On 24 July 2018 the US Court of Appeals overturned the decision of the Tax Court in the case of Altera Corp, a case that concerned the inclusion of stock based compensation costs in cost sharing agreements (CSAs). The Appeal Court has determined that the regulations in section 1.482-7 require that the stock based compensation must be included in cost sharing reimbursements.

Altera had entered into a research and development CSA with its Cayman Islands subsidiary but did not include expenses related to stock based compensation in the pool of costs shared under the CSA. The IRS took the view that the failure to share the expenses of cost based compensation violated the regulation.

In the original hearing in 2015 the Tax Court determined that the regulation requiring related parties to share stock-based compensation in a CSA was invalid. The Court ruled that the Treasury did not follow the Administrative Procedure Act and the Court also considered that the view that sharing stock based compensation was consistent with the arm’s length principle was contrary to all the evidence before it.

The Appeal Court has now determined however that the rule as framed by the Treasury was a valid exercise of its powers under section 482 and the rule was not inconsistent with the arm’s length principle or with the commensurate with income principle. The Treasury had also complied with the Administrative Procedure Act, explaining its reasons for the regulation and dealing with public comments in the course of the regulatory process.

As a result of this decision it is likely that the IRS will be looking at the possibility of adjustments for open tax years where the taxpayer has not included stock based compensation in its cost sharing reimbursements.

This is the final decision on the case unless Altera applies for a re-hearing in the Appeal Court or petitions the Supreme Court to review the decision. It should be noted that a request for a re-hearing would only be considered when there are exceptional circumstances.