Supreme Court docket refuses to listen to technical problem for IRS guidelines

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Supreme Court refuses to hear technical challenge for IRS rules

WASHINGTON – The US Supreme Court declined to hear a challenge to corporate tax rules and delivered a victory to the IRS that will cost technology companies billions of dollars.

The court issued a brief written order on Monday that it would not consider an appeal by Altera Corp., now owned by Intel Corp.

This is without prejudice to an appeal court decision that upheld the 2003 Internal Revenue Service regulations.

The regulations define how companies share costs with their overseas subsidiaries, which are usually located in countries with lower taxes. The costs at issue here are share-based payments that are widely used in the tech industry. Tax law generally requires that companies determine these internal divisions based on what independent companies would do in a similar transaction. However, the IRS approaches to determining this breakdown have been reviewed repeatedly.

The companies wanted more costs to be spent on US operations. This would increase their US deductions and lower their income at the relatively high US tax rates in place through 2018. Lower costs abroad mean higher profits abroad, which are taxed at lower rates.

Affected companies are Facebook Inc.,

alphabet Inc.

and twitter Inc.

Total tax revenue exceeds $ 2 billion and could be much higher as some companies have waited to record the impact on their books until the court case is resolved. Facebook said it paid $ 1.6 billion in November 2019 in connection with the appeals court ruling. Alphabet, the parent company of Google, said the ruling cost $ 418 million. Twitter reported an impact of $ 80 million.

The Supreme Court on Monday also declined to consider a case that challenged one of the laws enforcing President Trump’s tariffs, Section 232 of the Trade Expansion Act of 1962, effectively ending that attempt to lift the tariffs. The Trump administration has used the law to impose global tariffs on steel and aluminum imports into the US and to threaten tariffs on automobile imports. The law allows such tariffs to protect US national security.

The lawsuit, filed by a group representing US steel and aluminum importers, argued that the law, in violation of the Constitution, wrongly delegated trade powers to the president, who was supposed to be a member of Congress.

A separate law, Section 301, applied to most of the administration’s tariffs against China and the European Union and would not have been directly affected by the case. Several separate cases were filed against other aspects of the administration’s handling of the trade war.

In the case of corporate income tax, companies that have already paid the IRS as a result of the lower court ruling will not get their money back. Companies that have been waiting for the Supreme Court to hear the case must now consider the implications. Due to changes in the Tax Act of 2017, the ruling is unlikely to have a major impact on current corporate tax strategies.

Nicole Saharsky, a partner at Mayer Brown LLP who represented Altera, declined to comment on the court’s decision, as did Intel. The IRS did not respond to a request for comment.

The litigation wasn’t about whether the IRS rule was a correct guideline. Instead, the sides discussed whether the IRS and the Treasury Department were following proper procedures to draft the regulations and fill in loopholes when the bylaws are vague.

Altera, now acquired by Intel, was sued in 2012 after the IRS challenged transactions between the company’s parent company and a subsidiary in the Cayman Islands. The U.S. Treasury Court ruled in favor of the company in 2015, but the 9th U.S. Court of Appeals overturned that judgment.

“Altera may be more of a case where something bad happened, but it wasn’t,” said Daniel Shaviro, professor of tax law at New York University.

The Supreme Court doesn’t take many tax cases, but some attorneys thought it might be needed to clarify broader questions about how the government writes and enforces regulations.

In recent years, courts have begun to treat the IRS more like other regulators, requiring that tax rules follow practices more closely than those used in other areas.

“This is a clear case of overreaching by administrative agencies that have been stamped by an appeals court,” wrote Altera’s attorneys in their call to the Supreme Court to take the case. They argued that the IRS changed its reasoning during the legal process, depriving the public and interested companies of the opportunity to comment on its regulatory approach as needed.

“This case clearly shows how far an agency will go if it is not activated,” they wrote. “The IRS seeks to collect tax liability primarily through administrative fees.”

Government attorneys responded that the appeals court was correct and that the IRS was empowered to establish methods of analyzing corporate transactions. They also point to the lack of other appeals court rulings on the matter, as the division between counties often leads the Supreme Court to take a case.

“If a significant division of power develops in the future regarding the validity of the final 2003 ruling, this court’s review at this point may be warranted,” government lawyers wrote. “However, the petitioners see no urgent reason for the court to intervene now.”

Although the Supreme Court did not take up the case, the appeals court ruling upheld the idea that tax rules need to be reviewed as in other contexts, said Kristin Hickman, a law professor at the University of Minnesota.

“The IRS and the Treasury Department need to be more thorough in drafting their preamble to regulation to explain the choices they make when exercising discretion,” said Ms. Hickman, who was a special advisor to the Office for Information and Regulatory Affairs along the way Trump administration as this office began reviewing tax rules prior to publication.

Write to Richard Rubin at richard.rubin@wsj.com

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