August 21, 2019 - Douglas Myser

IRS responds to Altera Court Ruling. In our on going coverage of cases that relate to Tax Court issues, we want to highlight a case that has to do with cost sharing provisions and an about face by the IRS. When the IRS gives direction on a ax issue, and then a court ruling, or clarification of the new law shows the true direction of the tax code, often times, people and companies get caught int he cross file and end up owing large sums of money to the IRS, including penalties and interest. In many such cases, a taxpayer will have avenues to deal with those issues, providing relief from tax issues that were gray areas to begin with. IRS responds to Altera court ruling.

On July 31, 2019, the United States Internal Revenue Service issued a memorandum for all Large Business and International Divisions employees informing them of the withdrawal of a directive regarding cost sharing arrangements in the light of the recent Court of Appeals ruling in the Altera case. According to the memorandum, the purpose of the document is to formally withdraw Directive LB&I_04-0118-005 (Cost Sharing Arrangement (CSA) Stock Based Compensation (SBC) Directive), dated January 12, 2018, which provided instructions for examiners on transfer pricing issue selection related to SBC in CSAs.

US taxpayers that are cost sharing participants are required to include SBC as intangible development costs (IDCs), under Treasury Regulation Section 1.482-7A9d)(2) and 1.482-7)d)(3), if such costs are directly identified with, or reasonably allocable to, the intangible development activity of the CSA. However, in Altera Corp. v. Commissioner, the Tax Court invalidated Section 1.482-7A(d)(2). The IRS subsequently appealed this ruling and issued a directive on it, directing examiners to stop opening new examinations for issues related to SBC included in CSA IDCs until the outcome of the Altera appeal. On June 7, 2019, the Ninth Circuit Court of Appeals reversed the US Tax Court's opinion in Altera.

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