IRS Wins in Closely Watched Intel Tax Case -- WSJ
June 10 2019 - 3:02AM
Dow Jones News
By Richard Rubin
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (June 10, 2019).
A federal appeals court upheld tax regulations on certain
cross-border cost-sharing agreements within corporations,
delivering a victory for the Internal Revenue Service over Intel
Corp. in a case closely watched by tech companies.
The Ninth Circuit Court of Appeals ruled 2-1 on Friday for the
IRS over Altera Corp., now an Intel subsidiary. The court had
issued a similar ruling last year but heard the case again because
one of the judges, Stephen Reinhardt, died before the ruling was
issued.
Based on past disclosures, billions of dollars of federal tax
revenue could be at stake.
The case involves what is known as share-based compensation and
where it should be deducted as a business expense. The IRS wrote a
regulation that required companies to deduct more of it abroad as
opposed to deducting it in the U.S. Especially before the 2017
federal-tax overhaul that lowered corporate rates, companies had an
incentive to claim those deductions against the higher U.S. tax
rate -- and thus pack more of their profits into low-taxed foreign
jurisdictions.
"We disagree with the Tax Court that the 2003 regulations are
arbitrary and capricious," wrote Chief Judge Sidney Thomas, who was
appointed by President Clinton. "While the rulemaking process was
less than ideal, the [law] does not require perfection."
Many companies, including Alphabet Inc., Facebook Inc., Twitter
Inc. and Electronic Arts Inc. have cited the outcome of the Altera
case as a risk in their financial statements. The case would have
increased Altera's taxable income by only $80 million over four
years, but the effects on the industry would be much broader if the
court's ruling stands, creating an incentive for the company to
pursue further appeals.
The IRS declined to comment Friday. Intel didn't immediately
comment.
In some cases, companies may have assumed that the regulations
were still in place, so they wouldn't necessarily take a hit to
earnings because of the IRS victory. Other companies may have
assumed the benefits after the Tax Court initially ruled against
the IRS and will now report additional costs.
Over the past few years, federal courts have brought tax law
closer to the rest of administrative law, limiting the tax
exceptionalism that had given the Treasury Department and IRS more
flexibility than other agencies.
In this case, the court applied general administrative-law
principles but just determined that the IRS complied with the
appropriate standards, said Susan Morse, a University of Texas law
professor who has been following the Intel proceedings.
In dissent, Judge Kathleen O'Malley, appointed by President
Obama, wrote that the regulation improperly departed from the
practice of the arm's length standard, which generally requires
transactions within companies to mirror transactions between
companies. She also said the Treasury Department had made
procedural flaws.
"When [Treasury] fails to comply with those requirements, its
actions cannot be justified by the mere existence of the loophole,"
she wrote. "In other words, an arm's length result is not simply
any result that maximizes one's tax obligations."
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
June 10, 2019 02:47 ET (06:47 GMT)
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