Amicus Curiae Brief — Altera Corporation & Subsidiaries, Petitioner v. Commissioner of Internal Revenue

No. 19-1009

IN THE

Supreme Court of the United States

_______________

ALTERA CORPORATION ET AL.,

Petitioners,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

_______________

On Petition for a Writ of Certiorari to the

United States Court of Appeals for the Ninth Circuit

_______________

BRIEF OF AMICI CURIAE NATIONAL ASSOCIATION OF

MANUFACTURERS, SEMICONDUCTOR INDUSTRY

ASSOCIATION, SOFTWARE FINANCE AND TAX EXECUTIVES

COUNCIL, UNITED STATES COUNCIL FOR INTERNATIONAL

BUSINESS, NATIONAL FOREIGN TRADE COUNCIL,

SOFTWARE AND INFORMATION INDUSTRY ASSOCIATION,

FINANCIAL EXECUTIVES INTERNATIONAL, SILICON

VALLEY LEADERSHIP GROUP, SILICON VALLEY TAX

DIRECTORS GROUP, COMPUTING TECHNOLOGY INDUSTRY

ASSOCIATION, THE TAX COUNCIL, TECHNOLOGY

NETWORK, INC, AND INFORMATION TECHNOLOGY

INDUSTRY COUNCIL IN SUPPORT OF PETITIONERS

_______________

CHARLES G. COLE

CARTER G. PHILLIPS*

MICHAEL C. DURST

JOSEPH R. GUERRA

ALICE E. LOUGHRAN

MATTHEW D. LERNER

MARK C. SAVIGNAC

SIDLEY AUSTIN LLP

STEPTOE & JOHNSON LLP

1501 K Street, N.W.

Washington, D.C. 20005 1330 Connecticut Ave., N.W.

(202) 736-8000

Washington, D.C. 20036

cphillips@sidley.com

(202) 429-6270

Counsel for Amici Curiae

March 6, 2020

* Counsel of Record

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES .................................

ii

INTEREST OF AMICI CURIAE ..........................

1

INTRODUCTION .................................................

4

REASONS FOR GRANTING THE PETITION ...

9

I. THE DECISION BELOW IMPERMISSIBLY UPSETS SIGNIFICANT RELIANCE

INTERESTS ..................................................

9

A. Taxpayers Had Reasonable Reliance

Interests On Treasury’s Rationale For

Its Stock-Based Compensation Rule ......

9

B. The IRS Offered A New And Unexpected Rationale For The Rule In Litigation .......................................................

12

C. Review Is Required To Protect The

Significant Reliance Interests Of Taxpayers .......................................................

14

II. THE DECISION BELOW WILL UNDERCUT AMERICA’S COMPETITIVE ADVANTAGE IN THE TECHNOLOGY SECTOR ................................................................

17

III. REVIEW IS WARRANTED TO AFFIRM

AND REINFORCE CRITICAL LIMITS ON

JUDICIAL DEFERENCE IN THE AREA

OF FEDERAL TAXATION ...........................

19

CONCLUSION .....................................................

21

(i)

ii

TABLE OF AUTHORITIES

Page(s)

CASES

Auer v. Robbins,

519 U.S. 452 (1997) ........................................ 15, 20

Bowen v. Georgetown Univ. Hospital,

488 U.S. 204 (1988) .............................................. 15

Chamber of Commerce v. IRS,

2017 WL 4682050 (W.D. Tex. Oct. 6,

2017), appeal dismissed as moot,

2018 WL 3946143 (5th Cir. July 26,

2018)........................................................................ 6

Chevron, U.S.A., Inc. v. Natural

Resources Defense Council, Inc.,

467 U.S. 837 (1984) .......................................passim

Christopher v. SmithKline Beecham

Corp.,

567 U.S. 142 (2012) .......................................... 8, 15

City of Arlington v. FCC,

569 U.S. 290 (2013) ................................................ 6

Encino Motorcars, LLC, v. Navarro,

136 S. Ct. 2117 (2016) ............................................ 8

Florida Bankers Ass’n v. Dep’t of

Treasury,

799 F.3d 1065 (D.C. Cir. 2015) .............................. 6

iii

Golsen v. Commissioner,

54 TC 742 (1962) .................................................. 16

Gutierrez-Brizuela v. Lynch.

