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In Sudden About-Face, Ninth Circuit Withdraws Altera Decision Pending Further Discussions with New Panel Judge

As previously reported by Ropes & Gray, on July 24, 2018, the Ninth Circuit reversed the Tax Court’s prior decision in the Altera case and upheld the IRS regulation requiring the allocation of stock-based compensation in qualified cost-sharing agreements. The decision was particularly notable since it ended in a 2-1 vote, in which Judge Reinhardt, who passed away in March 2018, cast the deciding vote. Late last week, the Ninth Circuit appointed a new judge, Susan Graber, to replace Judge Reinhardt under a local procedural order mandating that the court clerk randomly draw a replacement judge upon the death of any panel member. However, in lieu of awaiting any motions for rehearing, today the Ninth Circuit withdrew its opinion “to allow time for the reconstituted panel to confer on this appeal.” Since a withdrawn decision has no legal effect and the decision of the court could change, affected taxpayers who have not already taken action in response to the decision should consider watching and waiting for a new opinion to be issued before taking any further action.

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Altera Aftermath: IRS Lifts Moratorium on Examining Stock-Based Compensation Cost-Sharing Arrangements

Time to Read: 1 minutes Practices: Tax Controversy

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In the wake of the IRS’ Ninth Circuit victory in Altera Corporation v. Commissioner, 926 F.3d 1061 (9th Circuit 2019), the IRS’ Large Business and International (LB&I) Division issued Memorandum LB&I-04-0719-008, informing examiners that they may once again open examinations to require taxpayers to include stock-based compensation costs as intangible development costs under Treasury Regulations §§ 1.482-7A(d)(2) and 1.482-7(d)(3). In Altera, a Ninth Circuit panel reversed a 2015 Tax Court decision invalidating the Treasury Regulation § 1.482-7A(d)(2) requirement that related parties allocate stock-based compensation costs when entering into cost-sharing arrangements to develop intangible assets. For more about the Altera decision, including prior actions by the Ninth Circuit, click here.

LB&I had previously, in Memorandum LB&I-04-0118-005 (referred to as the “Altera memo”), instructed examiners to refrain from opening audits related to the disputed regulation and suspend issue development in ongoing cases after the 2015 Tax Court decision invalidating the regulation.

LB&I’s newest guidance withdraws the moratorium, instructs examiners to apply the regulations in ongoing examinations, and encourages opening new examinations of cost-sharing arrangements relating to stock-based compensation, if appropriate. The IRS has taken this step despite Altera’s request for the full Ninth Circuit to reconsider the case, and the likelihood of a future appeal to the Supreme Court.

LB&I’s move is expected to simultaneously result in:

  • a wave of audits of companies taking positions contrary to the disputed regulations by excluding stock-based compensation from cost-sharing arrangements, and
  • the denial of existing refund claims filed by companies in response to the 2015 Tax Court decision to invalidate the regulations.

Please contact the Ropes & Gray tax controversy team with any questions you may have or if you would like any further information.


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