Mark Allison Speaks to Law360: 9th Circuit's Shift from Arm's-Length Rule May Embolden IRS

The Ninth Circuit’s revival of an IRS cost-sharing regulation previously invalidated by the U.S. Tax Court throws into disarray multinational companies’ expectations that they can rely on the arm’s-length standard to craft agreements for sharing research and development costs.

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The Ninth Circuit’s decision creates “an awkward position” between Altera and another industry player, Xilinx Inc., according to Mark Allison, an attorney who counsels multinational corporations at Caplin & Drysdale, Chtd. The latter had prevailed in a similar case involving stock-based compensation, but a different regulation, in which the Ninth Circuit had affirmed that Tax Court’s position that stock-based compensation costs do not have to be considered in cost-sharing arrangements.

“The court emphasizes very much the importance of … providing parity to taxpayers between controlled and uncontrolled transactions, and now you have a precise situation where two taxpayers with identical control transactions have different outcomes. That shouldn't be the way these things play out,” Allison said.

This conflict in how intangibles may be handled in the marketplace raises the question now of whether the IRS will be emboldened to apply non-arm’s-length standards for intangibles, he added.

“I think there is still the question of why and how the IRS can apply an obviously non-arm's-length standard when there's no evidence to support the use of a non-arm's-length standard,” Allison said. “I think that it is troublesome that the IRS and Treasury were unable to articulate it the way the court is now trying to justify it after the fact.”

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Excerpt taken from the article “9th Circ.’s Shift From Arm’s-Length Rule May Embolden IRS” by Vidya Kauri for Law360.