834 F.3d 1142 (10th Cir. 2016) .............................. 6

Kisor v. Wilkie,

139 S. Ct. 2400 (2019) ................................ 8, 19, 20

Michigan v. EPA,

135 S. Ct. 2699 (2015) .................................... 16, 20

Motor Vehicle Mfrs. Assoc. v. State Farm

Mutual Auto. Ins. Co.,

463 U.S. 29 (1983) ............................................ 8, 16

SEC v. Chenery Corp.,

318 U.S. 80 (1943) ............................................ 8, 20

United States v. Byrum,

408 U.S. 125 (1972) .............................................. 15

United States v. Mead Corp.,

533 U.S. 218 (2001) .............................................. 20

STATUTES

26 U.S.C. § 482....................................................... 9, 15

Anti-Injunction Act, 26 U.S.C. § 7421 .................. 7, 17

REGULATIONS

26 C.F.R. § 1.482-1(b)(1) .............................................. 9

iv

SCHOLARLY AUTHORITIES

B. Kavanaugh, Two Challenges for the

Judge as Umpire: Statutory

Ambiguity and Constitutional

Exceptions, 92 Notre Dame Law

Review 1907 (2017) ................................................ 6

K. Hickman and G. Kerska, Restoring

the Lost Anti-Injunction Act, 103 Va.

L. Rev. 1683 (2017) .......................................... 6, 19

OTHER AUTHORITIES

A Study of Intercompany Pricing Under

Section 482 of the Code (1988), I.R.S.

Notice 88-123, 1988-2 C.B. 458 .....................passim

IRS, Report on Application and Administration of Section 482 (1999) ............................. 18

U.S.-United Kingdom Income Tax Treaty, art. 9 (July 24, 2001); 7 Tax Treaties (CCH) ¶ 10901.09 .......................................... 18

INTEREST OF AMICI CURIAE1

Amici are trade associations and industry

membership organizations representing a broad

spectrum of industry interests that are affected by

the decision of the Ninth Circuit below.

1. The National Association of Manufacturers is

the largest manufacturing association in the United

States, representing small and large manufacturers

in every industrial sector and in all 50 states.

Manufacturing employs over 12 million men and

women, contributes roughly $2.1 trillion to the U.S.

economy annually, has the largest economic impact of

any major sector, and accounts for two-thirds of the

private-sector research and development.

2. The Semiconductor Industry Association is the

voice of the U.S. semiconductor industry, one of

America’s top export industries and a key driver of

America’s economic strength, national security, and

global competitiveness. Semiconductors are the

microchips that control all modern electronics and

the semiconductor industry directly employs nearly a

quarter of a million people in the United States.

3. The Software Finance and Tax Executives

Council (SoFTEC) is the voice of the software

industry on matters of state, federal, and

1 Both parties have consented to the filing of this brief by amici curiae. No party or counsel for a party authored this brief in

whole or in part or made a monetary contribution intended to

fund the preparation or submission of this brief. No person other

than amici curiae, their members, or their counsel made a monetary contribution intended to fund the preparation or submission of this brief.

2

international tax policy. SoFTEC submitted

comments in connection with the notice of proposed

rulemaking at issue here. SoFTEC also appeared and

presented evidence at the agency’s hearing on the

proposed regulations.

4. The United States Council for International

Business (USCIB) advances the global interests of

American business. It does so through advocacy that

calls for an open system of world trade, finance and

investment, where business can flourish and

contribute to economic growth, human welfare and

sustainable development. USCIB’s advocacy spans a

broad range of policy issues, leveraging the expertise

of our business members.

5. The National Foreign Trade Council (NFTC),

founded in 1914, is the oldest business association

dedicated to international tax, trade, and human

resource matters. The NFTC represents more than

250 U.S. company members and encourages policies

to eliminate major tax inequities in the treatment of

U.S. companies abroad.

6. The Software & Information Industry

Association (SIIA) is the principal trade association

for the software and digital information industries.

The 700-plus software companies, data and analytics

firms, information service companies, and digital

publishers that constitute its membership serve

nearly every segment of society, including business,

education, government, healthcare, and consumers.

Many of SIIA’s members have operations and

affiliates abroad and are subject to taxation in

multiple countries.

7. Financial Executives International represents

the interests of more than 10,000 chief financial

3

officers and other senior financial executives from

over 8,000 major companies in the U.S. and Canada.

8. Silicon Valley Leadership Group was founded

in 1978 by David Packard, co-founder of HewlettPackard Company, and represents more than 350 of

Silicon

Valley's

most

respected

employers.

Leadership Group member companies, which range

from start-ups to some of the largest global

technology companies, provide nearly one in every

three private sector jobs in Silicon Valley and account

for over $3 trillion in annual economic activity.

