A landmark tax case watched by Google, Apple, Facebook, and other tech giants concerning assets shifted overseas reached the Supreme Court on Monday.
Intel-owned Altera Corp. is appealing its loss in the U.S. Court of Appeals for the Ninth Circuit over the validity of Internal Revenue Service regulations that force companies to include stock-option compensation among the assets that are valued for U.S. tax purposes when multinationals shift their intangible assets abroad. Stock-option compensation gives employees the right to purchase a company’s stock at a specified price in the future.
“This is a clear case of administrative agency over-reaching,” Altera’s petition to the high court said. “The agency purported to apply a longstanding tax-law standard (the arm’s length standard), but provided no evidence to satisfy that standard.”
Google LLC, Apple Inc., and Facebook Inc. are among those that have argued that the appeals decision upholding the regulations threatens “the hard-won but fragile international consensus on treatment of hundreds of billions of dollars of intercompany payments.”
The case arose after Altera excluded the stock-based compensation it paid to employees who were engaged in research and development in 2004 to 2007—before Intel acquired Altera—from the costs covered by an agreement with a Cayman Islands subsidiary. The pair had agreed to share the risks and costs of research and development after Altera licensed the affiliate to use and exploit its intangible property outside of the U.S. and Canada.
The IRS concluded that under its regulations the compensation needed to be included in the agreement, leading to a reallocation of more than $100 million in income from the affiliate to Altera.
Altera has argued that the IRS violated requirements under the Administrative Procedure Act because, after giving notice of its proposed regulations, it didn’t respond to significant comments that pointed to transactions between actual entities that weren’t part of the same multinational company or otherwise related and nonetheless also didn’t share the costs of such compensation.
In a 2-1 decision, the three-judge Ninth Circuit panel held that it is “uncontroversial today” that stock options should be treated as accounting costs in these transactions and that the IRS didn’t need to respond to the comments after the Treasury Department decided to dispense with the “arm’s-length standard,” where it analyzes comparable transactions between unrelated parties, in situations where there weren’t actual comparable transactions.
Earlier, the U.S. Tax Court had ruled unanimously in favor of Altera.
The case is Altera Corp. v. Comm’r, U.S., 2/10/20.