Ninth Circuit Amicus Brief of 19 Tax Law and Administrative Law Professors, Altera v. Commissioner, Nos. 16-70496, 16-70497

Abstract

Amici file this brief to provide the Ninth Circuit with relevant background information on the basics of transfer pricing and cost-sharing agreements, and to advance four key points. First, the 2003 cost-sharing regulation at issue in this case is substantively reasonable under the commensurate-with-income standard. Although we agree with the government that this standard can be harmonized with the standard that generally governs Treasury’s rulemaking authority under section 482 (known as the arm’s-length standard), the focus of our brief is the commensurate-with-income authority. Properly understood, that authority provides a sufficient independent basis for the regulation. Indeed, the legislative history practically mandates that stock-based compensation be accounted for in cost-sharing agreements.Second, by requiring that Treasury rely exclusively on its commensurate-with-income authority in order to avail itself of that authority, the Tax Court misunderstood a basic principle of administrative law. To be sure, a court “must judge the propriety of [an agency’s action] solely by the grounds invoked by the agency.” S.E.C. v. Chenery Corp., 332 U.S. 194, 196 (1947). But a court must “uphold a decision of less than ideal clarity if the agency’s path may reasonably be discerned.” Motor Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). And here, the cost-sharing regulation may be reasonably understood as an exercise of Treasury’s commensurate-with-income authority, and both the notice of proposed rulemaking and the preamble to the final cost-sharing regulation cited this authority.Third, even if this Court finds that Treasury’s explanation of the cost-sharing regulation is inadequate, the taxpayer bears the burden of establishing that any error affected the procedure used or the substance of the decision reached. But it cannot carry this burden, because Treasury considered the comments submitted and responded accordingly. And Treasury reached a substantively reasonable conclusion that addresses the concerns that led Congress to create the commensurate-with-income standard in the first place. Therefore, at a minimum, this Court should remand the regulation to Treasury without vacating it, so that Treasury has an opportunity to clarify its explanation.Finally, invalidating the regulation would have significant policy consequences, resulting in billions of dollars of lost tax revenue due to this regulation alone. It would upset the past decade of cost-sharing agreements and adversely impact tax administration in a manner that reaches far beyond the regulation at issue here, at significant cost to the public fisc.