9. The Silicon Valley Tax Directors Group,

composed of 97 company members, promotes sound,

long-term tax policies that support the global

competitiveness of the U.S. high-technology industry.

10. The

Computing

Technology

Industry

Association is a non-profit trade association that

addresses the needs of the information technology

industry. It has more than 2,000 members, 3,000

academic and training partners and tens of

thousands of registered users spanning the entire

information

communications

and

technology

industry.

11. The Tax Council is a non-partisan organization

promoting sound tax and fiscal policies since 1966

and is comprised of Fortune 500 companies.

12. Technology Network, Inc. (TechNet) is a

national network of CEOs and senior executives of

technology companies, with more than two million

employees, in the fields of information technology, ecommerce, biotechnology, clean energy and venture

finance. TechNet is organized to promote the growth

of the technology industry and to advance America’s

global leadership in innovation.

4

13. The Information Technology Industry Council

represents the interests of the information and

communications technology industry, including

member companies that are among the global leaders

in innovation from all areas of information and

communications technology, including hardware,

services, and software.

Amici’s members are the engines of growth for the

U.S. economy. They dedicate billions of dollars to

research and development to bring new products and

services to the world market. Many of Amici’s

members engage in intercompany transfer pricing

and are subject to the U.S. Department of Treasury

regulations at issue here. Amici’s members are also

subject, through their foreign subsidiaries, to the

transfer-pricing tax regimes of numerous foreign

nations. Many Amici members are located within the

jurisdiction of the Ninth Circuit. Amici accordingly

submit this brief in support of the petition for

certiorari.

INTRODUCTION

This is a case of exceptional importance, both

practical and legal. Cost-sharing agreements of the

type at issue in this case are common. They are used

widely by amici’s members and other entities to

enable related entities to jointly develop intellectual

property without having to determine complex

ownership

questions

(with

substantial

tax

implications) if the intangible property later proves to

be valuable. Recognizing their validity, Treasury long

ago established a regulatory regime that both

facilitates the use of cost-sharing agreements and

establishes their prerequisites. Central to that

regime is the longstanding principle that parties to

5

such agreements must share costs when and to the

same extent that unrelated parties dealing at arm’s

length would do so.

Given industry’s reliance on this regime, the Ninth

Circuit’s decision allowing Treasury to dispense with

the arm’s-length standard’s bedrock comparability

analysis for stock-based compensation costs has

enormous financial implications for many companies.

As petitioner notes, over 80 companies have disclosed

in filings with the Securities and Exchange

Commission (SEC) that the decision below may have

potential impacts that, on an aggregate basis, total

billions of dollars. Petn. 25-26. Sixty-seven of these

companies are in the Ninth Circuit. Id. 31.

Nor do the ramifications of the decision below end

there. Amici’s members engage annually in trillions

of dollars of cross-border intercompany transactions

in reliance on treaties that, at the urging of the

United States, recognize the arm’s-length standard.

By allowing the Internal Revenue Service to jettison

the comparability analysis that, prior to the decision

below, has been central to the arm’s-length standard,

the Ninth Circuit has upset the objective of the

treaties: to have a single uniform standard for crossborder transfer pricing. The decision below thus

raises unsettling questions about the tax treatment of

countless international transactions.

Beyond

these

vitally

important

practical

considerations, the decision below casts a spotlight on

the pressing need for meaningful judicial review of

agency action in the tax field. Members of this Court

have noted the enormous power that deference under

Chevron, U.S.A., Inc. v. Natural Resources Defense

6

Council, Inc., 467 U.S. 837 (1984), confers on agencies

and the unelected officials who populate them.2 But

the dangers of agency overreach are particularly

pronounced in the tax field.

When Treasury announces a rule that, as here, is

inconsistent with decades of judicial and regulatory

precedent and bereft of empirical support, affected

taxpayers cannot simply bring a pre-enforcement

challenge. Treasury has long argued, and courts have

generally agreed, that the Anti-Injunction Act bars

such suits. See, e.g., Florida Bankers Ass’n v. Dep’t of

Treasury, 799 F.3d 1065 (D.C. Cir. 2015); but cf.

Chamber of Commerce v. IRS, 2017 WL 4682050

(W.D. Tex. Oct. 6, 2017), appeal dismissed as moot,

2018 WL 3946143 (5th Cir. July 26, 2018). Under

Treasury’s view, therefore, taxpayers must wait to

raise such challenges in litigation after the IRS issues

a notice of deficiency or pay taxes they do not believe

they owe and then sue for a refund.

