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9th Circ.'s Revival of IRS Rules Stretches 'Arm's Length'

Law360

13 Jun 2019
Reprinted with permission.

In the Law360 article “9th Circ.'s Revival of IRS Rules Stretches 'Arm's Length,’” Morrison & Foerster’s Edward Froelich discusses the Ninth Circuit's decision to overturn the U.S. Tax Court’s ruling for chipmaker Altera Corp., thereby reinstating a 2003 regulation that required related businesses to include stock-based compensation in their cost-sharing agreements.

The Tax Court had struck down the regulation in 2015, when it found that the U.S. Department of the Treasury had failed to adequately explain its belief that the rules were consistent with the arm’s-length standard. Treasury failed to respond to significant comments when the court issued its final rule; however, the Ninth Circuit has now said that the comments were “irrelevant” to the issues Treasury was considering.

Edward told Law360 that Treasury might have chosen to treat the comments as irrelevant because it was focusing on the commensurate-with-income standard. But the regulations don't say that, and under the Administrative Procedure Act, the government must articulate the basis for its rules, he said.

“You have to engage with the comments that were provided to you and make a rational connection between those and the final rule,” said Edward. “It's about the process.”

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