Ninth Circuit Panel Upends Arm's Length Standard In Cost Sharing

July 24, 2018, marked a significant, although potentially short-lived, victory for the Internal Revenue Service (IRS), as a panel of the US Court of Appeals for the Ninth Circuit reversed by 2 votes to 1, the full US Tax Court's unanimous opinion in Altera Corp. v. Commissioner.¹ The Ninth Circuit opinion in IRS's favor upholds the validity of the Treasury Department's 2003 final regulation mandating that stock-based compensation (SBC) costs be treated as "costs" to be shared between parties to a qualified cost sharing arrangement (QCSA). The majority of the Ninth Circuit panel concluded that (1) the challenged regulation is valid under the Administrative Procedure Act (APA) because the Treasury Department did not exceed the authority granted by Congress under Section 482 to establish regulations to address cost allocations in a QCSA; and (2) that the challenged regulation is entitled to Chevron deference because it is not arbitrary, capricious, or manifestly contrary