United States Tax Court Invalidates Portion of Section 482 Cost Sharing Regulations

In a unanimous, reviewed decision released on July 27, 2015, the U.S. Tax Court, in Altera Corporation and Subsidiaries v. Commissioner, 145 T.C. No. 3, has held that the requirement in the final section 482 cost sharing regulations that stock-based compensation be included in the intangible development cost sharing pool is invalid. The Court found that the final rule failed to meet the reasoned decisionmaking standard required by the Administrative Procedure Act.

Specifically, the Court concluded that Treasury failed to support its belief that unrelated parties would share stockbased compensation cost, failed to explain why all qualified cost sharing arrangements should be treated identically, failed to respond to significant comments, and failed to investigate whether such costs would or would not be included in an arm’s-length transaction. The Tax Court’s decision can be interpreted broadly as confirmation of the widely-held view that, in drafting the current cost sharing regulations, Treasury had simply re-adopted the rule that had previously been rejected in Xilinx Inc. v. Commissioner, 125 TC 37 (2005), aff’d, 598 F.3d 1191 (9th Circ. 2010).

What it Means

While it is too soon to know whether Treasury will appeal this decision, the law as it currently stands does not require taxpayers to include stock-based compensation in an intangible development cost sharing pool to have a qualified cost sharing arrangement. Taxpayers that have been doing so may want to reconsider their tax return positions for both current and prior years. This reconsideration is especially urgent for taxpayers who have yet to file their calendar year 2014 tax returns. There may also be a basis for amending tax returns for open, prior years where taxpayers included stockbased compensation in a cost sharing pool. Additionally, taxpayers who have recorded FIN 48 reserves for not including stock-based compensation in an intangible development cost sharing pool may want to reconsider whether such reserves are necessary.

The transfer pricing experts at True Partners Consulting have extensive experience assisting clients with navigating the intricacies of cost sharing arrangements. Our professionals are available to assist in determining specifically how this ruling may impact your tax return and financial statement reporting positions.

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Daniel Falk
Managing Director

Justin Smith
Managing Director