Ninth Circuit Upholds Validity Of Cost-Sharing Regulation

The Court of Appeals for the Ninth Circuit yesterday upheld the validity of amendments to the cost-sharing regulation under I.R.C. § 482 (Treas. Reg. § 1.482-7), announced Principal Deputy Assistant Attorney General Richard E. Zuckerman and Deputy Assistant Attorney General Travis A. Greaves of the Justice Department’s Tax Division.  The regulatory amendments clarified that (1) the term “costs” under § 1.482-7 includes stock-based compensation costs, and (2) a cost-sharing arrangement produces results that are consistent with an arm’s-length result if, and only if, each controlled participant’s share of the costs of intangible development equals its share of reasonably anticipated benefits attributable to such development.

In the consolidated cases, Altera Corporation & Subsidiaries v. Commissioner of Internal Revenue, Case Nos. 16-70496 & 16-70497, the Ninth Circuit reversed a decision of the U.S. Tax Court, and held that the regulatory amendments were both procedurally valid under the Administrative Procedure Act (APA) and substantively valid under the test set forth in Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 461 U.S. 837 (1984).  The court held that the amendments satisfied the APA because Treasury’s rationale could be “reasonably discerned” from the preambles to the proposed and final amendments, each of which referred extensively to the legislative history of the 1986 amendment of § 482.  The court further held that the amendments were substantively valid under Chevron’s two-step analysis because (1) § 482 does not speak directly to the matters covered by the regulatory amendments, and (2) the regulatory amendments represent a permissible construction of § 482 since they are “entirely consistent with Congress’s rationale for amending § 482 [in 1986] in the first place.”

Principal Deputy Assistant Attorney General Zuckerman thanked Tax Division attorneys Richard Farber and Arthur Catterall, who handled the case on appeal for the government.

Additional information about the Tax Division and its enforcement efforts may be found on the division’s website.