Ninth Circuit Reverses Tax Court, Upholds Treasury Regulation on Cost-Sharing Arrangements: Decision has Significant Implication for Judicial Review of Treasury Regulations and for Corporations’ Ability to Deduct Costs of Stock CompensationSullivan & Cromwell LLP - August 6, 2018
On July 24, 2018, in Altera Corporation v. Commissioner, the U.S. Court of Appeals for the Ninth Circuit reversed an earlier U.S. Tax Court decision and held that a Treasury rule requiring sharing of stock-based compensation costs in qualified cost-sharing arrangements (QCSAs) is valid. The decision is noteworthy in three respects. First, pursuant to this decision, these stock-based compensation costs must be shared under QCSAs, resulting in a potentially significant financial impact on certain U.S. multinational corporations. Second, while the decision confirms that Treasury Regulations are subject to scrutiny under the Administrative Procedure Act (APA), the decision may render Treasury Regulations harder to challenge as violating the requirements of the APA. Third, it is worth noting that, at the time the Ninth Circuit issued this decision, one of the two judges in the majority, Judge Stephen Reinhardt, had been deceased for over three months.