On June 22, the US Supreme Court denied Altera Corp.’s petition for certiorari seeking review of the US Court of Appeals for the Ninth Circuit’s decision upholding the US Department of the Treasury’s transfer pricing regulation requiring related participants in cost-sharing agreements to include stock-based compensation costs in the joint cost pool to comply with the arm’s-length standard.
The split Ninth Circuit court had previously reversed a unanimous, en banc decision of the Tax Court invalidating those regulations on the grounds that they violated the Administrative Procedure Act.
In finding that the cost-sharing regulations adequately comported with the arm’s-length standard, the Ninth Circuit endorsed a more fluid definition of the standard — one that permits the use of flexible methodology and does not necessarily require specific arm’s-length comparability.
The federal tax and administrative law implications of the Ninth Circuit’s holding are important and have been widely discussed in the legal press. However, the Altera decision may also have potentially broad significance for the states’ application of transfer pricing principles in separate-return states. In this article for Law360, Eversheds Sutherland attorneys Eric Tresh, Maria Todorova and Justin Brown discuss the potential state tax impacts of the decision and strategies for state transfer pricing audits in the wake of Altera.