This limitation on judicial review has adverse

consequences for taxpayers. It forecloses an early,

industry-wide challenge to the validity of the

regulation. Thus, where there are strong reasons to

2 See, e.g., City of Arlington v. FCC, 569 U.S. 290, 314-15

(2013) (Roberts, C.J., joined by Kennedy and Alito, JJ., dissenting) (noting “the danger posed by the growing power of the administrative state” and that “Chevron is a powerful weapon in

an agency’s arsenal”); Gutierrez-Brizuela v. Lynch. 834 F.3d

1142, 1149 (10th Cir. 2016) (Gorsuch, J., concurring) (Chevron

allows agencies to “concentrate federal power in a way that

seems more than a little difficult to square with the Constitution”); B. Kavanaugh, Two Challenges for the Judge as Umpire:

Statutory Ambiguity and Constitutional Exceptions, 92 Notre

Dame Law Review 1907, 1911 (2017) (noting that Chevron deference “encourages agency aggressiveness on a large scale”).

7

believe that a regulation rests on an invalid rationale

(as was true here), taxpayers face years of

uncertainty concerning the propriety of the taxes

they must pay. At the same time, the delay in judicial

review “encourages” a “casual disregard for …

general administrative law norms” by Treasury and

the IRS. K. Hickman and G. Kerska, Restoring the

Lost Anti-Injunction Act, 103 Va. L. Rev. 1683, 1687

(2017) (“Hickman and Kerska”). Indeed, “scholars

and commentators have complained for decades

about Treasury’s weak record of compliance with the

[Administrative Procedure Act (APA)].” Id. at 1714. If

and when taxpayers finally get their day in court,

moreover, they face an agency that is not simply

defending a policy choice announced in a recently

promulgated rule of general application. The IRS is

an interested party, with strong financial incentives

to advance new or different interpretations of rules

issued years earlier.

That is precisely what happened here. After all 15

judges of the Tax Court unanimously rejected the

IRS’s claim that requiring related parties to share the

costs of stock-based compensation was consistent

with the arm’s-length standard, the IRS adopted a

new theory on appeal. It managed to persuade two

judges that Treasury’s 2003 regulations actually

“make clear that, in the context of a [cost-sharing

agreement], the arm’s-length standard does not

require an analysis of what unrelated entities do

under comparable circumstances.” Appellant’s Br. 57

(internal quotation marks and brackets removed).

The IRS claimed—and the majority below agreed—

that passing references to snippets of legislative

history were sufficient to provide notice of this

startling departure from decades of practice based on

a straightforward reading of the regulations

8

themselves. But none of the many sophisticated

commenters, including tax specialists, addressed this

theory in the rulemaking, because Treasury had

never suggested it.

Review is thus warranted in this case for reasons

similar to those that led the Court to grant review in

Christopher v. SmithKline Beecham Corp., 567 U.S.

142 (2012), and Kisor v. Wilkie, 139 S. Ct. 2400

(2019). First, as in Christopher, the IRS seeks to

impose massive liability on significant segments of

industry based on an interpretation that is nothing

more than a post hoc rationalization or convenient

litigating position.

Second, as in Kisor, the Court should grant review

to enforce critical limits on agency deference,

particularly given the heightened dangers of

overreach in the tax setting. Here, interested parties

were never given notice or an opportunity to address

the rationale on which the rule was sustained. See

Motor Vehicle Mfrs. Assoc. v. State Farm Mutual

Auto. Ins. Co., 463 U.S. 29 (1983). Treasury itself did

not acknowledge and explain why it was ignoring

longstanding arm’s-length comparability analysis in

the case of stock-based compensation costs. Encino

Motorcars, LLC, v. Navarro, 136 S. Ct. 2117 (2016).

And the IRS did not defend the rule based on the

rationale Treasury had advanced in support of the

rule. SEC v. Chenery Corp., 318 U.S. 80, 92-93 (1943).

The Ninth Circuit not only failed to enforce these

requirements, it gave Chevron deference to a post-hoc

rationale that the IRS advanced to salvage the rule

after the Tax Court thoroughly exposed the

deficiencies of Treasury’s actual justification. The

consequences of these errors are simply too great to

await further “percolation” of the issues and

9

development of a division among the circuits. Massive

amounts of money are at stake and for several dozen

companies, the decision below is the final word on the

validity of Treasury’s deeply flawed rule, and the

propriety of the bait-and-switch tactics the IRS used

to defend it.

This Court should grant the petition.

REASONS FOR GRANTING THE PETITION

I. THE DECISION BELOW IMPERMISSIBLY

UPSETS SIGNIFICANT RELIANCE INTERESTS.

