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By Richard Rubin
A federal appeals court upheld tax regulations on certain cross-border cost-sharing agreements within corporations, delivering a victory for the Internal Revenue Service over Intel Corp. in a case closely watched by tech companies.
The Ninth Circuit Court of Appeals ruled 2-1 on Friday for the IRS over Altera Corp., now an Intel subsidiary. The court had issued a similar ruling last year but heard the case again because one of the judges, Stephen Reinhardt, died before the ruling was issued.
Based on past disclosures, billions of dollars of federal tax revenue could be at stake.
The case involves what is known as share-based compensation and where it should be deducted as a business expense. The IRS wrote a regulation that required companies to deduct more of it abroad as opposed to deducting it in the U.S. Especially before the 2017 federal-tax overhaul that lowered corporate rates, companies had an incentive to claim those deductions against the higher U.S. tax rate -- and thus pack more of their profits into low-taxed foreign jurisdictions.
"We disagree with the Tax Court that the 2003 regulations are arbitrary and capricious," wrote Chief Judge Sidney Thomas, who was appointed by President Clinton. "While the rulemaking process was less than ideal, the [law] does not require perfection."
Many companies, including Alphabet Inc., Facebook Inc., Twitter Inc. and Electronic Arts Inc. have cited the outcome of the Altera case as a risk in their financial statements. The case would have increased Altera's taxable income by only $80 million over four years, but the effects on the industry would be much broader if the court's ruling stands, creating an incentive for the company to pursue further appeals.
The IRS declined to comment Friday. Intel didn't immediately comment.
In some cases, companies may have assumed that the regulations were still in place, so they wouldn't necessarily take a hit to earnings because of the IRS victory. Other companies may have assumed the benefits after the Tax Court initially ruled against the IRS and will now report additional costs.
Over the past few years, federal courts have brought tax law closer to the rest of administrative law, limiting the tax exceptionalism that had given the Treasury Department and IRS more flexibility than other agencies.
In this case, the court applied general administrative-law principles but just determined that the IRS complied with the appropriate standards, said Susan Morse, a University of Texas law professor who has been following the Intel proceedings.
In dissent, Judge Kathleen O'Malley, appointed by President Obama, wrote that the regulation improperly departed from the practice of the arm's length standard, which generally requires transactions within companies to mirror transactions between companies. She also said the Treasury Department had made procedural flaws.
"When [Treasury] fails to comply with those requirements, its actions cannot be justified by the mere existence of the loophole," she wrote. "In other words, an arm's length result is not simply any result that maximizes one's tax obligations."
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(END) Dow Jones Newswires
June 07, 2019 16:15 ET (20:15 GMT)
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