US: Tax Court finds cost-sharing regulations invalid

US: Tax Court finds cost-sharing regulations invalid

The U.S. Tax Court today, in a “reviewed opinion,” held that Treasury final regulations issued in August 2003—requiring participants in qualified cost-sharing arrangements to share stock-based compensation costs to achieve an arm’s length result—failed to satisfy the required reasoning and were therefore invalid.

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The case is: Altera Corp. v. Commissioner, 145 T.C. No. 3 (27 July 2015)

In the 70-page opinion [PDF 248 KB], the Tax Court held that the final regulations lacked a “basis in fact” and that Treasury had “failed to respond to significant comments” when Treasury issued the final regulations.

The taxpayer introduced information that was available at the time the regulations were in the process of being finalized, that unrelated parties do not engage in the sharing of stock-based compensation costs.

The Tax Court summed up that Treasury’s conclusion that the final regulations were consistent with the arm’s length standard was contrary to all of the evidence before Treasury and that the final regulations failed to satisfy the U.S. Supreme Court’s “reasoned decisionmaking” standard of the State Farm case.

There were no dissenting opinions.

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