intangible assets Archives - TAX CONTROVERSY 360

Court Awards $206 Million in Section 1603 Grant Wind Project Case

The US Court of Federal Claims awarded damages of more than $206 million to the plaintiffs in a case involving the cash grant program pursuant to Section 1603 of the American Recovery and Reinvestment Act of 2009 (the Section 1603 Grant). In its opinion, published on October 31, 2016, the court held that the US Treasury Department (Treasury) had underpaid the Section 1603 Grants arising from projects in the Alta Wind Energy Center because it had incorrectly reduced the plaintiffs’ eligible basis in the projects. The court rejected the Treasury’s argument that the applicants’ basis in the facilities was limited to only development and construction costs, and accepted the plaintiffs’ position that the arm’s length purchase price of the projects prior to their placed-in-service date was a reasonable starting point to determine the projects’ value. The court determined that the facilities, having not yet been placed in service and having only one customer pursuant to a master power purchase agreement (PPA), could not have any value assigned to goodwill or going concern value which would reduce the amount of eligible costs for purposes of the Section 1603 Grant. The court noted that the transactions surrounding the sales of the facilities were conducted at arm’s length by economically self-interested parties, and that the purchase prices and side agreements were not marked by “peculiar circumstances” that influenced the parties to agree to a price in excess of the assets’ value. Importantly, the court also held that PPAs were more like land leases, and should not be viewed as separate intangible assets from the underlying facilities, and are thus eligible property for purposes of the Section 1603 Grant. Finally, the court accepted the plaintiffs’ pro rata allocation of costs between eligible and ineligible property.

An interesting side note to the trial was the court’s refusal to allow the government’s economics expert to testify. According to the court’s procedural rules, experts are required to list “all publications authored in the previous ten years.” During voir dire, the expert confirmed that he had provided a listing of all of his articles, not just the ones that he had published in the last 10 years. The plaintiffs’ counsel also introduced a report that the government’s expert had authored in another case, and the expert also confirmed that the second report had a listing of all of his articles. However, during trial, the plaintiffs’ counsel exposed that the government’s expert had “attempted to conceal articles he wrote for Marxist and East German publications.” While the hidden articles had nothing to do with the testimony he was prepared to give to the court, nonetheless, the court refused to admit him as an expert and to testify explaining “[t]he Court simply could not rely on the substantive expert testimony of a witness who was untruthful in describing his background and qualifications.” As a result, the government had no expert to rebut the plaintiffs’ case and to support its counterclaims against the plaintiffs.

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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