On 22 June 2020 the US Supreme Court announced that it would not review the Ninth Circuit panel decision in the Altera case. The Ninth Circuit decision of 7 June 2019 that upheld the validity of US cost sharing regulations therefore still stands.

Altera Corp designed, manufactured, and marketed programmable logic devices. Like many other multinationals Altera had concluded cost sharing arrangements with related parties in relation to the development of intangibles. The remuneration of personnel involved in activities such as research and development (R&D) and marketing involved a significant amount of compensation in the form of employee stock options.

Altera disputed with the IRS in relation to the issue of whether the employee stock option compensation should be included in the shared intangible development costs in a cost sharing agreement.

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 when it issued the regulation and the Court also considered that the view that sharing stock-based compensation was at arm’s length was contrary to all the evidence before it.

The IRS appealed against the ruling and on 24 July 2018 the Court of Appeals overturned the decision of the Tax Court, determining 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 Court of Appeals also held that the Treasury had complied with the Administrative Procedure Act when the regulation was issued, explaining its reasons for the regulation and dealing with public comments in the course of the regulatory process.

However, on 8 August 2018 the Court of Appeals announced that it was withdrawing the opinion of 24 July 2018 to allow time for a reconstituted panel to confer on the appeal. The Altera case was therefore re-heard in the Court of Appeals in October 2018. The decision of the Ninth Circuit issued on Altera in June 2019 again reversed the original 2015 decision of the Tax Court and agreed with the IRS view. The Court of Appeals held that an arm’s length result may be arrived at by using a fluid set of methodologies without a transactional comparability analysis. The regulations requiring related parties to share stock-based compensation in a qualifying CSA therefore withstood scrutiny.

The taxpayer requested en banc review of this majority decision by the Ninth Circuit, however in November 2019 the petition by Altera for a rehearing of its case was denied. Altera then filed an appeal with the US Supreme Court, however as already stated on 22 June 2020 the Supreme Court announced that it would not review the Ninth Circuit panel decision.