In a case involving how expenses are allocated between corporate domestic and overseas operations, the Ninth Circuit Court of Appeals reversed on Tuesday the Tax Court’s decision, in a major win for the Internal Revenue Service against Intel’s subsidiary Altera.

In the earlier decision, Altera Corp. v. Commissioner, 145 T.C. No. 3, the Tax Court invalidated the regulations under section 482 of the tax code that require related entities to share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified cost-sharing arrangements under 26 C.F.R. section 1.482-7A(d)(2).

The IRS made deficiency determinations based on section 482 allocations it made under the regulations. A 15-judge panel of the Tax Court agreed with Altera Corporation (which was later acquired by Intel in 2015) that the regulations were arbitrary and capricious.

The Ninth Circuit, however, reversed the Tax Court ruling, finding that the IRS’s rule-making authority complied with the Administrative Procedure Act, and therefore the regulation was entitled to deference.

As the Ninth Circuit noted, transactions between related parties can provide opportunities for minimizing or avoiding taxes, particularly when a foreign subsidiary is located in a low-tax jurisdiction. United States companies can shift profits that would be subject to tax in America offshore to avoid tax. Similarly, related companies can identify and shift costs between American and foreign jurisdictions to minimize tax exposure. Section 482 was passed to address the risk of multinational corporation tax avoidance. Regulations promulgated by the Treasury under section 482 authorize the IRS to allocate income and costs among related entities, and 26 C.F.R. section 1.482-7A(d)(2), which was at issue in this decision, was promulgated under section 482.

The U.S. Tax Court
The U.S. Tax Court Matthew Bisanz

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