Amicus Curiae Brief — Altera Corporation & Subsidiaries, Petitioner v. Commissioner of Internal Revenue
Supreme Court briefMar 12, 2020
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No. 19-1009
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In The
Supreme Court of the United States
---------------------------------♦--------------------------------ALTERA CORPORATION & SUBSIDIARIES,
Petitioner,
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 CISCO SYSTEMS, INC.,
APPLE INC., APPLIED MATERIALS, DANAHER
CORPORATION, DELL TECHNOLOGIES, INC.,
DOLBY LABORATORIES, INC., ELECTRONIC ARTS
INC., EMERSON ELECTRIC CO., FACEBOOK, INC.,
FIREEYE, INC., GENERAL MILLS, INC., GOOGLE
LLC, GOPRO, INC., HEWLETT PACKARD ENTERPRISE
COMPANY, INTERNATIONAL PAPER COMPANY,
JOHNSON CONTROLS, INC., MAXIM INTEGRATED,
NETAPP, INC., NORTONLIFELOCK INC., PEPSICO,
INC., PFIZER INC., QUALCOMM INCORPORATED,
S&P GLOBAL INC., SURVEYMONKEY, AND
XILINX, INC. IN SUPPORT OF PETITIONER
---------------------------------♦--------------------------------DAVID B. SALMONS
Counsel of Record
RODERICK K. DONNELLY
THOMAS M. PETERSON
MICHELLE L. ANDRIGHETTO
MORGAN, LEWIS & BOCKIUS LLP
1111 Pennsylvania Avenue, NW
Washington, DC 20004
(202) 739-3000
david.salmons@morganlewis.com
Counsel for Cisco Systems, Inc.
================================================================================================================
COCKLE LEGAL BRIEFS (800) 225-6964
WWW.COCKLELEGALBRIEFS.COM
i
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES .................................
iii
STATEMENT OF INTEREST OF AMICI
CURIAE ............................................................
1
SUMMARY OF THE ARGUMENT .....................
2
ARGUMENT ........................................................
4
I.
The Ninth Circuit Inappropriately Upended
Well-Settled Tax Law ................................
4
A. A consistent and predictable application of the tax law is vital to protect
settled expectations and to permit
prudent business planning ..................
4
B. The Ninth Circuit departed from wellsettled law in concluding that the
government may disregard evidence of
comparable transactions when applying
§ 482 to cost-sharing arrangements between related parties ............................
6
C. The Ninth Circuit’s characterization of
cost-sharing arrangements also departs
from longstanding law and settled
expectations ........................................... 13
II.
The Ninth Circuit’s Decision Has Immediate,
Enormous Detrimental Effects That Require
This Court’s Review ................................... 15
A. The impact of the Ninth Circuit’s decision on amici and similarly situated
companies throughout all sectors of
the economy is staggering ................... 15
ii
TABLE OF CONTENTS—Continued
Page
B. The Ninth Circuit’s decision disrupts
international consensus on the treatment of cost-sharing payments............. 16
C. The Ninth Circuit’s decision sows great
confusion concerning the proper application of the “commensurate with income”
standard ................................................. 19
III.
Conclusion ................................................. 20
iii
TABLE OF AUTHORITIES
Page
CASES
Barclays Bank PLC v. Franchise Tax Bd., 512
U.S. 298 (1994) .................................................... 7, 12
Bowman Transp., Inc. v. Ark.-Best Freight Sys.,
Inc., 419 U.S. 281 (1974)..........................................10
Commissioner v. First Sec. Bank of Utah, 405
U.S. 394 (1972) ..........................................................8
Edwards v. Wabash Ry. Co., 264 F. 610 (2d Cir.
1920) ..........................................................................5
Entergy Corp. v. Riverkeeper, Inc., 556 U.S. 208
(2009) .........................................................................8
Motor Vehicle Mfrs. Ass’n of the U.S. v. State
Farm Mut. Auto. Ins., 463 U.S. 29 (1983) ............ 5, 10
Peck v. Commissioner, 752 F.2d 469 (9th Cir.
1985) ..........................................................................8
United States v. Byrum, 408 U.S. 125 (1972) ...............4
Xilinx, Inc. v. Commissioner, 125 T.C. 37 (2005) ........11
Xilinx, Inc. v. Commissioner, 598 F.3d 1191 (9th
Cir. 2010) ............................................................. 7, 11
STATUTES
5 U.S.C. § 551 et seq. (Administrative Procedure
Act) ............................................................................2
26 U.S.C.
§ 482 ................................................................ passim
§ 1442.......................................................................16
iv
TABLE OF AUTHORITIES—Continued
Page
RULES & REGULATIONS
Compensatory Stock Options Under Section
482, 68 Fed. Reg. 51171 (Aug. 26, 2003) .................14
Supreme Court Rule 37.6 .............................................1
Treas. Reg.
