Tuesday, October 10, 2017

Ninth Circuit oral argument on Altera

I have been reliably informed (and then was able to confirm for myself online) that the Ninth Circuit oral argument in the appeal of the Tax Court's misguided Altera decision is taking place this Wednesday.  I gather that Susan Morse and Steve Shay will be blogging about this, and I'll duly post links thereto.

I previously discussed the Altera decision here and here. Stripped to its substantive (as opposed to administrative law) essentials, it's a case in which the Tax Court ruled that an indisputably correct Treasury regulation, to the effect that the bulk of compensation costs in a cost-sharing deal between related parties should be included in the formula even if they're structured as incentive compensation, was arbitrary and capricious, hence an abuse of discretion. In effect, it's an abuse of discretion to say that 1 + 1 = 2, unless one spends pages of regulatory preamble explaining why taxpayers were incorrect when they filed briefs at the notice and comment stage arguing that 1 + 1 = 1.

The Tax Court relied upon aspects of true arm's length deals that had zero pertinence or relevance to related party paper-shuffling agreements, and accepted expert testimony to the effect that incentive compensation that in fact is worth millions of dollars should be viewed as having a cost of zero.  Here's hoping that the Ninth Circuit straightens things out.

UPDATE: Here is the link for the Morse-Shay posting, further explaining why the Tax Court so clearly erred in striking down the regulation at issue in Altera.

Leandra Lederman adds her comments here.

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