INTC Intel Corporation

By Richard Rubin and Theo Francis 

A long-running tax dispute is racking up a potentially hefty price tag of nearly $2 billion and counting for dozens of big U.S. companies, including Facebook Inc. and Alphabet Inc.

Since the most recent ruling on the case, in June, more than two dozen companies have disclosed the potential impact on their financial results. Facebook recorded a $1.1 billion tax expense because of the case, while Alphabet, the parent of Google, reversed a $418 million benefit it had previously taken. Other companies reporting at least a $50 million impact include Twitter Inc., Lam Research Corp. and Symantec Corp.

The case pits Altera Corp., now a subsidiary of chip maker Intel Corp., against the Internal Revenue Service. The IRS in 2003 issued a regulation dictating how companies must account for stock and other equity compensation they pay to workers when they are parceling out costs between the parent and their foreign subsidiaries. Altera sued in 2012, arguing the IRS exceeded its authority.

Legally, the case turns on questions of administrative law and the government's ability to fill in the gaps in a vague statute. It also has significant tax consequences. A federal appeals court in San Francisco is deciding whether to give the issue another hearing.

Multinationals benefit by allocating as much pay as possible -- including stock-based pay -- to U.S. operations, where the companies could claim a business-expense deduction for it against higher domestic tax rates. In foreign jurisdictions, reporting lower costs increases profits that can be taxed at lower foreign rates. That was especially advantageous before the 2017 federal tax overhaul reduced the gap between U.S. and foreign corporate-tax rates.

The government's 2003 rule requires companies to share more of the costs with their foreign subsidiaries, reducing taxable profits in low-tax jurisdictions and increasing them in the U.S.

Companies are supposed to determine the right foreign-U.S. split by figuring out what the foreign subsidiaries would have had to pay an unrelated company for the same services. The fight over the regulation is about how that calculation happens.

Altera challenged the rule, which increased the company's taxable income by about $80 million over four years. Intel inherited the case when it acquired Altera in 2015. Intel declined to comment, as did Alphabet and Facebook.

In 2015, the U.S. Tax Court ruled for Altera. In 2018, the Ninth U.S. Circuit Court of Appeals overturned that decision -- siding with the IRS -- then withdrew its own ruling because one of the judges in the 2-1 majority died before it was released. A new panel reached the same conclusion this year, upholding the 2003 rule on the grounds that the IRS had acted reasonably and legally in writing the rules.

Intel has asked the full Ninth Circuit to hear the case, hoping to reinstate the trial court's ruling in its favor. If that fails, the chip maker could still appeal to the U.S. Supreme Court.

The government filed a brief saying the judges should deny a new hearing.

The legal questions turn on arcane corners of tax and regulatory-procedure law. Over the past few years, courts have begun treating the IRS more like other regulatory agencies and making tax regulations follow more of the procedures used in other areas.

In the original court ruling supporting Altera's treatment of stock-based compensation, the Tax Court found the IRS hadn't followed aspects of the Administrative Procedure Act, which governs how agencies write regulations, and had misapplied certain approaches to determining what an arm's-length transaction would look like. The appellate panel disagreed.

Write to Richard Rubin at richard.rubin@wsj.com and Theo Francis at theo.francis@wsj.com

(END) Dow Jones Newswires

September 03, 2019 05:44 ET (09:44 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.