A. Taxpayers Had Reasonable Reliance

Interests On Treasury’s Rationale For

Its Stock-Based Compensation Rule.

Treasury’s 2003 rulemaking took place in the

context of a well-established legal framework. Since

1935, Treasury regulations have provided that

Treasury’s authority (under what is now 26 U.S.C.

§ 482) to allocate income and deductions between

related entities in order “clearly to reflect the income”

of each is to be guided by the “arm’s-length” standard.

See Art. 45-1, Regulation 86 (1935). This principle

applies both to the sharing of income between related

entities, and the sharing of costs. Accordingly, a

Treasury regulation provides that, “in every case,”

the IRS will look to what unrelated parties

transacting at arm’s length would have done. See 26

C.F.R. § 1.482-1(b)(1).

In 1986, Congress adopted the so-called

“commensurate with income” standard. 26 U.S.C.

§ 482. This standard, however, applies only with

respect to the narrow category of income from

“transfer[s] (or license[s]) of intangible property.”

10

And even where it applies, Treasury has historically

taken the position that “intangible income must be

allocated on the basis of comparable transactions if

comparables exist.” A Study of Intercompany Pricing

Under Section 482 of the Code (1988) (“White Paper”),

I.R.S. Notice 88-123, 1988-2 C.B. 458, 474. Thus,

Treasury had interpreted the “commensurate with

income” standard to be consistent with the rest of the

longstanding framework. Pet. App. 52a-54a (dissent).

Given the importance of the 2003 rule and the

arm’s-length standard, it is unsurprising that

Treasury’s notice of proposed rulemaking concerning

the sharing of stock-based compensation costs

generated comments from numerous corporations,

interest groups, and tax specialists, some of whose

representatives also spoke at a public hearing. Pet.

App. 98a-99a. Several amici and their members

presented substantial comments and evidence. Id. at

98a-101a.

The rulemaking did not announce or imply that

Treasury was thinking of declaring real-world

comparable transactions irrelevant to the arm’slength analysis for cost-sharing. That would have

been a dramatic departure from decades of practice

involving the arm’s-length standard, and would

undoubtedly have elicited vociferous opposition.

Instead, commenters understood that real-world

evidence of how unrelated companies behave

remained the touchstone under the arm’s-length

standard. And they showed that unrelated

corporations in similar arrangements do not share

responsibility for stock-based compensation. Id. at

99a-101a. Under the arm’s-length standard, then,

related companies should not be required to do so,

either.

11

Among other things, commenters told Treasury

that:

•

They “knew of no transactions between

unrelated parties . . . that required one party to

pay or reimburse the other party for amounts

attributable to stock-based compensation.”

•

No such agreements were evident from a survey

of companies that were members of the

American Electronics Association.

•

No such agreements could be found in the

EDGAR database maintained by the SEC.

•

Model accounting procedures from the Council

of Petroleum Accountant Societies (COPAS)

recommended that stock options not be included

in cost-sharing.

•

“Federal acquisition regulations prohibit

reimbursement of amounts attributable to

stock-based compensation.”

And the commenters presented several examples of

real-world, arm’s-length agreements in which stockbased compensation was not reimbursed. Id.

In response, Treasury said, in cursory fashion, that

the cited transactions did “not share enough

characteristics . . . to establish that parties at arm’s

length would not take stock options into account in

the context of an arrangement similar to a [costsharing agreement].” Pet. App. 231a. That comment

reflected Treasury’s view that real-world comparable

transactions remained the best evidence of arm’slength behavior, but (according to Treasury) no such

evidence was available. “While the results actually

realized in similar transactions under similar

circumstances ordinarily provide significant evidence

12

in determining whether a controlled transaction

meets the arm’s length standard, in the case of [costsharing agreements] such data may not be available.”

Id. If only valid comparisons existed, Treasury was

saying, it would gladly use them.

Given this comparables-focused response, no one

could have understood that Treasury actually

believed that real-world comparables were legally

irrelevant. In fact, Treasury asserted that unrelated

parties in cost-sharing agreements would share

stock-based compensation costs. Treasury wrote that

such parties “would ensure . . . that the arrangement

reflect all relevant costs, including all costs of

compensating

employees”;

they

“would

not

distinguish between stock-based compensation and

other forms of compensation”; “the party committing

employees to the arrangement generally would not do

so on terms that ignore the stock-based

compensation.” Pet. App. 232a-233a (emphases

added).

