Ninth Circuit Brief of Amici Curiae J. Richard Harvey, Leandra Lederman, Ruth Mason, Susan Morse, Stephen Shay and Bret Wells in Altera Corp. v. Commissioner, in Support of Respondent-Appellant Commissioner

Abstract

The Treasury regulations at issue in Altera Corp. v. Commissioner condition the validity of controlled taxpayers’ income allocation under a cost-sharing agreement upon the requirement that the controlled parties share all costs, including stock-based compensation costs, proportionately with the benefits they expect to receive from joint development of intangibles. Amici are tax professors who conclude that these regulations are not arbitrary and capricious under Section 706(2)(A) of the Administrative Procedure Act, but rather are a valid and reasonable exercise of the responsibility of the Treasury Department to administer Section 482 of the Internal Revenue Code. We concur with the government’s argument before this Court that coordinating amendments promulgated with Treas. Reg. § 1.482-7(d)(2) vitiate the Tax Court’s analysis in Xilinx that the cost-sharing regulation conflicts with the arm’s-length standard. We also agree that Treasury’s commensurate-with-income authority under the second sentence of Section 482 provides an independent basis for upholding the cost-sharing regulation, as argued in an amicus brief submitted in this case by Anne Alstott et al. The purpose of this amicus brief is to offer an alternative argument for the validity of the cost-sharing regulation under what the government in its brief called the “traditional” view of the arms’ length standard, which depends on analysis of what unrelated parties would have done in comparable circumstances, and to which evidence from uncontrolled transactions, properly adjusted, could be relevant. In Part I we argue that even if this Court accepts the argument that comparable uncontrolled transactions should be analyzed as part of the arm’s-length standard, Treasury reasonably decided not to incorporate into the cost-sharing regulations the stock-based compensation sharing practices of unrelated parties engaged in joint ventures. Ignoring stock-compensation costs in controlled joint development agreements would violate the arm’s length principle, notwithstanding evidence that supposedly shows that uncontrolled parties ignore such costs. In Part II of this brief, we argue that Treasury’s administrative process was valid, not arbitrary and capricious. We also argue that Treasury’s regulatory interpretations merit deference.