cost-sharing regulation Archives - TAX CONTROVERSY 360

Weekly IRS Roundup June 3 – 7, 2019

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of June 3 – 7, 2019.

June 4, 2019: The IRS issued a news release noting that it granted tax relief to victims of severe storms, tornadoes, straight-line winds and flooding in Oklahoma by postponing until September 16, 2019, various tax return filing and tax payment deadlines that occurred starting on May 7— including quarterly estimated tax payments due on June 17 and employment and excise tax returns due on July 31.

June 4, 2019: The IRS released issued a news release announcing that it will stop its tax transcript faxing service in June and will amend the Form 4506 series to end third-party mailing of tax returns and transcripts in July as part of its efforts to protect taxpayers from identity thieves.

June 5, 2019: The IRS released issued a news release announcing a decrease in interest rates for the third calendar quarter beginning July 1, 2019.

June 5, 2019: The IRS, in a memorandum dated May 21, 2019, indicated that it was withdrawing Directive LB&I 04-0018-004, Reasonably Anticipated Benefits in Cost Sharing Arrangements, which provided instructions for examiners on transfer pricing issue selection related to reasonably anticipated benefits in cost sharing agreements.

June 7, 2019: The IRS released final regulations for Section 337(d) effecting the repeal of the General Utilities doctrine by the Tax Reform Act of 1986 and preventing abuse of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The final regulations impose corporate-level tax on certain transactions in which property of a C corporation becomes the property of a REIT.

June 7, 2019: The IRS released proposed regulations dealing with the section 897(l) exception from taxation on gain or loss of a qualified foreign pension fund attributable to specified interests in US real property. The proposed regulations also provide rules for how to certify that a qualified foreign pension fund is not subject to withholding on some dispositions of, and distributions for, US real property interests.

June 7, 2019: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Special thanks to Alex Ruff in our Chicago office for this week’s roundup.

Law School Professors File Amicus Briefs in Support of Commissioner’s Position in Altera

Two groups of law school professors have filed amicus briefs with the US Court of Appeals for the Ninth Circuit in support of the government’s position in Altera Corp. v. Commissioner, Dkt Nos. 16-70496, 16-70497. Read more on the appeal of Altera here and the US Supreme Court’s opinion addressing interplay between the Administrative Procedure Act (APA) procedural compliance and Chevron deference here. Each group argues that Treas. Reg. § 1.482-7 represents a valid exercise of the Commissioner’s authority to issue regulations under Internal Revenue Code (Code) Section 482 and that the US Tax Court (Tax Court) erred in finding the regulation to be invalid under section 706 of the APA.

One group of six professors (Harvey Group) first notes its agreement with the arguments advanced by the government in its opening brief. In particular, the Harvey Group concurs with the argument that “coordinating amendments promulgated with Treas. Reg. § 1.482-7(d)(2) vitiate the Tax Court’s analysis in Xilinx that the cost-sharing regulation conflicts with the arm’s-length standard.” It then goes on to note its agreement with the government’s argument that “the ‘commensurate with the income’ standard … contemplates a purely internal approach to allocating income from intangibles to related parties.”

Having thus supported the government’s commensurate-with income-based arguments, the Harvey Group argues that the regulation in question is, in any event, consistent with the general arm’s-length standard of Code Section 482. It does so based principally on the proposition that “[s]tock-based compensation costs are real costs, and no profit-maximizing economic actor would ignore them.” However, that said, “there are material differences between controlled and uncontrolled parties’ attitudes, motivations and behaviors regarding stock-based compensation.” Thus, according to the Harvey Group, the Tax Court erred when it concluded that “Treasury necessarily decided an empirical question when it concluded that the final rule was consistent with the arm’s-length standard,” because “[n]o empirical finding that uncontrolled parties do, or might, share stock-based compensation costs is required to support Treasury’s regulation.” Accordingly, the Tax Court’s reliance on State Farm and the cases following it was a “key misstep” by the Tax Court.

The Harvey Group also proposes that, should the Ninth Circuit find that the term “arm’s length standard” or the meaning of the “coordinating regulations” is ambiguous, the government’s interpretation embodied in Treas. Reg. § 1.482-7 should be afforded Auer deference. Read more on deference principles in tax cases and the unique challenges of Auer deference. Auer deference is a special level of deference that can apply when an agency interprets its own regulations, although there are several limitations on its use. Finally, if the Ninth Circuit decides that the regulations “have an infirmity,” the Harvey Group argues that “[t]he best remedy is to remand to Treasury for further consideration.”

A second group of nineteen professors (Alstott Group) similarly agrees with the government’s arguments to the Ninth Circuit. The Alstott Group argues that the 1986 addition of the “commensurate with income” standard [...]

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