Armanino Blog
Supreme Court Won’t Review the Altera Tax Case
by Nghi Huynh
June 23, 2020

The decision upholds the Ninth Circuit decision that stock-based compensation should be included in cost-sharing arrangements.

In February, Altera Corp. appealed to the Supreme Court its loss in the U.S. Court of Appeals for the Ninth Circuit over the validity of IRS regulations that force companies to include stock-option compensation among the assets that are valued for U.S. tax purposes when multinationals shift their intangible assets abroad. On June 22, the Supreme Court declined to review the lower court’s decision.

Since the Supreme Court decided to not review the Altera case, the Ninth Circuit’s decision will be the final word on the stock-based compensation (SBC) issue. The Ninth Circuit’s decision will be precedent for taxpayers residing in the Ninth Circuit (i.e., California, Washington, Oregon, and several other Western states). Taxpayers outside the Ninth Circuit can rely on the Tax Court opinion that invalidated the regulations that require related parties to share the costs of SBC in cost-sharing arrangements (CSAs) on the grounds that they violate the Administrative Procedure Act. Therefore, a taxpayer’s location is a key factor in considering the implications of the Altera issue.

Who This Applies To

  • Applies to all entities with CSAs that have excluded SBC from cost-sharing reimbursements based on the prior Tax Court ruling.
  • Also has implications in situations where SBC compensation is not included in cost pools for service transactions.

Financial Impact/Considerations

  • Reverse claw-backs - Taxpayers should review their CSA agreements for their reverse claw-back provisions to determine the adjustments that need to be made to retroactively share SBC costs.
    1. Generally, adjustments to cost-sharing transactions should be allocated to the tax years in which the intangible development costs were incurred, meaning amending tax returns for open years. Taxpayers can consider filing an amended return sharing SBC before it is under examination by the authorities. A taxpayer cannot file a Qualified Amended Return (QAR) for a year under examination. However, without more IRS guidance, it’s uncertain if taxpayers are better off reporting the adjusting in the current year or not in light of COVID-19 and the NOL carryback provisions.
    2. Including SBC adjustments in the current year will likely lead to increased taxable income, but it may be a better answer since the corporate tax rate is 21% rather than pre-2018 tax rate of 35%.
    3. Any Section 482 adjustments to share SBC could reduce earnings and profits in the foreign participant – leading to adjustments in Section 965 calculations or reducing tested income in Section 951A calculations.
    4. Taxpayers may face double taxation if the SBC expenses cannot be deducted in the current year or prior years in the foreign jurisdictions.
  • ASC 740 - Generally, most taxpayers should have accrued a tax provision for the additional income and interest in the U.S. if SBC had been included in the CSAs over the summer of 2019 when the Ninth Circuit released its decision.
  • Penalties - Taxpayers that have not been sharing the costs of SBC may be exposed to penalties, including the penalty for negligence or disregard of the regulations (20%) and the transfer pricing net adjustment penalty (20% or 40%). If taxpayers have not been including SBC expenses in their CSAs, existing transfer pricing documentation does not preclude the IRS from asserting penalties since the taxpayer did not follow the relevant requirements set forth in regulations under Section 482.
  • Doing Nothing - Alternatively, taxpayers may want to wait until any future IRS audits before making any changes.


The impact of including SBC in the qualified CSA should be reviewed for the quarterly provisions, year-end, estimated tax payment and other reporting requirements.

If you have any additional questions, contact our experts.

June 23, 2020

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Nghi Huynh - Partner, Tax - San Jose CA | Armanino
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