Thus, taxpayers expected that, when the regulation

was eventually subject to judicial review, its validity

would be assessed based on the empirically-based

arm’s length standard. This judgment was later

vindicated by the Tax Court. Not a single judge of the

en banc Tax Court found that the arm’s-length

standard, and its focus on comparable transactions,

had been abrogated or modified by statute, or that

the stock-based compensation rule was consistent

with that standard.

B. The IRS Offered A New And Unexpected

Rationale For The Rule In Litigation.

It was a complete surprise to the taxpayer

community when, 13 years after Treasury published

13

its final rule in 2003, the IRS announced its radically

new understanding of the nature of the arm’s-length

standard. The IRS claimed in its Ninth Circuit brief

that the regulations actually “make clear that, in the

context of a [cost-sharing agreement], the arm’slength standard does not require an analysis of what

unrelated

entities

do

under

comparable

circumstances.” Appellant’s Br. 57 (internal quotation

marks and brackets removed); see also id. at 46-47.

To justify its final rule, Treasury had engaged in

tortured efforts to explain away the data and

evidence commenters had provided. Yet the IRS

asserted on appeal that promulgation of the new rule

“did not require an examination of data, fact-finding,

or consideration of evidence before the agency.” Id. at

57-58 (internal quotation marks and brackets

removed). And while Treasury had claimed in the

final rule that the commenters’ comparisons were not

truly comparable, the IRS dismissed Treasury’s

discussion of this evidence as “extraneous”: “[S]ince

Treasury reasonably determined that it was

statutorily authorized to dispense with comparability

analysis in this narrow context, there was no need for

it to establish that the uncontrolled transactions cited

by commentators were insufficiently comparable.”

Appellant’s Br. 64. The IRS acknowledged on appeal

that its current position “change[s] the legal

landscape” (Br. 30, 46), but Treasury never gave

proper notice of such a change in the rulemaking.

The Ninth Circuit majority concluded that

Treasury provided the public with adequate notice of

its (supposed) intention to abandon the bedrock

principle of arm’s-length comparability by quoting

from the legislative history of the 1986 amendment

that added the “commensurate with income”

language. Pet. App. 35a-36a, 39a-40a. But these

14

vague references cannot possibly be taken as an

adequate statement that Treasury planned to

abandon its longstanding endorsement of real-world

comparisons. Pet. App. 64a (dissent). After all,

Treasury had stated in its 1988 White Paper (which

also relied on congressional intent) that even the

“commensurate with income” standard should take

real-world comparisons into account where they exist.

See Pet. App. 14a-15a; id. at 53a-54a (dissent).

Indeed, Treasury’s own endorsement of the

comparability

standard—in

its

dismissal

of

commenters’ cited transactions on the ground that

they supposedly were insufficiently comparable—

itself belies the notion that Treasury was abandoning

the

standard

with

respect

to

stock-based

compensation.

In short, the preamble to the final rule does not

support the IRS’s novel account of what the bases for

Treasury’s actions were in 2003. As Judge Smith

observed, by accepting the IRS’s revisionist history,

“the [panel] majority renders extensive comments

irrelevant, and is strangely untroubled by the idea

that no member of the tax community noticed this

alternative reasoning or submitted a relevant

comment.” Pet. App. 159a (dissent from denial of

rehearing en banc).

C. Review Is Required To Protect The Significant Reliance Interests Of Taxpayers.

This Court has recognized that deference to agency

interpretations of their own regulations is

unwarranted where the agency seeks to impose

“potentially massive liability” and it “appears that

the interpretation is nothing more than a convenient

litigating position, … or a post hoc rationalizatio[n]

15

advanced by an agency seeking to defend past agency

action against attack.” Christopher, 567 U.S. at 155

(quoting Bowen v. Georgetown Univ. Hospital, 488

U.S. 204, 213 (1988), and Auer v. Robbins, 519 U.S.

452, 462 (1997)). That is true with respect to the

IRS’s

newly-minted

and

litigation-driven

interpretation of the “commensurate with income”

language in section 482. The potential liabilities here

are truly massive, both for individual companies and

on an industry-wide basis. And the IRS’s argument

below is such a transparent post hoc rationalization

that the IRS was forced to dismiss Treasury’s actual

analysis as “extraneous,” precisely because the new

rationale is so far afield from the standard that all

commenters and Treasury itself viewed as controlling

when the rule was adopted.

The resulting harms to the reliance interests of

taxpayers are significant in two distinct respects.

