Tuesday, July 28, 2015

Tax Court Voids Portion of Code Section 482 Cost Sharing Regulations

There are tax advantages for U.S. taxpayers to jointly develop intangible personal property with related non-U.S. entities. For an overview, see my prior post here.

Treasury Regulations provide detailed guidance on what costs must be shared between the co-developers if they want the IRS to respect the cost sharing arrangement. Under those regulations, stock-based compensation of one of the parties, such as restricted stock, nonstatutory stock options, statutory stock options (ISOs and ESPPs), stock appreciation rights, and phantom stock, must be shared.

The Tax Court has stricken as invalid Reg. § 1.482-7(d)(2) which requires such sharing of stock-based compensation costs. The Court found the rules to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, because such cost-sharing does not generally occur in the real world between unrelated parties. The IRS was required to show some real world use of sharing of these costs because of the general arms-length standards of the Section 482 regulations (citing Xilinx v. Commissioner, which case also held that Congress never intended for the commensurate-with-income standard relating to intangible property to supplant the arm's-length standard). The Tax Court found that the regulations had not abandoned the arm’s length standard, and left for another day the question whether the IRS could do so in future regulations.

Altera Corporation and Subsidiaries, (2015) 145 TC No. 3

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