§ 1.482-1 .............................................................. 8, 19
§ 1.482-4 ........................................................ 9, 19, 20
§ 1.482-7A .......................................................... 14, 17
OTHER AUTHORITIES
H.R. REP. NO. 99-841 (1986) .........................................9
IRS, Notice 88-123, A Study of Intercompany
Pricing Under Section 482 of the Code, 1988-2
C.B. 458............................................................ passim
OECD Comm. on Fiscal Affairs, Transfer Pricing
and Multinational Enterprises (1979) ....................16
1
STATEMENT OF INTEREST
OF AMICI CURIAE1
25 U.S. corporations representing more than $3.5
trillion in market capitalization join together as amici
to draw this Court’s attention to the harmful, real
world implications of the Ninth Circuit’s opinion in
Altera Corp. & Subsidiaries v. Commissioner, Pet. App.
1a (“Altera”).
Amici’s various business activities draw from a
broad and diverse spectrum of industries that are significant to the U.S. economy. Collectively and on an
annual basis amici: (i) engage in hundreds of billions
of dollars’ worth of intercompany transactions subject
to the transfer pricing regulations promulgated under
26 U.S.C. § 482, and (ii) spend many tens of billions of
dollars on research and development (“R&D”). Many
amici use cost-sharing arrangements for global R&D
projects, acting cooperatively with foreign subsidiaries,
as Altera did in this case. Amicus Cisco Systems alone
has spent tens of billions of dollars on R&D pursuant
to its cost-sharing arrangement.
The Ninth Circuit’s decision dramatically departs
from well-settled transfer pricing precedent, violates
1
Both parties have consented to the filing of this brief by
amici curiae. Pursuant to Supreme Court Rule 37.6, amici state
that no counsel for any party to this proceeding authored this
brief in whole or in part, no party or party’s counsel contributed
money that was intended to fund preparing or submitting the
brief, and no person other than amici contributed money that was
intended to fund preparing or submitting this brief. All parties
have been timely notified of the submission of this Brief.
2
basic administrative law requirements, and spurns international norms. In doing so, the decision upends
settled expectations and creates significant ongoing
confusion and uncertainty for U.S. multinationals that
have long relied on these precedents to conduct their
global businesses. In particular, the decision leaves
unclear the role of comparables in application of the
arm’s-length standard for transfer pricing—the keystone of § 482. The decision will cost U.S. corporations
billions of dollars. It also creates ambiguity regarding
the characterization of cost-sharing payments. The decision will also disrupt the international consensus on
taxation of related party transactions, including R&D
cost-sharing arrangements. And finally, the decision
ignores the notice-and-comment requirements of the
Administrative Procedure Act and inappropriately defers to the agency’s post hoc litigation position. Amici
submit this brief to highlight these concerns and urge
this Court’s immediate review.
---------------------------------♦---------------------------------
SUMMARY OF THE ARGUMENT
In a divided decision, the Ninth Circuit disregarded basic requirements of administrative procedure and upended settled expectations—grounded in
longstanding tax law—of U.S. multinational corporations and United States’ treaty partners. It did so
based on arguments the government adopted for the
first time during litigation, without proper notice to
affected parties and without allowing them an
3
opportunity to respond through required administrative processes.
Specifically, the decision holds that the government may disregard evidence of comparable transactions when applying the arm’s-length standard under
§ 482. Contrary to longstanding regulations, IRS pronouncements, and the language of § 482, the decision
concludes that the “commensurate with income” standard added to § 482 in 1986 applies to development of
intangibles in cost-sharing arrangements between related parties and allows evidence of comparable transactions to be ignored. To reach this startling decision,
the Ninth Circuit majority accepted and gave deference
to an agency argument that was not the basis for the
rulemaking, in violation of basic tenets of administrative law and the Chevron doctrine.
As dissenting Ninth Circuit judges recognized,
the decision “tramples on the longstanding reliance
interests of American businesses.”2 The decision below will have dramatic impacts on amici and other
multinational companies throughout all segments of
the economy. The amount of tax at issue for amici is
staggering, exceeding $5 billion. The decision also disrupts expectations of U.S. treaty partners and undermines the international consensus on transfer pricing.
The IRS rulemaking at issue contained no hint of these
shocking consequences; the IRS’s position emerged
only in litigation.
2
Pet. App. 165a (dissent).
4
This Court’s immediate review is warranted.
---------------------------------♦---------------------------------
ARGUMENT
I.