First, taxpayers have always understood that the

arm’s-length standard requires a comparability

analysis—i.e., an examination of how third parties

dealing at arm’s length behave in comparable

circumstances—except in the limited circumstance of

a license or transfer of intangible property when

comparable transactions do not exist. White Paper,

I.R.S. Notice 88-123, 1988-2 C.B. 458, 474. The arm’slength standard governs countless trans-border

transactions subject to treaties that incorporate that

standard. By accepting an unprecedented and

apparently uncabined deviation from that standard

here, the decision below introduces uncertainty in an

area where the need for certainty is particularly vital.

See United States v. Byrum, 408 U.S. 125, 135 (1972)

(noting the dangers of “depart[ing] from an

interpretation of tax law which has been generally

16

accepted when the departure could have potentially

far-reaching consequences”). See infra § II.

Second, taxpayers were entitled to expect that the

validity of the stock-based compensation rule would

ultimately be judged on the basis of the rationale

Treasury advanced for that rule in 2003. Eighty years

of law and practice establish that the arm’s-length

standard imposes a fact-intensive test. The armslength standard, as well as the focus on comparable

transactions of unrelated parties, is embedded in the

law that Treasury developed in the United States and

encouraged abroad. It is profoundly unfair for the IRS

to require taxpayers to live with a rule for over a

decade and then, when its validity is finally tested in

court, to propound a new rationale for it—

particularly where that rationale deviates from

decades of practice. “[T]he foundational principle of

administrative law [is] that a court may uphold

agency action only on the grounds that the agency

invoked when it took the action.” Michigan v. EPA,

135 S. Ct. 2699, 2710 (2015); State Farm, 463 U.S. at

50. This principle must apply with particular force

where the agency insists that regulated parties

cannot bring pre-enforcement challenges to the

agency’s action.

For these reasons, it is simply no answer to argue

(as the government likely will) that the Court should

await a circuit split before acting. Companies

engaged in foreign transactions need to know now

whether they can continue to rely on the arm’s-length

comparability standard for existing and upcoming

cross-border arrangements. And at least 67

companies whose income is materially affected by the

decision below have little chance of escaping the

impact of the decision. See Golsen v. Commissioner,

17

54 TC 742 (1962) (Tax Court follows the law of the

circuit in which cases arise). Moreover, under the

government’s approach to the Anti-Injunction Act,

the IRS controls whether, when, and where to bring

future deficiency cases based on the stock-based

compensation rule. Taxpayers thus have little ability

to precipitate a division among the circuits,

particularly given the amounts of money at stake and

the pressures to settle rather than risk interest and

penalties.

II. THE DECISION BELOW WILL UNDERCUT

AMERICA’S COMPETITIVE ADVANTAGE

IN THE TECHNOLOGY SECTOR.

The Ninth Circuit’s opinion threatens significant

exposure and uncertainty for amici’s members.

Pet. 29-31; see also Pet. App. 331-338a (listing U.S.

tax treaties that incorporate the arm’s-length

standard). The decision upsets decades of precedent

concerning the meaning of the arm’s-length standard

and the settled expectations of U.S. multinational

companies. Amici’s members engage annually in

trillions of dollars of cross-border intercompany

transactions. They rely heavily upon U.S. and

international recognition of the arm’s-length

standard for their cross-border transactions,

including transactions that involve the joint

development of intangible assets. Given the

significant

interests

of

U.S.

multinational

companies—many of which are based in the Ninth

Circuit—this Court’s review is warranted now.

As the petition explains, the arm’s-length standard

is not a unique feature of U.S. tax law. To the

contrary, the United States has long championed the

standard and made it “the international norm.” 1988

White Paper, 1988-2 C.B. 458 at *31. As a result, the

18

arm’s length standard is reflected in the network of

international treaties that were negotiated in part by

the United States. The key objective was to ensure all

nations are using a consistent approach in

determining how profits and deductions are allocated

among related parties. As Treasury explained,

“virtually every major industrial nation takes the

arm’s length standard as its frame of reference in

transfer pricing cases.” Id. at 43,539. The arm’slength standard’s reference to how unrelated parties

actually interact is central to international norms

regarding transfer pricing. See, e.g., IRS, Report on

Application and Administration of Section 482, at iiiii, 2.2-2.4 (1999), www.irs.gov/pub/irs-pdf/p3218.pdf.

Under U.S. bilateral tax treaties, the arm’s lengthstandard looks to what unrelated parties do or would

do in comparable circumstances. For example, the

income tax treaty with the United Kingdom provides

that if the conditions made between the two

enterprises in their financial relations “differ from

those that would be made between independent

enterprises,” then profits could be reallocated. 2001

U.S.-United Kingdom Income Tax Treaty, art. 9 (July

24, 2001); 7 Tax Treaties (CCH) ¶ 10901.09.1 at

201.019. If the United States were to depart

unilaterally from the arm’s-length standard, it may

be allocating costs to a country that did not recognize

the costs as ones that arm’s-length parties would

share, risking double taxation by both countries of

the same income. Amici’s members have a significant

interest in the uniform application of the arm’s

length standard to avoid double taxation in a global

operating environment.

