stare decisis didn’t stop it from abandoning its earlier decision in Oakbrook because its Oakbrook decision was revealed to be in error, the law was unstable, and there was no entrenched precedent on the issue.

Under this reasoning, the Tax Court likely wouldn’t abandon its 15-0 decision in Altera. First, that decision’s analysis was correct and not directly challenged by the Ninth Circuit—the Ninth Circuit effectively ignored the APA analysis of the Tax Court. Second, the interpretation of the law is disputed but not unstable given that only one other court has reached a contrary conclusion. Third, while disputed, the Tax Court’s unanimous decision is as entrenched as any decision could be in the Tax Court.

We encourage taxpayers outside the Ninth Circuit with Altera claims to review Valley Park Ranch and consider it a possible invitation to present their claim in the US Tax Court.

The case is Valley Park Ranch LLC v. Commissioner, T.C., No. 12384-20, Opinion 3/28/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Edward L. Froelich is counsel in McDermott Will & Emery’s tax practice group. He represents clients in federal tax controversies.

Susan E. Ryba is partner in McDermott Will & Emery’s tax practice group. focusing on federal tax controversies.

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