The Ninth Circuit Inappropriately Upended Well-Settled Tax Law.
A. A consistent and predictable application
of the tax law is vital to protect settled
expectations and to permit prudent
business planning.
To operate efficiently in the global economy, amici
and other multinational businesses must have uniform and predictable rules to govern the tax treatment
of their cross-border intercompany transactions. This
Court and others have long recognized that tax certainty is a bedrock of effective and efficient business
planning. For this reason, the consistent and predictable application of tax law is of vital importance.
As this Court has explained, “[c]ourts properly
have been reluctant to depart from an interpretation
of tax law which has been generally accepted when the
departure could have potentially far-reaching consequences.”3 Similarly, the Second Circuit explained
that the object of dealing with tax statutes “must be,
above that of all other acts, to maintain them and to
expound them in a manner which will be consistent,
and which will enable the subjects of this country to
know what exactly is the amount of charge and burden
3
United States v. Byrum, 408 U.S. 125, 135 (1972).
5
which they are to sustain.”4 The risk of harm caused
by departure from accepted interpretation is particularly important where—as here—the tax law in question is far-reaching and has ramifications for the tax
treatment of intercompany and cross-border transactions worth many billions of dollars.
The Ninth Circuit decision violated bedrock principles of administrative law in order to defer to agency
arguments that were never raised during the administrative process.5 In so doing, the Ninth Circuit panel
endorsed a position that disregards the administrative
record in favor of post hoc rulemaking, ignores
longstanding tax law and guidance, and tramples on
the settled expectations of massive segments of the
economy and U.S. treaty partners.
4
Edwards v. Wabash Ry. Co., 264 F. 610, 617 (2d Cir. 1920).
Pet. App. 159a (dissent) (“The APA does not allow an
agency to reclassify the reasoning it articulated to the public as
‘extraneous observations,’ * * * ignore public comments pointing
out the failures in such reasoning, and then defend its rule in
litigation using reasoning the public never had notice of.”); id. at
48a (dissent) (“The majority, thus, ‘suppl[ies] a reasoned basis
for the agency’s action that the agency itself has not given.’ ”
(quoting Motor Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut.
Auto. Ins., 463 U.S. 29, 43 (1983))).
5
6
B. The Ninth Circuit departed from wellsettled law in concluding that the government may disregard evidence of
comparable transactions when applying
§ 482 to cost-sharing arrangements between related parties.
The arm’s-length principle is firmly ingrained in
U.S. and international transfer-pricing law. Since
1935, Treasury regulations have interpreted the first
sentence of § 482 as requiring intercompany transactions to satisfy the arm’s-length standard—i.e., “the
results of [a related-party] transaction [must be] consistent with the results that would have been realized
if uncontrolled [unrelated] taxpayers had engaged in
the same transaction under the same circumstances
(arm’s length result).”6 Whether a transaction produces an arm’s-length result “generally will be determined by reference to the results of comparable
transactions under comparable circumstances.”7 The
arm’s-length standard is important because if related
companies transfer property or services amongst each
other, and if what they charge for such property or services meets the arm’s-length standard, the IRS cannot
change that pricing—i.e., there will be no changes to
the income reported (and hence the taxes owed) by
each company.
The primacy of the arm’s-length standard (with its
emphasis on evaluating comparable transactions) has
6
7
Id. at 173a.
Id. (emphasis added).
7
been reinforced by decades of pronouncements and
guidance from Congress, Treasury, and the IRS. The
Ninth Circuit has itself agreed that the arm’s-length
standard governs the pricing of intercompany transactions.8 And as this Court acknowledged in Barclay’s
Bank, the arm’s-length standard forms the basis of an
international consensus on transfer pricing.9
Amici have relied on the arm’s-length standard
when determining pricing for their intercompany
transactions. In so doing, amici have run their global
businesses within a predictable tax framework for
pricing intercompany transactions. This framework
assesses the arm’s-length nature of a transaction by
way of reference to comparable transactions (“comparables”).
The notion that comparables are paramount when
applying the arm’s-length standard is based on decades of authority; authority upon which amici and
those like them have long relied.10 The Ninth Circuit
8
See, e.g., id. at 6a (“The parties agree that, under the governing tax statute, the ‘arm’s length’ standard applies.”); Xilinx, Inc. v. Commissioner, 598 F.3d 1191, 1197 (9th Cir. 2010)
(describing the arm’s-length standard as “the readily understandable international measure”).
9
Barclays Bank PLC v. Franchise Tax Bd., 512 U.S. 298, 305
(1994) (under the “ ‘separate accounting’ method * * * used by all
major developed nations * * * transactions between affiliated
corporations must be scrutinized to ensure that they are reported
on an ‘arm’s-length’ basis”).
10
See, e.g., Pet. App. 173a (whether a transaction produces
an arm’s-length result “generally will be determined by reference
to the results of comparable transactions under comparable
circumstances”); IRS, Notice 88-123, A Study of Intercompany
8
majority brushed this all aside, stating “[w]hile interpreting the [‘commensurate with income’ standard] to
do away with reliance on comparables may not have
been ‘the only possible interpretation’ of Congress’s
intent, it proves a reasonable one.”11 But the “commensurate with income” standard does not justify the
Ninth Circuit’s interpretation.
Congress added the “commensurate with income”
standard to § 482 to address transfers of intangible
property for which comparable information was unavailable or scarce. Nowhere in the text or legislative
history of that change did Congress embrace or suggest
Pricing Under Section 482 of the Code, 1988-2 C.B. 458, 473, 477
(emphasis added) (the “White Paper”) (“Intangible transfer prices
will * * * be determined on the basis of comparables if they
exist,” and where “there is a true comparable for a high profit
intangible, the royalty rate must be set on the basis of the
comparable because that remains the best measure of how third
parties would allocate intangible income”); Commissioner v. First
Sec. Bank of Utah, 405 U.S. 394, 400 (1972) (“The purpose of
section 482 is to place a controlled taxpayer on a tax parity with
an uncontrolled taxpayer* * * * The standard to be applied in
every case is that of an uncontrolled taxpayer dealing at arm’s
length with another uncontrolled taxpayer.” (quoting Treas. Reg.
§ 1.482-1(b)(1) (1971))); Peck v. Commissioner, 752 F.2d 469, 472
(9th Cir. 1985) (the failure to provide “reliable evidence that [the
taxpayer’s terms] are terms that would have been arrived at had
the parties dealt at arm’s-length” supported an adjustment under
§ 482).
11
Pet. App. 29a (quoting Entergy Corp. v. Riverkeeper, Inc.,
556 U.S. 208, 218 (2009)).
9
ignoring comparables when they exist. When comparables are available, they remain crucial.12
When Congress enacted the “commensurate with
income” standard in 1986, it directed Treasury to conduct a “comprehensive study” of intercompany transfer
pricing rules.13 Congress prompted this study “at the
same time it added the ‘commensurate with income’
standard to § 482.”14 The study was a two-year undertaking and the resulting White Paper addressed, in
particular, the sentence added by way of the “commensurate with income” amendment.15 The White Paper
concluded that the amendment did not displace reliance on comparables when they exist: “Intangible
transfer prices will in any event be determined on the
basis of comparables if they exist.”16
In Treasury’s 2003 final rulemaking, it purported
to apply the longstanding arm’s-length standard, which
relies on comparables when they exist. In response to
the proposed rulemaking, uncontradicted public comments stated, with support, that parties at arm’s
length would not share stock-based compensation
costs. In the final rulemaking, Treasury noted “[t]he
12
“If the arm’s length result is derived from the application
of the comparable uncontrolled transaction method based on the
transfer of a comparable intangible under comparable circumstances,” no “commensurate with income” adjustment is permitted. Treas. Reg. § 1.482-4(f )(2)(ii)(B).
13
H.R. REP. NO. 99-841, at II-638 (1986).
14
Pet. App. 150a n.5 (dissent).
15
See generally White Paper.
16
Id. at 477 (emphasis added).
10
uncontrolled transactions cited by commentators do
not share enough characteristics of [cost-sharing arrangements] involving the development of high-profit
intangibles to establish that parties at arm’s length
would not take stock options into account in the context of an arrangement similar to a [cost-sharing arrangement].”17
Amici naturally interpreted this
statement to mean not that comparables are irrelevant, but that the proffered evidence of other transactions was not, in the government’s view, comparable to
cost-sharing arrangements under review (“do not
share enough characteristics of ”). Plainly, the government’s outright rejection of comparables in this case
“may [not] be reasonably discerned” from this rulemaking.18 If it were at all “discernable,” amici and the
broader tax community would have provided detailed
and extensive comments to express their concern. All
15 Tax Court judges unanimously agreed the rulemaking embraced the use of comparables in applying the
arm’s-length standard.19
17
Pet. App. 231a.
State Farm, 463 U.S. at 43 (“We will * * * ‘uphold [an
agency] decision of less than ideal clarity if the agency’s path
may reasonably be discerned.’ ” (quoting Bowman Transp., Inc. v.
Ark.-Best Freight Sys., Inc., 419 U.S. 281, 286 (1974))).
19
Pet. App. 118a (“Treasury necessarily decided an empirical
question when it concluded that the final rule was consistent with
the arm’s-length standard* * * * [T]he preamble to the final rule
does not justify the final rule on the basis of any modification or
abandonment of the arm’s-length standard* * * *”), rev’d, id. at 1a;
see also id. at 119a n.15 (“[T]he preamble never suggests that the
final rule could be consistent with the arm’s-length standard if
18
11
The government’s shift in this case—from its 2003
final rulemaking (which, as noted, signaled continuing
vitality of reliance on comparables) to its newfound
litigation position that comparables are irrelevant—is
astounding. Yet, unfortunately, it is not an isolated
example of aggressive litigation behavior by the IRS
in this context. In Xilinx, Inc. v. Commissioner,20 a
case involving the treatment of stock options under
prior cost-sharing regulations, the IRS litigation position was that the cost-sharing regulatory requirement
to share “all of the costs” related to intangible development was immune to the steadfast, generally applicable requirement that “the standard to be applied
in every case is that of a taxpayer dealing at arm’s
length with an uncontrolled taxpayer.”21 Xilinx provided substantial and uncontradicted evidence that
uncontrolled parties would not share the cost of
stock options. The Tax Court agreed with Xilinx. In a
2-1 decision, the Ninth Circuit ultimately affirmed the
Tax Court,22 noting that “taxpayers have not been
given clear, fair notice of how the regulations will affect
them.”23 The same is true here: the government’s
evidence showed that unrelated parties would not share stockbased compensation costs* * * *”).
20
125 T.C. 37 (2005), aff ’d, 598 F.3d 1191 (9th Cir. 2010).
21
Pet. App. 173a.
22
598 F.3d 1191 (9th Cir. 2010).
23
Id. at 1198.
12
outright rejection of comparables could not be “reasonably discerned” from Treasury’s 2003 final rulemaking.24
Moreover, as the dissenting judges observed in
their dissent to the denial of en banc review here, the
arm’s-length standard and its emphasis on comparables forms the basis of an international consensus on
transfer pricing: “the arm’s length method is ‘used by
all major developed nations,’ ” and “[t]he panel majority’s interpretation of § 482 as allowing for the use of
a purely internal standard to make cost and income
allocations, i.e., without ever inquiring as to the behavior of parties operating at arm’s length, greatly upsets
this international uniformity.”25 Comparables are
the touchstone of the arm’s-length principle and are
relevant to the pricing of all transactions between related companies. By ignoring comparable transactions
where they exist, the Ninth Circuit has embraced a
startling shift that “sows uncertainty over the fate of
billions of dollars.”26
24
Pet. App. 49a (dissent) (“Treasury did not provide adequate notice of its intent to change its longstanding practice of
employing the arm’s length standard and using a comparability
analysis to get there.”); id. at 158a (dissent) (“The panel majority
ignores Treasury’s clear statements in the preamble to its 2003
rule expressly justifying its treatment of stock-based compensation based on a traditional arm’s length analysis employing (unsubstantiated) comparable transactions.”).
25
Id. at 166a (dissent) (quoting Barclays, 512 U.S. at 305).
26
Id. at 167a (dissent).
13
C. The Ninth Circuit’s characterization of
cost-sharing arrangements also departs
from longstanding law and settled expectations.
The government’s position and the Ninth Circuit’s
decision also depart from longstanding law and settled
expectations in their characterization of cost-sharing
arrangements. By its terms, the “commensurate with
income” standard only applies to “any transfer (or license) of intangible property (within the meaning of
[§] 936(h)(3)(B)).” The Ninth Circuit’s decision is
therefore premised on the court’s view that “parties to
a [cost-sharing arrangement] transfer cost-shared intangibles.”27 But that premise, too, is inconsistent with
settled tax law and guidance.
Treasury’s White Paper—provided to Congress
only two years after the “commensurate with income”
standard was enacted—made clear that cost sharing is
“an appropriate method of attributing the ownership
of intangibles ab initio to the user of the intangible,
thus avoiding section 482 transfer pricing issues related to the licensing or other transfer of intangibles.”28
This means that when technology is developed under
a cost-sharing arrangement, each participant immediately owns its appropriate share of the developed intangible property directly upon creation: there is no
transfer to each participant of what it already owns.
27
28
Id. at 25a.
White Paper at 474.
14
Because there is no transfer, the “commensurate with
income” standard does not apply.
Treasury’s own regulations further confirm this
conclusion. As Judge Smith noted in his dissent to the
denial of rehearing en banc, the cost-sharing regulations themselves characterize cost-sharing agreements
as “arrangements for the development of high-profit
intangibles.”29 The regulations say that interests in
developed intangibles are assigned to the payor and
that cost-sharing payments are “considered costs of
developing intangibles of the payor.”30 As Judge
O’Malley explained in her Ninth Circuit panel dissent, “[n]o rights are transferred when parties enter
into an agreement to develop intangibles; this is because the rights to later-developed intangible property
would spring ab initio to the parties who shared the
development costs without any need to transfer the
property.”31
29
Pet. App. 156a (dissent) (quoting 68 Fed. Reg. at 51173).
Treas. Reg. § 1.482-7A(a)(1); Treas. Reg. § 1.482-7A(h)(1).
31
Pet. App. 70a (dissent).
30
15
II.
The Ninth Circuit’s Decision Has Immediate, Enormous Detrimental Effects That
Require This Court’s Review.
A. The impact of the Ninth Circuit’s decision on amici and similarly situated
companies throughout all sectors of the
economy is staggering.
Amici are concerned not only by the government’s
flouting of decades of precedent regarding the role of
comparables and the treatment of cost-sharing arrangements, but also by the Ninth Circuit’s willingness to disregard core administrative law protections
to endorse the government’s new and unprincipled litigation position.
For years, U.S. multinationals like amici have
structured intercompany transactions with the understanding that if their transfer pricing produced an
arm’s-length result—determined by reference to the
results of comparable transactions under comparable
circumstances—they would be free from tax adjustments. By disregarding comparable transactions, the
Ninth Circuit unsettles these ground rules and turns
a sound and workable regime on its head. Federal tax
treatment of all intercompany transactions of U.S.
multinationals is now exposed to the uncertainty that
the government may in litigation argue against the
relevance of comparables. As a result of the decision,
companies in the Ninth Circuit are disadvantaged
compared to companies in other circuits for sharing of
stock-based compensation costs in a cost-sharing arrangement. Companies outside the Ninth Circuit can
follow the Tax Court decision. As Judge Smith wrote
16
for the en banc dissenters, “the panel majority’s opinion tramples on the longstanding reliance interests of
American businesses,”32 and “threatens the uniform
enforcement of the Tax Code.”33
The tax amounts at stake in connection with costsharing of stock-based compensation as a consequence
of the Ninth Circuit decision are enormous: amici face
an aggregate tax burden of over $5 billion. For all companies nationwide the amount will undoubtedly be
larger.
B. The Ninth Circuit’s decision disrupts
international consensus on the treatment of cost-sharing payments.
The Ninth Circuit’s outright rejection of comparables and its holding on the transference of cost-shared
intangibles shatters the international consensus on
treatment of hundreds of billions of dollars of costsharing payments.
The United States, like many countries, imposes a
“withholding tax” on certain outbound payments to
foreign payees.34 As the Organisation for Economic Cooperation and Development (“OECD”) has recognized,
there is an international consensus that cost-sharing
payments should not be subject to withholding taxes.35
32
Id. at 165a (dissent).
Id. at 147a (dissent).
34
See 26 U.S.C. § 1442.
35
OECD Comm. on Fiscal Affairs, Transfer Pricing and
Multinational Enterprises, ¶ 123 (1979).
33
17
The White Paper reached the same conclusion, explaining that because cost-sharing payments are not gross
income to the recipient, “no U.S. withholding tax would
be imposed on outbound cost sharing payments made
by a U.S. person to a foreign person.”36 The basis for
this international consensus not to impose withholding
tax on cost-sharing payments is—as explained in the
White Paper—the widespread understanding that costsharing payments do not constitute gross income to
the payee but rather are a reduction of its deductions.
The U.S. cost-sharing regulations also embrace this
treatment. Treas. Reg. § 1.482-7A(h)(1) provides that
cost-sharing payments “will be considered costs of developing intangibles of the payor and reimbursements
of the same kind of costs of developing intangibles of
the payee.” Once again, this characterization is a corollary of the conclusion that cost-shared intangibles
are not transferred.
The Ninth Circuit holding that cost-shared intangibles are transferred is inconsistent with what had
been an agreed upon, multijurisdictional framework.
This framework prevented opportunistic behavior by
any particular country, which might otherwise be inclined to enrich itself (at the expense of other countries) by imposing withholding taxes on outbound
cost-sharing payments. Fissures in internationally
agreed treatment of transactions produce tax uncertainty that hinders multinational companies from
making prudent business decisions. Additionally,
36
White Paper at 497.
18
cracks in the internationally agreed treatment of
transactions can also—in the case of imposition by foreign countries of withholding taxes not fully mitigated
by tax treaties—erode the U.S. fisc if such foreign taxes
can be credited, or lead to double taxation of the same
corporate income if they cannot.
There is no evidence the Ninth Circuit majority
contemplated the inconsistency and confusion its opinion would create either at home or abroad. What is
clear is that Treasury’s 2003 final rulemaking never
said a peep about the abandonment of comparables or
cost-shared intangibles being transferred, nor was
there any acknowledgement of the inconsistency and
confusion that results from the adoption of the government’s litigating position. Nowhere in the White Paper
was Congress told that Treasury might later—to advance its litigation interests—completely abandon its
studied positions. Nowhere in the process leading to
the 2003 final rulemaking did Treasury signal any
departure from the White Paper. If Treasury had asserted these positions in its rulemaking, then amici
(and likely foreign governments, keen to preserve international consensus) would have commented to correct these misinterpretations.
19
C. The Ninth Circuit’s decision sows great
confusion concerning the proper application of the “commensurate with income”
standard.
The Ninth Circuit majority swallowed whole the
government’s litigation arguments that the “commensurate with income” standard applied to the development of intangibles in a cost-sharing arrangement,
and that the standard contained the heretofore hidden
notion that the government could ignore comparables
in determining cost-sharing costs. The decision creates
major confusion regarding the application of the “commensurate with income” standard not only in the
context of cost-sharing arrangements, but also as to
actual transfers of intangible property, where the
“commensurate with income” standard was meant to
apply.
When Treasury and the IRS wrote regulations
codifying the “commensurate with income” standard,
they told taxpayers to interpret that standard in a
manner consistent with the arm’s-length standard.37
Their regulations enshrined the primacy of comparables: in the case of an actual transfer of intangibles,
no “commensurate with income” adjustment would be
made if the taxpayer had suitable evidence of comparables.38 In those circumstances, comparables trump
37
“Adjustments made pursuant to this paragraph * * * shall
be consistent with the arm’s length standard and the provisions
of § 1.482-1.” Treas. Reg. § 1.482-4(f )(2).
38
“If the arm’s length result is derived from the application
of the comparable uncontrolled transaction method based on the
20
“commensurate with income” as Treasury’s own regulations direct.39 So the Ninth Circuit decision leaves
amici—who conduct many billions of dollars of actual
intangibles transfers each year—exposed to a government “convenient litigating position”40 that comparables are irrelevant, in place of what the regulations
plainly instruct.
III. Conclusion.
The Ninth Circuit decision turned a number of
well-settled administrative and tax law principles on
their head and disrupted the international consensus
on the relevance of comparables and the treatment of
cost-sharing payments. In so doing, the decision “tramples on the longstanding reliance interests of American
businesses”41 and leaves U.S. multinationals with tremendous uncertainty as to the application of the
arm’s-length standard, the proper characterization of
cost-sharing payments, and the relevance of comparables to actual transfers of intangible property. In the
absence of a predictable framework governing the tax
transfer of a comparable intangible under comparable circumstances,” no “commensurate with income” adjustment is permitted.
Treas. Reg. § 1.482-4(f )(2)(ii)(B).
39
The absurdity of the IRS arguing on appeal that “commensurate with income” in one context (cost sharing) allows it to
ignore comparables, but “commensurate with income” in its intended context (actual intangibles transfers) is subject to regulations saying comparables are paramount, will not be lost on this
Court.
40
Pet. App. 161a (dissent).
41
Id. at 165a (dissent).
21
treatment of cross-border intercompany transactions,
amici and other similarly situated multinational businesses face many billions of dollars in unexpected tax
liabilities.
As Petitioner demonstrates, the regulation upheld
below suffers from a number of significant procedural
defects. The Ninth Circuit decision inappropriately endorsed the government’s new and unprincipled litigation position reinterpreting its flawed rulemaking.
This Court’s immediate review is justified and desperately needed.
Respectfully submitted,
DAVID B. SALMONS
Counsel of Record
RODERICK K. DONNELLY
THOMAS M. PETERSON
MICHELLE L. ANDRIGHETTO
MORGAN, LEWIS & BOCKIUS LLP
1111 Pennsylvania Avenue, NW
Washington, DC 20004
(202) 739-3000
david.salmons@morganlewis.com
Counsel for Cisco Systems, Inc.
THEODORE J. BOUTROUS, JR.
CHRISTOPHER CHORBA
GIBSON, DUNN &
CRUTCHER LLP
333 South Grand Avenue
Los Angeles, CA 90071
(213) 229-7000
Counsel for Apple Inc.
ARMIN D. EBERHARD
Director, International Tax
Planning and M&A
APPLIED MATERIALS
3225 Oakmead Village Dr.,
MS 1281
P.O. Box 58039
Santa Clara, CA 95054
(408) 563-5835
Counsel for Applied Materials
22
BRIAN W. ELLIS
Senior Vice President &
General Counsel
DANAHER CORPORATION
2200 Pennsylvania
Avenue NW, Suite 800W
Washington, DC 20037
(202) 419-7679
Counsel for
Danaher Corporation
THOMAS J. VALLONE
Senior Vice President,
Global Tax
DELL TECHNOLOGIES, INC.
401 Dell Way
Round Rock, TX 78682
(512) 723-1798
Counsel for
Dell Technologies, Inc.
ANDY SHERMAN
DOLBY LABORATORIES, INC.
1275 Market Street
San Francisco, CA 94103
(415) 558-0200
Counsel for
Dolby Laboratories, Inc.
JACOB SCHATZ
EVP, General Counsel and
Corporate Secretary
ELECTRONIC ARTS INC.
209 Redwood Shores Parkway
Redwood City, CA 94065
(650) 628-1500
Counsel for Electronic Arts Inc.
DANA A. LASLEY
EMERSON ELECTRIC CO.
8000 West Florissant
Avenue, P.O. Box 4100
St. Louis, MO 63136
(314) 553-2824
Counsel for
Emerson Electric Co.
PAUL S. GREWAL
VP & Deputy General Counsel
FACEBOOK, INC.
1 Hacker Way
Menlo Park, CA 94025
(650) 543-4800
Counsel for Facebook, Inc.
ALEXA KING
EVP & General Counsel
FIREEYE, INC.
601 McCarthy Boulevard
Milpitas, CA 95035
(408) 321-7745
Counsel for FireEye, Inc.
CHRISTINE HENNINGER
GENERAL MILLS, INC.
1 General Mills Boulevard
Golden Valley, MN 55426
(763) 293-3734
Counsel for
General Mills, Inc.
NORA PUCKETT
GOOGLE LLC
1600 Amphitheatre Parkway
Mountain View, CA 94043
(650) 253-0000
Counsel for Google LLC
23
KYLE BONACUM
GOPRO, INC.
3000 Clearview Way
San Mateo, CA 94402
(650) 436-4139
Counsel for GoPro, Inc.
JOSHUA MISHOE
Vice President
Tax Planning, Controversy,
Policy and M&A
HEWLETT PACKARD
ENTERPRISE COMPANY
5400 Legacy Drive
Plano, TX 75024
(832) 502-9171
Counsel for Hewlett Packard
Enterprise Company
BARBARA BECKERMAN
INTERNATIONAL PAPER
COMPANY
6400 Poplar Avenue, Tower 4
Memphis, TN 38197
(901) 419-4520
Counsel for International
Paper Company
JOHN DONOFRIO
Executive Vice President,
General Counsel
JOHNSON CONTROLS, INC.
5757 North Green Bay Avenue
Milwaukee, WI 53209
(414) 524-8284
Counsel for
Johnson Controls, Inc.
MARK CASPER
Vice President, Deputy
General Counsel
MAXIM INTEGRATED
160 Rio Robles
San Jose, CA 95134
(408) 601-5865
Counsel for
Maxim Integrated
MATTHEW FAWCETT
General Counsel
NETAPP, INC.
1395 Crossman Avenue
Sunnyvale, CA 94089
(408) 822-8700
Counsel for NetApp, Inc.
BRYAN KO
General Counsel &
Corporate Secretary
NORTONLIFELOCK INC.
60 E. Rio Salado Parkway
Suite 1000
Tempe, AZ 85281
(650) 527-8000
Counsel for
NortonLifeLock Inc.
MARYANNE BIFULCO
Vice President,
Transfer Pricing Counsel
PEPSICO, INC.
700 Anderson Hill Road
Purchase, NY 10577
(914) 253-3178
Counsel for PepsiCo, Inc.
24
MARKUS GREEN
Assistant GC, Government
Relations/Litigation
PFIZER INC.
235 East 42nd Street
New York, NY 10017
(212) 733-3966
Counsel for Pfizer Inc.
BETH WAPNER
VP Tax
QUALCOMM INCORPORATED
5775 Morehouse Drive
San Diego, CA 92121
(858) 651-3883
Counsel for
Qualcomm Incorporated
TANYA GUAZZO
S&P GLOBAL INC.
55 Water Street
New York, NY 10041
(212) 438-0926
Counsel for S&P Global Inc.
MARCH 2020
LORA BLUM
General Counsel
SURVEYMONKEY
1 Curiosity Way
San Mateo, CA 94403
(650) 543-8400
Counsel for SurveyMonkey
CATIA HAGOPIAN
Senior Vice President &
General Counsel
XILINX, INC.
2100 Logic Drive
San Jose, CA 95124
(408) 559-7778
Counsel for Xilinx, Inc.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.