Cost-Sharing Regulations Revived By Ninth Circuit

The Ninth Circuit Court of Appeals reversed the Tax Court in Altera Corp. in the latest chapter of the dispute over the validity of cost-sharing regulations. The decision, issued on July 24, revives certain regulatory provisions previously invalidated by the Tax Court. (See Altera Corp. v. Commissioner, Dkt. Nos. 16-70597 & 16-70497 (9^th Cir. 2018) rev'g 145 T.C. 91 (2015)). These regulations govern the allocation of stock-based compensation costs to a foreign subsidiary in qualified cost-sharing agreements (QCSA). U.S. corporations enter into QCSAs to allocate research and development costs with a foreign subsidiary usually located in a low tax jurisdiction and to grant the foreign subsidiary rights to exploit the developed property internationally. The Ninth Circuit Court of Appeals' decision to uphold the validity of Treas. Reg. § 1.482-7A(d)(2) means that parties to a QCSA must allocate stock-based compensation between themselves. By avoiding an allocation of