19

III. REVIEW IS WARRANTED TO AFFIRM AND

REINFORCE CRITICAL LIMITS ON JUDICIAL DEFERENCE IN THE AREA OF

FEDERAL TAXATION.

This Court recently upheld the principle of

deferring to agency interpretations of their own

regulations but, in doing so, affirmed and

“reinforce[d] its limits.” Kisor, 139 S. Ct. at 2408.

Given the financial implications of the decision below

and the unique dangers of overreach in the area of

federal taxation, the Court should grant review here

for similar reasons.

As scholars have noted, the difficulty taxpayers face

in bringing pre-enforcement challenges “encourages”

a “casual disregard for … general administrative law

norms” by Treasury and the IRS. Hickman and

Kerska, 103 Va. L. Rev. at 1687. As an interested

party seeking money, moreover, the IRS has strong

incentives to gloss over defects in Treasury’s

reasoning and instead to frame its litigation positions

as essential to preventing corporate tax evasion. Take

this very case, for example. Treasury regulations

facilitate the use of cost-sharing agreements between

related parties, and unrebutted empirical evidence

shows that unrelated parties do not share stock-based

compensation when they enter into such agreements.

Yet, the IRS convinced the majority below that

requiring related parties to share such costs is

somehow necessary to combat “tax abuse by

multinational corporations with foreign subsidiaries.”

Pet. App. 7a. See also id. at 7a-8a (referring to

incentives for “tax avoidance” and “transactionshuffling” by related parties); id. at 10a “the problem

of abusive transfer pricing practices created a new

adherence to a stricter arm’s length standard”). In

20

conjunction with Chevron deference, therefore, the

IRS’s ability to delay and frame that review in terms

that are unfavorable to taxpayers creates a unique

environment for agency overreach—and a correlative

need for this Court to reinforce limits on Chevron

deference in the tax area.

Accordingly, the Court should grant review to

emphasize the principles of administrative law that

appropriately cabin Chevron deference in the tax

field. Just as Auer deference is “rooted in a

presumption about congressional intent,” Kisor, 139

S. Ct. 2412, so, too, is Chevron deference. See United

States v. Mead Corp., 533 U.S. 218, 229 (2001). It is

reasonable to assume that Congress intended courts

to defer to interpretations of the Tax Code that

actually reflect Treasury’s “authoritative, expertisebased, fair[, or] considered judgment,” Kisor, 139 S.

Ct. at 2414 (brackets in original, internal quotation

marks omitted; citing Mead, 533 U.S. at 229-31 as

“adopting a similar approach to Chevron deference”).

But that assumption does not apply where, as here, a

court is asked to defer to a statutory interpretation

that Treasury did not announce when it promulgated

its final rule, and that instead appeared in appellate

briefs filed by the IRS.

Indeed, in promulgating that rule, Treasury simply

purported to apply the traditional arm’s-length

comparability analysis. Its conclusion that its rule

was consistent with the evidence in the record was a

classic failure of reasoned decision-making, as the

Tax Court held. It was particularly improper,

therefore, for the Ninth Circuit to rely on Chevron

principles to excuse this failure. That error would

have been avoided had the Ninth Circuit applied the

bedrock rule that courts can sustain an agency’s

21

action based only on the rationale that the agency

itself gave for that action, not theories propounded by

agency counsel in litigation. Chenery, 318 U.S. at 87;

Michigan v. EPA, 135 S. Ct. at 2710.

CONCLUSION

For the foregoing reasons and those stated in the

petition, the petition for a writ of certiorari should be

granted.

Respectfully submitted,

CHARLES G. COLE

CARTER G. PHILLIPS*

MICHAEL C. DURST

JOSEPH R. GUERRA

ALICE E. LOUGHRAN

MATTHEW D. LERNER

MARK C. SAVIGNAC

SIDLEY AUSTIN LLP

STEPTOE & JOHNSON LLP

1501 K Street, N.W.

Washington, D.C. 20005 1330 Connecticut Ave., N.W.

(202) 736-8000

Washington, D.C. 20036

cphillips@sidley.com

(202) 429-6270

ccole@steptoe.com

Counsel for Amici Curiae

March 6, 2020

* Counsel of Record