Sep 26, 2012

Alison Dougherty

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The IRS and Altera Corp. Litigate Transfer Pricing Rules for Expenses Related to Employee Stock-Based Compensation

Altera Corp. is a technology company that manufactures semiconductors with a unit of business in the Cayman Islands.  According to court records and Thomson Reuters on July 24, 2012, the IRS argued that Altera should have divided certain expenses related to its employee stock-based compensation between its U.S. parent company and its Cayman Islands unit.  Altera booked the expenses relating to its employee stock-based compensation in the United States where the expenses are deductible for tax purposes.  The current litigation in the U.S. Tax Court involves Altera’s challenge to a 2003 U.S. transfer pricing regulation (Treas. Reg. Section 1.482-7A(d)(2)) which requires a U.S. parent company and a foreign subsidiary to share expenses for employee stock-based compensation.  The IRS asserts that $27 million in tax is due and that Altera should not be entitled to deduct the expenses allocated to the Cayman Islands unit on its U.S. tax return.

The Altera case represents a renewed battle over similar issues that the IRS litigated in the Xilinx case with respect to years prior to the issuance of the 2003 regulations.  In Xilinx, Inc. v. Commissioner, 598 F.3d 1191 (9^th Cir. 2010), the Ninth Circuit affirmed the decision of the U.S. Tax Court that a U.S. technology corporation and its Irish subsidiary were not required to include employee stock option costs under their intangibles development cost-sharing agreement.

Please consult your Aronson LLC tax advisor or Alison Dougherty, International Tax Services at 301.231.6290 for more information regarding U.S. transfer pricing rules.