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As previously reported by Ropes & Gray, on July 24, 2018, the Ninth Circuit reversed the Tax Court’s prior decision in the Altera case and upheld the IRS regulation requiring the allocation of stock-based compensation in qualified cost-sharing agreements. The decision was particularly notable since it ended in a 2-1 vote, in which Judge Reinhardt, who passed away in March 2018, cast the deciding vote. Late last week, the Ninth Circuit appointed a new judge, Susan Graber, to replace Judge Reinhardt under a local procedural order mandating that the court clerk randomly draw a replacement judge upon the death of any panel member. However, in lieu of awaiting any motions for rehearing, today the Ninth Circuit withdrew its opinion “to allow time for the reconstituted panel to confer on this appeal.” Since a withdrawn decision has no legal effect and the decision of the court could change, affected taxpayers who have not already taken action in response to the decision should consider watching and waiting for a new opinion to be issued before taking any further action. To read today’s order, click here.

In an unexpected 2-1 decision, Judge Reinhardt, who passed away in March of this past year, cast the Ninth Circuit’s deciding vote to reverse the Tax Court’s prior ruling in Altera. In 2015, the Tax Court invalidated Treasury Regulation 1.482-7A(d)(2)’s requirement that related parties allocate stock-based compensation costs when entering into cost-sharing agreements to develop intangible assets. The Tax Court’s decision in Altera centered on the IRS’s failure to support the regulation with examples of unrelated parties sharing stock-based compensation costs (comparable uncontrolled transactions). This failure was fatal, according to Judge Marvel of the Tax Court, because to require related taxpayers to share stock-based compensation absent any evidence of similar behavior by unrelated parties would mean the regulation did not seek parity between these groups of taxpayers, contrary to the long-standing arm’s-length principle for transfer pricing. As a result, the Tax Court held that the regulation did not meet the reasoned decision-making standard in the State Farm Supreme Court case.

Click here to read the full alert.

On June 21, 2018, the Supreme Court ruled 5-4 in South Dakota v. Wayfair et al. that the Constitution does not prevent the State of South Dakota from requiring large online retailers without actual physical presence in the state to collect and remit sales tax. The Supreme Court’s decision is based on a South Dakota statute that it viewed as not imposing significant burdens on interstate commerce, because, among other things, it was prospective in its application, imposed a single level of tax and applied only to non-resident sellers that deliver more than $100,000 in goods or services or engage in 200 or separate transactions for the delivery of goods and services into South Dakota. The Court otherwise left open the question of whether other statutory conditions would render a similar result.

Click here to read the full alert.

In this Ropes & Gray podcast, Gabby Hirz, counsel in the tax controversy group, is joined by Loretta Richard, a partner in the tax and benefits group and co-founder of the tax controversy group, and Christi Lazo, counsel in the private client group, to discuss another notable Tax Court decision, Lender Management LLC v. Commissioner of Internal Revenue. Lender Management considered whether a family office was operating a trade or business and could therefore deduct investment expenses as business expenses.

In a recent Tax Notes International article, “Is Fishing in Tax Waters Getting Easier or Just More High Tech?,” Brian Studniberg, Gabby Hirz and Loretta Richard provide commentary on the continued role of international information exchange on request given the availability of automatic information exchange.

Click here to read the full article including further insight from the group.

 

The Potential Threat

Class-action lawyers have set their sights on retirement savings plans offered by colleges and universities, focusing on “jumbo” plans, often with assets of more than $1 billion (though that amount may decline as the pickings become slimmer). These lawsuits are founded in claims of ERISA breaches of fiduciary duty. Colleges and universities need to understand these claims, and know what they need to do to prepare. Continue Reading UNDER ATTACK: ERISA Class-Action Lawyers Target Colleges and Universities