United States: Altera Corporation Files Answering Brief In Commissioner's Ninth Circuit Appeal Of Altera

Last Updated: September 21 2016
Article by Roger J. Jones

In Altera Corp. v. Commissioner, 145 T.C. No. 3 (July 27, 2015), the Tax Court, in a unanimous reviewed opinion, held that regulations under Section 482 requiring parties to a qualified cost-sharing agreement ("QCSA") to include stock-based compensation costs in the cost pool to comply with the arm's-length standard were procedurally invalid because Treasury and the IRS did not engage in the "reasoned decisionmaking" required by the Administrative Procedures Act and the cases interpreting it. The Commissioner of Internal Revenue ("Commissioner") appealed this holding to the Ninth Circuit Court of Appeals, Dkt. Nos. 16-70496, 16-70497. The Commissioner filed his opening brief on June 27, 2016. Two groups of law school professors filed amicus briefs in support of the Commissioner's position. On September 9, 2016, Altera Corporation ("Altera") filed its answering brief with the Ninth Circuit.

Altera begins with the observation that the Commissioner "has remarkably little to say" about the Tax Court's rationale in holding the QCSA regulation invalid. According to Altera, the Commissioner either did not respond to the salient points in the Tax Court's analysis or, more often, actually admitted that those points were correct. Instead, the Commissioner advanced a "new, litigation-driven position" that Section 482's "commensurate with income" requirement is an independent "internal standard" that "does not require consideration of transactions between unrelated parties." Indeed, Altera notes, the Commissioner now argues "that the arm's-length standard may be applied without considering any facts at all." Thus, rather than engage with the Tax Court's reasoning, the Commissioner "mistakenly accuses the Tax Court of overlooking an argument that is missing from the administrative record."

The Commissioner's argument fails, Altera maintains, for three reasons: (1) the Commissioner cannot defend the QCSA regulation with an argument not adopted by the Treasury and the IRS when the regulation was promulgated; (2) Treasury cannot alter its interpretation of the statute without "acknowledging and justifying the change"; and (3) the commensurate with income standard simply does not mean what the Commissioner says it does.

Citing the Supreme Court's holding in S.E.C. v. Chenery Corp., Altera argues that the fact that the Commissioner's new position "bears no discernible relation" to the rationale advanced by Treasury and the IRS when they issued the QCSA regulation "precludes consideration of the Commissioner's new argument here."

Altera traces the introduction and continued application of the "parity principle" – that the "purpose of section 482 is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer" – from its introduction in then-Section 45 in 1928 through its continuation in Section 482 in 1954 to the present. Rather than operating as a "separate standard," as argued by the Commissioner, Altera says, the commensurate with income standard "clarifies" that the Commissioner's review of a related-party transfer or license of an intangible "should account not just for the ex ante expectations of the contracting parties" but should also account "for the income actually generated by the intangible." This, Altera explains, has been the long-standing position of both Treasury and the Commissioner, as evidenced by such public statements as 1988's A Study of Intercompany Pricing Under the Code (the so-called "White Paper") and the Report[s] on the Application of Section 482 submitted to Congress by the Commissioner in 1992 and 1999. The Commissioner's claim is also belied, Altera argues, by the repeated reassurances made by Treasury to the US's treaty partners – 26 are cited – that the commensurate with income standard "was not intended to override the arm's-length standard." Indeed, the preambles to both the proposed and the final QCSA regulation acknowledge the requirement of "consistency" between the commensurate with income and arm's-length standards. The interpretation of the statute advocated by the Commissioner, then, represents a radical departure from the interpretation maintained for the approximately 17 years between the addition of the commensurate with income standard to Section 482 in 1986 and the issuance of the final QCSA regulation in 2003. But, as noted above, Treasury did not acknowledge or discuss this changed interpretation when it promulgated the QCSA regulation, as required by the APA. Citing the Supreme Court's recent Encino Motorcars opinion, Altera maintains that this failure is fatal to the validity of the QCSA regulation.

Having pointed to the long-standing position of Treasury and the IRS that application of the commensurate with income standard must be "consistent" with the arm's length standard, Altera turns to the "substantial administrative record evidence" that "parties dealing at arm's length do not share amounts attributable to stock-based compensation." Altera goes on to assert that not only did Treasury and the IRS reject this evidence, but they presented no evidence that such parties would share such amounts, which Altera characterizes as another procedural defect in the issuance of the QCSA regulation. Again citing Encino Motorcars, Altera argues that these procedural defects "preclude [Chevron] deference to the Commissioner's proffered interpretation here."

Altera argues that the Commissioner's underlying interpretation of Section 482 is unreasonable under Chevron's standard. It avers that his new position is contrary to Congress's intent, as recognized by the Commissioner in the years since 1986. Altera also advances what is, in effect, a "plain meaning" argument against the Commissioner's claim to Chevron deference. Noting first that "by its express terms" the commensurate with income standard applies only to the "transfer (or license) of intangible property," Altera observes that "[h]istorically, the Commissioner has recognized that no 'transfer (or license)' occurs when entities develop intangibles jointly." Thus, Altera argues, the commensurate with income requirement does not apply to QCSAs in the first instance.

Finally, Altera addresses certain arguments raised in the amicus briefs filed in support of the Commissioner's position. It notes that both groups of amici proposed that, should the Court find Treasury's explanation to be insufficient, it should remand the regulation to Treasury without redetermining the deficiency at issue. Altera dismisses this proposal, observing that the regulation is "the sole basis for the Commissioner's deficiency determination." What's more, "[t]he Commissioner has not requested that extraordinary relief; accordingly, he is not entitled to it." Altera also addresses the argument of one amicus group that invalidation of the regulation would have "severe policy consequences and would reduce federal revenue." It notes that federal revenue will be reduced "[w]henever a revenue-enhancing rule is invalidated," but "that is no reason to give the Secretary a free pass to dodge his obligations."

Xilinx, Inc., the taxpayer in Xilinx, Inc. v. Commissioner, in which the Tax Court held for the taxpayer on a similar issue for a pre-QCSA regulation tax year (affirmed by the Ninth Circuit), has submitted an amicus brief supporting Altera's position. That brief and those of any other amici supporting Altera will be the subject of a separate post. Barring an extension by the Court of Appeals, the Commissioner has until September 23 to file a reply brief.

Altera Corporation Files Answering Brief In Commissioner's Ninth Circuit Appeal Of Altera

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions