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 & SUBSIDIARIES,

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 FOR PRICEWATERHOUSECOOPERS LLP,

DELOITTE TAX LLP, AND KPMG LLP AS AMICI

CURIAE IN SUPPORT OF PETITIONERS

MELISSA ARBUS SHERRY

Counsel of Record

MIRIAM L. FISHER

ERIC J. KONOPKA

LATHAM & WATKINS LLP

555 Eleventh Street, NW

Suite 1000

Washington, DC 20004

(202) 637-2200

melissa.sherry@lw.com

Counsel for Amici Curiae PricewaterhouseCoopers LLP,

Deloitte Tax LLP, and KPMG LLP

TABLE OF CONTENTS

Page

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

INTEREST OF AMICI CURIAE ................................1

INTRODUCTION

AND

SUMMARY

OF

ARGUMENT ..........................................................3

ARGUMENT ...............................................................6

I. THE ROLE OF THE ARM’S LENGTH

STANDARD IN TRANSFER PRICING IS

EXCEPTIONALLY IMPORTANT ........................6

A. The Ninth Circuit Departed From The

Arm’s

Length

Standard

And

Circumvented The Rulemaking Process .......6

B. The Consequences Of The Ninth Circuit’s

Decision Are Significant...............................11

II. WHETHER PARTICIPANTS IN A COST

SHARING ARRANGEMENT MUST SHARE

STOCK-BASED

COMPENSATION

IS

IMPORTANT TOO ..............................................16

CONCLUSION ..........................................................20

ii

TABLE OF AUTHORITIES

Page(s)

CASES

Barclays Bank PLC v. Franchise Tax

Board of California,

512 U.S. 298 (1994) ................................................7

CNT Investors, LLC v. Commissioner,

144 T.C. 161 (2015) ..............................................18

Frank v. International Canadian Corp.,

308 F.2d 520 (9th Cir. 1962)................................11

Xilinx Inc. v. Commissioner,

125 T.C. 37 (2005) ..........................................16, 17

Xilinx, Inc. v. Commissioner,

598 F.3d 1191 (9th Cir. 2010), acq.

in result, 2010-33 I.R.B. 240 ................................17

STATUTES AND REGULATIONS

26 U.S.C. § 482 ..........................................................10

26 C.F.R. § 1.482-1(b)(1) .............................................7

26 C.F.R. § 1.482-1(c)(2) ............................................12

26 C.F.R. § 1.482-1(d)(1) .......................................7, 12

26 C.F.R. § 1.482-6(c)(3)(ii)(B) ..................................12

iii

TABLE OF AUTHORITIES—Continued

Page(s)

26 C.F.R. § 1.482-7(d)(3) .............................................8

26 C.F.R. § 1.482-7A(d)(2) ...........................................5

26 C.F.R. § 1.6662-3(b)(3) .........................................18

26 C.F.R. § 1.6662-4(d)(3)(iii) ...................................18

67 Fed. Reg. 48,997 (July 29, 2002)............................8

68 Fed. Reg. 51,171 (Aug. 26, 2003) .....................8, 17

76 Fed. Reg. 80,082 (Dec. 22, 2011) ............................8

OTHER AUTHORITIES

A Study of Intercompany Pricing Under

Section 482 of the Code, I.R.S. Notice

88-123, 1988-2 C.B. 458 ...................................7, 10

Convention for the Avoidance of Double

Taxation and the Prevention of

Fiscal Evasion with Respect to

Taxes on Income, U.S.-Mex., Sept.

18, 1992, T.I.A.S. No. 93-1228,

https://www.state.gov/wp-content/

uploads/ 2019/02/93-1228-MexicoTax-Convention.pdf ...............................................8

iv

TABLE OF AUTHORITIES—Continued

Page(s)

Letter from Alan Shapiro & Darcy

Alamuddin, Deloitte & Touche LLP,

to Commissioner, Internal Revenue

Service (Mar. 26, 2003), with Alan

Shapiro & Darcy Alamuddin,

Proposed Cost Sharing Stock Option

Regulations: IRS Opens Another

Front in the Battle, World Corp. Fin.

Rev. (BNA Feb. 2003) ............................................9

Organisation for Economic Co-operation

and Development, OECD Transfer

Pricing Guidelines for Multinational

Enterprises and Tax

Administrations (July 2017),

https://dx.doi.org/10.1787/

tpg-2017-en ......................................................8, 12

Patricia Gimbel Lewis & Neal M.

Kochman, Option Wars: Upping the

Ante for Cost Sharing Arrangements,

31 Tax Mgmt. Int’l J. 547 (2002) .........................16

Pol Antràs & Stephen R. Yeaple,

Multinational Firms and the

Structure of International Trade, in

4 Handbook of International

Economics (Gita Gopinath, Elhanan

Helpman & Kenneth Rogoff eds.,

2014) .......................................................................3

Sup. Ct. R. 10(c) ..........................................................3

v

TABLE OF AUTHORITIES—Continued

Page(s)

U.S. Dep’t of the Treasury, United

States Model Income Tax Convention

(2016),

https://www.treasury.gov/resourcecenter/tax-policy/treaties/

Documents/Treaty-US%20Model2016.pdf ................................................................13

U.S. Dep’t of the Treasury, United

States Model Income Tax Convention

of September 20, 1996: Technical

Explanation (1996),

https://www.irs.gov/pub/irs-trty/

usmtech.pdf ..........................................................10

U.S. Dep’t of the Treasury, United

States Model Technical Explanation

Accompanying the United States

Model Income Tax Convention of

November 15, 2006 (2006),

https://www.irs.gov/pub/irs-trty/

temod006.pdf..........................................................7

United Nations, Manual for the

Negotiation of Bilateral Tax Treaties

Between Developed and Developing

Countries 2019 (2019),

https://www.un.org/esa/ffd/

wp-content/uploads/2019/06/

manual-bilateral-tax-treatiesupdate-2019.pdf .....................................................6

INTEREST OF AMICI CURIAE1

PricewaterhouseCoopers LLP, Deloitte Tax LLP,

and KPMG LLP (collectively, “amici”) are professional

services firms that provide tax services, including

services related to transfer pricing, in the United

States. The networks of professional firms to which

amici belong provide such services in over 150

countries around the world.

Amici and their

respective networks represent three of the world’s

“Big Four” accounting, tax, and advisory professional

service organizations.2

PricewaterhouseCoopers LLP, a Delaware limited

liability partnership, is the United States member

firm of the global network of member firms of

PricewaterhouseCoopers International Limited, a UK

private company limited by guarantee. Each member

firm is a separate and independent legal entity. The

member firms in the PricewaterhouseCoopers global

network provide audit, assurance, advisory, and tax

services to many of the world’s largest corporations.

Member firms in the PricewaterhouseCoopers global

network include more than 276,000 people across

offices in 157 countries, and provided services to 85

1

The parties have consented in writing to the filing of this

brief, and received timely notice of the intent to file. No counsel

for a party authored this brief in whole or in part; and no such

counsel, any party, or any other person or entity—other than

amici curiae and their counsel—made a monetary contribution

intended to fund the preparation or submission of this brief.

2

Ernst & Young LLP is the financial statement auditor of

Intel Corporation, Altera Corporation’s parent company, and

accordingly declined to participate as an amicus curiae.

2

percent of the companies comprising the Fortune

Global 500 during its 2019 fiscal year.

Deloitte Tax LLP, a Delaware limited liability

partnership owned by Deloitte LLP and its individual

partners and principals who actively participate in its

business, provides tax services to a variety of clients

located in the United States and throughout the

world. Deloitte LLP is the United States member

firm of Deloitte Touche Tohmatsu Limited, a UK

private company limited by guarantee. Deloitte

Touche Tohmatsu Limited’s global network of

member firms consists of separate and independent

legal entities with approximately 312,000 people in

more than 150 countries and territories, and is a

leading global provider of audit and assurance,

consulting, financial advisory, risk advisory, tax, and

related services, serving four out of five Fortune

Global 500 companies.

KPMG LLP, a Delaware limited liability

partnership, is the United States member firm of the

KPMG International network of independent member

firms affiliated with KPMG International, a Swiss

cooperative. Each member firm is an independent

entity and describes itself as such. KPMG LLP, with

cooperation from other members of the KPMG

International network, provides audit, advisory, and

tax services to many of the world’s largest

corporations. KPMG International’s member firms

have more than 162,000 professionals, including more

than 10,500 partners, in 152 countries.

Firms in amici’s global networks audit client

financial statements in accordance with applicable

auditing standards to provide an opinion on whether

the financial statements present fairly, in all material

respects, the client’s financial position and the results

3

of its operations and cash flows in accordance with

generally accepted accounting principles. Auditing

and accounting are vital to the integrity of our capital

markets.

In

addition,

amici

assist

hundreds

of

multinational enterprises with issues related to

transfer pricing. These transfer pricing services are

designed to assist multinational enterprises in their

preparation of accurate tax returns in the countries

where they operate. As three of the Big Four firms

that provide audit, tax, and advisory services, amici

have a global perspective on—and substantial

expertise and interest in—transfer pricing matters.

Amici are thus in a unique position to discuss the

significance of the Ninth Circuit’s decision, the

uncertainty it has created, and the adverse collateral

consequences that may result.

Amici do not have a practice of joining together to

provide this Court with their views at the certiorari

stage and, in fact, have only rarely done so in the past.

Amici are doing so here not only because of their

particular perspectives on the issues involved, but

also because they strongly believe this case is

exceptionally important and warrants this Court’s

review. See Sup. Ct. R. 10(c).

INTRODUCTION AND

SUMMARY OF ARGUMENT

Multinational enterprises engage in trillions of

dollars of cross-border intercompany transactions

each year. See, e.g., Pol Antràs & Stephen R. Yeaple,

Multinational Firms and the Structure of

International Trade, in 4 Handbook of International

Economics 55, 55–56 (Gita Gopinath, Elhanan

Helpman & Kenneth Rogoff eds., 2014). When they

4

do so, they must determine the price for the

transaction—i.e., the transfer price. The transfer

price is, in essence, the price an affiliate in one

country charges an affiliate in another country in

conjunction with a particular transaction, like the

sale of a good or service. It affects the income and

expenses of each affiliate and, ultimately, how the

enterprise’s taxable income is allocated across the

jurisdictions where it operates. As a result, getting

transfer prices right is important to taxpayers and

taxing authorities alike.

Cost sharing arrangements can simplify transfer

pricing issues.

The Treasury Regulations have

sanctioned the use of cost sharing arrangements for

over 50 years. They have become common, crucial

tools for multinational enterprises to manage their

business and tax affairs, covering billions of dollars of

costs. And they are typically long term. A clear

understanding of the scope and meaning of the cost

sharing rules is thus essential to determining the tax

liabilities of multinational enterprises in the United

States and elsewhere.

This case concerns a key aspect of cost sharing

arrangements—namely, whether the participants in

a cost sharing arrangement must share stock-based

compensation.

More fundamentally, though, it

concerns the standard that has governed transfer

pricing for more than eight decades: the arm’s length

standard. Under that standard, transfer prices

between related entities are evaluated for consistency

with the results that unrelated, arm’s length parties

would realize in the same transaction under the same

circumstances. The arm’s length standard underlies

an international transfer pricing system—i.e.,

common approaches to transfer pricing and a network

5

of international tax treaties—that nations around the

world have developed collaboratively over the course

of more than 80 years. The arm’s length standard is

thus a foundational principle used by taxpayers and

taxing authorities to allocate a multinational

enterprise’s income between the countries in which

the enterprise operates. In this regard, the arm’s

length standard serves the critical role of providing

the accepted framework for dividing taxing rights

between and among countries.

The Ninth Circuit’s split decision raises questions

about the arm’s length standard generally, and the

treatment of stock-based compensation in cost

sharing arrangements specifically, that are important

to amici.

First, as petitioners explain, the decision below

departed from the arm’s length standard—even

though the Treasury Department purported to apply

that standard when promulgating the transfer

pricing regulation at issue here, 26 C.F.R. § 1.4827A(d)(2). See Pet. 17–19. The decision below has

prompted confusion and uncertainty among

taxpayers regarding the application of the arm’s

length standard. Continued uncertainty could lead to

more transfer pricing disputes—beyond just cost

sharing disputes—which would impose significant

costs on both multinational enterprises and taxing

authorities. Amici would have had the opportunity to

express these concerns during the administrative

rulemaking process if the Treasury Department had

advanced the same justification for § 1.482-7A(d)(2)

that the Ninth Circuit adopted on appeal.

Second, § 1.482-7A(d)(2) itself directly affects the

tax and financial reporting of billions of dollars of

stock-based compensation each year. Amici have

6

been closely watching this case, and amici expect that,

although many taxpayers will follow the decision

below and treat the regulation as valid, many others

may not, relying instead on the 15-0 Tax Court

opinion going the other way. Amici are unaware of

any other case presenting the same issue—and it

would likely take a decade or more for another case to

reach this Court. Without this Court’s intervention,

disuniformity and uncertainty created by the decision

below will not be resolved any time soon.

ARGUMENT

I. THE ROLE OF THE ARM’S LENGTH

STANDARD IN TRANSFER PRICING IS

EXCEPTIONALLY IMPORTANT

The Ninth Circuit’s split decision upheld the stockbased compensation regulation on a basis other than

the one articulated by the Treasury Department

during the rulemaking process. The meaning and

applicability of the arm’s length standard are

exceptionally important to amici, and the Ninth

Circuit’s decision to circumvent the administrative

rulemaking process warrants this Court’s review.

A.

The Ninth Circuit Departed From The

Arm’s

Length

Standard

And

Circumvented The Rulemaking Process

1. Multinational enterprises must comply with

the tax laws of every country where they operate.

Doing so is complex, and when countries use different

rules, there is a significant risk that multiple

jurisdictions will seek to tax the same income. See,

e.g., United Nations, Manual for the Negotiation of

Bilateral Tax Treaties Between Developed and

7

Developing Countries 2019, at 4 (2019).3 A key

objective of the international tax treaty network is to

ensure that taxing authorities use consistent

principles in order to minimize double taxation.

The arm’s length standard is one such principle.

Under that standard, income and expense allocations

between related entities are tested for tax purposes

by reference to what the allocations would be if there

were an arm’s length relationship between the

entities. See, e.g., 26 C.F.R. § 1.482-1(b)(1), (d)(1);

U.S. Dep’t of the Treasury, United States Model

Technical Explanation Accompanying the United

States Model Income Tax Convention of November 15,

2006, at 30 (2006).4 Over the course of more than 80

years, the United States and many other countries

have coalesced around the arm’s length standard to

allocate the income and deductions of a multinational

enterprise among the countries where it operates—

which helps ensure that the income earned in each

country is taxed only once.

The central role of the arm’s length standard in

transfer pricing is reflected in decades of case law,

regulations, and administrative practice, as well as in

the worldwide network of international tax treaties.

See, e.g., Barclays Bank PLC v. Franchise Tax Bd. of

Cal., 512 U.S. 298, 305 (1994); A Study of

Intercompany Pricing Under Section 482 of the Code,

I.R.S. Notice 88-123, 1988-2 C.B. 458, 459–61 (“White

Paper”) (tracing the history of the arm’s length

3

Available

at

https://www.un.org/esa/ffd/wp-content/

uploads/2019/06/manual-bilateral-tax-treaties-update-2019.pdf.

4

.pdf.

Available

at

https://www.irs.gov/pub/irs-trty/temod006

8

standard); Convention for the Avoidance of Double

Taxation and the Prevention of Fiscal Evasion with

Respect to Taxes on Income, U.S.-Mex., art. 9, Sept.

18, 1992, T.I.A.S. No. 93-1228.5 Indeed, as the

Organisation for Economic Co-operation and

Development (“OECD”) has put it, “the arm’s length

principle . . . is the international transfer pricing

standard that OECD member countries”—including

the United States—“have agreed should be used for

tax purposes by [multinational enterprise] groups

and tax administrations.” OECD, OECD Transfer

Pricing Guidelines for Multinational Enterprises and

Tax Administrations 33 (July 2017) (“OECD Transfer

For transfer pricing to

Pricing Guidelines”).6

effectively prevent double taxation, then, taxpayers

and taxing authorities must adhere to and

consistently apply the arm’s length standard.

2. During the rulemaking process for § 1.4827A(d)(2), the Treasury Department purported to

apply the arm’s length standard. See 67 Fed. Reg.

48,997, 49,000 (July 29, 2002) (notice of proposed

rulemaking); 68 Fed. Reg. 51,171, 51,172–73 (Aug. 26,

2003) (preamble to final rule).7

Amici and others submitted comments explaining

that, in fact, the proposed rule was inconsistent with

the arm’s length standard the Treasury Department

was purporting to apply. For example, amicus KPMG

5

Available at https://www.state.gov/wp-content/uploads/

2019/02/93-1228-Mexico-Tax-Convention.pdf.

6

7

Available at https://dx.doi.org/10.1787/tpg-2017-en.

The substance of § 1.482-7A(d)(2) was incorporated into a

comprehensive set of cost sharing regulations that was

promulgated in 2011, and is currently codified at 26 C.F.R.

§ 1.482-7(d)(3). See 76 Fed. Reg. 80,082, 80,096 (Dec. 22, 2011).

9

LLP explained that evidence showed that “[u]nrelated

third parties do not include compensatory stock

options in the pool of ‘costs’ to be shared in cost

sharing arrangements and analogous joint ventures.”

C.A. Suppl. Excerpts of Record (“SER”) 183. Amicus

PricewaterhouseCoopers LLP agreed that the rule

was “fundamentally flawed” because “[t]he evidence

from both private sector and government contracts

demonstrates that independent parties do not, in fact,

agree to share any amounts based on the other party’s

employee stock options.” Id. at 192–93. Likewise,

representatives of amicus Deloitte Tax LLP raised the

proposed regulation’s inconsistency with the arm’s

length standard. See Attachment to Letter from Alan

Shapiro & Darcy Alamuddin, Deloitte & Touche LLP,

to Commissioner, Internal Revenue Service (Mar. 26,

2003) (“The proposals engendered a storm of protest

arguing that [they] are inconsistent with the arm’s

length standard . . . . The authors are generally in

agreement with these comments . . . .”).8 In short,

amici all took the Treasury Department at its word

that the arm’s length standard was the relevant

governing standard under Section 482, and submitted

comments that accorded with that understanding.

3. As petitioners explain, the Ninth Circuit’s

decision circumvented the notice-and-comment

process. In upholding § 1.482-7A(d)(2), the Ninth

Circuit justified a departure from the arm’s length

standard by giving significant weight to statutory

language requiring that “income with respect to [the]

8

The attachment was a copy of an article that the authors

had published. See Alan Shapiro & Darcy Alamuddin, Proposed

Cost Sharing Stock Option Regulations: IRS Opens Another

Front in the Battle, World Corp. Fin. Rev. 3, 3 (BNA Feb. 2003).

10

transfer or license” of intangible property “be

commensurate with the income attributable to the

intangible.” 26 U.S.C. § 482; see Pet. 17–19; see also

Pet. App. 63a–65a, 158a–59a (dissenting opinions of

judges below expressing the same view). But when

the Treasury Department proposed (and then

finalized) § 1.482-7A(d)(2), it barely even mentioned

that standard. Had the agency intended to use

“commensurate with income” as a separate standard

to justify the regulation, it should have made that

clear during the rulemaking process. And if it had,

amici would have had the chance to submit comments

explaining that such an approach would cause

confusion about the arm’s length standard and raise

serious policy considerations—both nationally and

internationally.

For example, amici (and other commentators)

could have reminded the Treasury Department that

it had long emphasized the importance of the arm’s

length standard and construed the “commensurate

with income” standard to operate consistently with it.

See, e.g., White Paper, supra, 1988-2 C.B. at 472–80;

U.S. Dep’t of the Treasury, United States Model

Income Tax Convention of September 20, 1996:

Technical Explanation, at 29 (1996).9 Amici could

have pointed out that justifying the regulation on the

basis of the “commensurate with income” standard as

distinct from the arm’s length standard would have

broken from that longstanding position and

improperly diminished the role of the arm’s length

standard. And amici could have explained the

potential for conflict with the United States’ tax

treaty obligations and how such a change in position

9

Available at https://www.irs.gov/pub/irs-trty/usmtech.pdf.

11

could undermine the arm’s length standard more

generally. Faced with such comments, the Treasury

Department would have had to respond, make clear

its position, and explain whether and why it was

changing its understanding of the “commensurate

with income” standard. It did none of those things.

In short, these points should have been raised and

thoughtfully debated on the rulemaking record. By

adopting a justification for § 1.482-7A(d)(2) that the

Treasury Department offered only on appeal, the

Ninth Circuit circumvented the administrative

rulemaking process.

B.

The Consequences Of The Ninth

Circuit’s Decision Are Significant

1. There can be little question that the Ninth

Circuit’s decision employed reasoning that has sown

confusion about whether and how the arm’s length

standard should be applied. Indeed, many taxpayers

have approached amici with questions about the

decision below and its effect on the arm’s length

standard.

That confusion likely stems from three main

aspects of the Ninth Circuit majority’s opinion. First,

that opinion characterized the arm’s length standard

as “flexible” and “fluid” based on case law that did not

apply, or even purport to apply, the arm’s length

standard. Pet. App. 28a, 38a; see id. at 9a–10a

(discussing Frank v. Int’l Canadian Corp., 308 F.2d

520, 528–29 (9th Cir. 1962)). Thus, the Ninth Circuit

left unclear whether the arm’s length standard

remains the applicable standard—as it had been until

the decision below was issued—or whether it is

instead one transfer pricing standard among many.

12

Second, the decision below downplayed the role of

comparability with uncontrolled transactions in

applying the arm’s length standard. The transfer

pricing regulations specifically emphasize the

importance of comparability in applying the arm’s

length standard. See, e.g., 26 C.F.R. §§ 1.482-1(c)(2),

(d)(1), -6(c)(3)(ii)(B). So do international transfer

pricing guidelines. See, e.g., OECD Transfer Pricing

Guidelines, supra, at 35. But the Ninth Circuit held

that a comparability analysis was not required—and

it upheld § 1.482-7A(d)(2) even though the evidence

provided to the agency during the rulemaking process

pointed to the conclusion that uncontrolled parties

would not share stock-based compensation. See Pet.

App. 26a–27a; see also id. at 102a–03a (noting the

lack of evidence). The decision below thus raises

questions about whether taxpayers and the Internal

Revenue Service (“IRS”) must first look for marketbased evidence of arm’s length results when

evaluating transfer prices, or whether other factors

stand on equal footing with comparability in all cases.

Third, the decision below gave mixed messages

about the meaning of the “commensurate with

income” standard. The Ninth Circuit discussed that

standard in several different ways that obscure its

effect on and relationship with the arm’s length

standard. For example, the court of appeals cited

scholarship and other authorities suggesting that the

“‘commensurate with income standard is not really a

new approach to § 482’” and is “consistent with the

arm’s length standard.” Pet. App. 12a, 15a (citation

omitted). But elsewhere, the Ninth Circuit both

hinted that the addition of the “commensurate with

income” standard changed the meaning of the arm’s

length standard, id. at 29a–30a, and implied that the

13

arm’s length and “commensurate with income”

standards operate independently, id. at 39a–40a. The

“commensurate with income” standard either is a

manifestation of the traditional arm’s length

standard, changed that standard, or is independent of

that standard; it cannot be all three.

The lack of consistency and clarity creates

confusion about what standard or standards

taxpayers must comply with going forward.

2. The United States is a leader in, and often sets

the tone on, transfer pricing issues. Foreign taxing

authorities take note of the Treasury Department and

IRS’s positions on the arm’s length standard and

monitor

significant

transfer

pricing

cases.

Sometimes, foreign taxing authorities even rely on

court opinions from cases like this one when

developing their positions in transfer pricing

disputes. If the Ninth Circuit’s decision is allowed to

stand, numerous adverse collateral consequences will

likely follow.

First, if the application of the arm’s length

standard is weakened, and taxing authorities begin to

employ “flexible” or “fluid” standards (as the decision

below suggests might be appropriate), resolution of

international tax disputes will become more complex

and time consuming, and less predictable and

consistent. Tax treaty mutual agreement procedures

provide countries with a mechanism to agree on the

proper division of the tax base under the arm’s length

standard. See, e.g., U.S. Dep’t of the Treasury, United

States Model Income Tax Convention 56–63 (2016).10

10

Available at https://www.treasury.gov/resource-center/taxpolicy/treaties/Documents/Treaty-US%20Model-2016.pdf.

14

Although disagreements among taxing authorities do

exist and negotiations between countries have

material consequences for national income tax

revenue, the international commitment to follow a

single standard—the arm’s length standard—has

made agreement possible in almost all cases.

If one or another of the negotiating countries

asserts the authority to abandon the internationally

accepted arm’s length standard in a particular

situation, however, companies and taxing authorities

will spend more time and more resources addressing

such disputes as they seek to find common ground on

the basic analytical framework applicable to each

dispute. Moreover, companies and taxing authorities

will be less likely to resolve tax disputes successfully

and equitably, resulting in a higher incidence of

double taxation.

Second, multinational enterprises’ tax reporting

burdens could increase markedly.

Preparing

consistent transfer pricing documentation across a

number of jurisdictions is already difficult. If the

relevant countries apply conflicting principles or

standards, the ability of multinational enterprises to

comply will be compromised, and amici’s ability to

advise multinational enterprises regarding the

certainty of their compliance obligations will be

diminished. Multinational enterprises will have to

dedicate more time and resources to risk assessment

and evaluation, and they will become far less

confident in their ability to comply with their legal

obligations in all the countries where they operate.

Third, the lack of clarity arising from the Ninth

Circuit’s decision could cause the preparation and

auditing of multinational enterprises’ financial

statements to become more difficult and costly.

15

Uncertainty and complexity in tax compliance lead to

greater uncertainty and complexity in financial

reporting: Multinational enterprises must analyze—

and make judgments about—whether tax benefits

recognized under the arm’s length standard may be

recognized under the applicable financial reporting

standard.11

Taxpayers have already spent

substantial time and resources wrestling with the

proper treatment of stock-based compensation in cost

sharing arrangements.

If uncertainty in the

application of the arm’s length standard extended to

other transfer pricing matters, that expenditure

would multiply exponentially.

Finally, and relatedly, different companies and

tax advisors may take different positions on the

meaning and scope of the arm’s length standard based

on the decision below. Companies could also take

different views of whether to report tax benefits from

that standard in their financial statements. Such

variations in reporting could make it more difficult for

investors to compare financial statements across

different companies.

*

*

*

The decision below and the shift in justification for

§ 1.482-7A(d)(2) have increased uncertainty about the

arm’s length standard.

Such uncertainty is

counterproductive for multinational enterprises and

11

With respect to U.S. generally accepted accounting

principles, the applicable standard is Accounting Standards

Codification Topic 740 (“ASC 740”). Under ASC 740, the benefit

of a tax position is recognized in a company’s financial

statements only if company management concludes that it is

more likely than not that the position would be sustained based

on its technical merits if taken to the court of last resort.

16

could increase the number and complexity of transfer

pricing disputes in the future. The applicability and

scope of the arm’s length standard are exceptionally

important to tax practitioners and taxpayers. Amici

could have (and would have) expressed these concerns

during the administrative rulemaking process—if the

Treasury Department had justified § 1.482-7A(d)(2)

on the basis ultimately sustained by the Ninth

Circuit. Amici never had that chance. This Court’s

review is warranted.

II. WHETHER PARTICIPANTS IN A COST

SHARING ARRANGEMENT MUST SHARE

STOCK-BASED

COMPENSATION

IS

IMPORTANT TOO

Beyond the overarching concerns raised by the

Ninth Circuit’s decision regarding the role and scope

of the arm’s length standard, the specific issue in this

case is also an important one that will have

significant consequences. Taxpayers and the IRS

have long disputed whether participants in a cost

sharing arrangement must share stock-based

compensation. See, e.g., Patricia Gimbel Lewis &

Neal M. Kochman, Option Wars: Upping the Ante for

Cost Sharing Arrangements, 31 Tax Mgmt. Int’l J.

547, 547 (2002) (“The IRS and taxpayers have been at

loggerheads on this issue since the mid 1990s.”).

That question is now definitively resolved for

stock-based compensation incurred before 2003—the

year § 1.482-7A(d)(2) took effect. In Xilinx Inc. v.

Commissioner, the Tax Court held that “the arm’slength standard is applicable in determining the

appropriate allocation of costs” in a cost sharing

arrangement. 125 T.C. 37, 55 (2005). Since the IRS

had not shown that unrelated parties would share

17

stock-based compensation costs, the Tax Court said,

related entities that participate in a cost sharing

arrangement need not share those costs either. Id. at

59–63. The Ninth Circuit affirmed the Tax Court’s

decision in 2010, and the IRS has acquiesced in it

nationally. See Xilinx, Inc. v. Commissioner, 598 F.3d

1191 (9th Cir. 2010), acq. in result, 2010-33 I.R.B. 240.

In promulgating § 1.482-7A(d)(2), the Treasury

Department departed from the result ultimately

reached in Xilinx for stock-based compensation

incurred beginning in 2003. See 68 Fed. Reg. at

51,172 (requiring that stock-based compensation be

“taken into account in determining” shared intangible

development costs). The Tax Court below found

§ 1.482-7A(d)(2) invalid—in a reviewed, 15-0

opinion—for reasons similar to those given in Xilinx:

The Treasury Department failed to provide any

evidence that unrelated parties would agree to share

stock-based compensation—and failed to rebut ample

evidence showing that unrelated parties would not.

See Pet. App. 99a–103a, 121a–36a; see also supra at

8–11; SER183. In a split decision, the Ninth Circuit

reversed. In upholding § 1.482-7A(d)(2), the twojudge majority deviated from the considered views of

15 Tax Court judges, a dissenting panel judge, and

three judges who dissented from the denial of

rehearing en banc. See Pet. App. 47a–167a.

The validity of § 1.482-7A(d)(2) is an issue of

extraordinary importance to many taxpayers. As

petitioners correctly note, the rule affects the tax and

financial reporting of billions of dollars each year. See

Pet. 26–27. Indeed, recent Securities & Exchange

Commission (“SEC”) filings show that companies

have already reported over a billion dollars of

accounting charges related to the Ninth Circuit’s

18

ruling. See id.; see also Pet. App. 324a–30a (listing

SEC filings mentioning this case). And numerous

companies have publicly mentioned this case,

highlighting the lasting importance of the issue. See,

e.g., Pet. 25–26 (noting that over 100 companies have

publicly said that this case and/or § 1.482-7A(d)(2)

affect them). Many taxpayers have likewise told

amici that they are interested in and affected by this

issue.

The decision below is the first and only court of

appeals opinion on the validity of § 1.482-7A(d)(2).

Many taxpayers will treat it as dispositive—and it is

especially important to them that this Court

determine the validity of this regulation. To be sure,

some taxpayers may assert that § 1.482-7A(d)(2) is

invalid—and may rely on the Tax Court’s opinion,

which remains good law outside of the Ninth

Circuit.12 At a minimum, then, there will continue to

be pervasive uncertainty about the regulation’s

validity, which could cause inconsistency in financial

reporting and more international transfer pricing

disputes,

among

other

negative

collateral

consequences. Cf. supra at 13–15.

Amici are not currently aware of any pending

cases—other than those involving petitioners—in

which the validity of § 1.482-7A(d)(2) (or the 2011

12

The Tax Court follows an on-point court of appeals decision

when appeal “lies to that Court of Appeals and to that court

alone.” CNT Inv’rs, LLC v. Commissioner, 144 T.C. 161, 183

(2015) (citation omitted). Moreover, a Tax Court opinion can

provide a “reasonable basis” or “substantial authority” for a tax

position, insulating the taxpayer from penalties, even if it has

been overruled or reversed by a court of appeals “to which [the]

taxpayer does not have a right of appeal.” 26 C.F.R. §§ 1.66623(b)(3), -4(d)(3)(iii).

19

version of the regulation) is at issue. This is

significant because it means that, without this

Court’s intervention, any uncertainty will persist for

the indefinite future. Disputes about tax positions

often take more than a decade to percolate through

the administrative and judicial process before

reaching the court of appeals—as this case

exemplifies. See C.A. Excerpts of Record 1–9, 264–65,

298–99 (returns filed for tax years 2004 to 2007;

notices of deficiency issued in 2011 and 2012; Tax

Court decision issued in 2015); Pet. App. 1a (final

Ninth Circuit decision issued in 2019). Only this

Court can definitively resolve whether the

participants in a cost sharing arrangement must

comply with § 1.482-7A(d)(2) and share stock-based

compensation. This Court should grant certiorari

now rather than let the enormous financial and

practical consequences compound for the foreseeable

future.

20

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted,

MELISSA ARBUS SHERRY

Counsel of Record

MIRIAM L. FISHER

ERIC J. KONOPKA

LATHAM & WATKINS LLP

555 Eleventh Street, NW

Suite 1000

Washington, DC 20004

(202) 637-2200

melissa.sherry@lw.com

Counsel for Amici Curiae PricewaterhouseCoopers LLP,

Deloitte Tax LLP, and KPMG LLP

March 16, 2020