Armanino Blog

Altera v. Commissioner Impact on Cost-Sharing Agreements

by Nghi Huynh, Jon Davies

On June 7th, 2019, the Ninth Circuit issued its opinion in Altera v. Commissioner. In a 2-1 decision, the court upheld the validity of the cost-sharing regulation requiring that stock-based compensation be treated as a cost-shared cost, reversing the Tax Court (and reaching the same conclusion as the 9th Circuit’s previously withdrawn opinion).

The Ninth Circuit upheld the 2003 cost-sharing regulations regarding the inclusion of stock-based compensation (SBC) under the qualified cost-sharing arrangements (QCSA). The Ninth Circuit’s decision will be the final word on the SBC issue, unless Altera seeks rehearing or petitions the Supreme Court. The Ninth Circuit’s decision will represent precedent for taxpayers that reside in the Ninth Circuit (i.e., California, Washington, Oregon, and several other western states). The Tax Court decision remains precedent in the Tax Court, outside of cases that can appeal to the Ninth Circuit.

The panel held that Treasury reasonably interpreted § 482 as an authorization to require internal allocation methods in the QCSA context, provided that the costs and income allocated are proportionate to the economic activity of the related parties and concluded that the regulations are a reasonable method for achieving the results required by the statute.

Does This Apply to You?

If your company has cost-sharing arrangements that have excluded stock-based compensation from cost sharing reimbursements, this ruling applies to you. It also has implications in situations where SBC compensation is not included in cost pools for service transactions.

Financial Impact and Considerations

If you haven’t been sharing the costs of stock-based compensation, you may be exposed to penalties including the penalty for negligence or disregard of the regulations (20 percent) and the transfer pricing net adjustment penalty (20 percent or 40 percent). Review your CSA agreements for claw back or reverse-claw back provisions to determine that adjustments that need to be made.

You should also consider filing an amended return sharing SBC before it is under examination by the authorities. Keep in mind that you cannot file a Qualified Amended Return (QAR) for a year under examination.

To alleviate exposure against the negligence/disregard penalty, you would have had to report risk ratings and your Altera position on tax return schedules like Uncertain Tax Positions (Schedule UTP) or Form 8275-R (regulation disclosure statement) and set aside a reserve for adverse outcome. Simply disclosing a position (rather than correcting it on a QAR) does not insulate you against the transfer pricing net adjustment penalty.

Additionally, you should consider whether you need to accrue a tax provision for the interest that would be due if you filed amended returns to include SBC. Finally, any Section 482 adjustments to share SBC could reduce E&P in the foreign participant – leading to adjustments in section 965 calculations or reduced tested income in section 951A calculations.


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

If your company needs assistance complying with the new ruling on cost-sharing regulations, reach out to Armanino’s experts today.

June 13, 2019

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