Altera Reply Brief on Petition for Certiorari (6/7/20; 6/11/20)

I have previously written on the Altera Corporation petition for certiorari from the decision in Altera Corp. v. Commissioner, 926 F.3d 1061 (9th Cir. 2019), reh. en banc den. 941 F.3d 1200 (9th Cir. 2019).  Altera Petition for Certiorari (Federal Tax Procedure Blog 2/12/20; 2/13/20), here; see also Excellent Blog Postings on the State of the Altera Petition for Certiorari (Federal Tax Procedure Blog 5/22/20), here.  The Supreme Court docket page is here; the SCOTUSBlog case docket page is here.  

Altera Corporation has now filed its Reply Brief for Petitioners, here.  Professor Christopher Walker, an observer of the intersection between tax and administrative law (and counsel for an amici supporting Altera's petition), has posted notice of the Reply Brief and excerpted the introduction:  Altera v. IRS: Major Tax and Administrative Law Cert Petition Before the Supreme Court (Notice & Comment 6/5/20), here; see also Susan C. Morse and Stephen E. Shay (Guest Bloggers), In Altera Reply Brief, Taxpayer Doubles Down on Flawed Argument That the Government Changed Its Tune (Procedurally Taxing Blog 6/11/20), here, cross posted at Notice and Comment here.  [The latter citation was added 6/11/20.]

Like the petition and amici submissions in support of the petition, the Reply Brief indulges in considerable hyperbole.  For example, the Reply Brief (p. 5) claims that the Government does not dispute the importance of the case and simply argues the merits.  I think that claim is exaggerated.

To be sure, significant tax revenue is at issue and if that is all that makes a case important for certiorari purposes, the Government could have / should have acquiesced in certiorari.  Cf. Alan Horwitz, Government Acquiesces in Beard Petition for Certiorari (Tax Appellate Blog 7/29/11), here.  Dollars at issue do not make a case important for certiorari purposes, otherwise the next time a tax protester claims that his wages are not income, he could claim importance on petition for certiorari.  (Well, a tax protester would do that anyway, but Altera and its amici are not tax protesters, at least not often characterized that way.)

The administrative law principles are really not at issue either (in my opinion).  They are fairly settled unless Altera were asking for Chevron to be overruled.  At best, Altera's argument is that the Ninth Circuit improperly applied those principles.  The Morse and Shay posting linked above addresses Altera's claim that the process was procedurally flawed under the arbitrary and capricious standard in § 706/State Farm, and assert that the process was not procedurally flawed.  But the Ninth Circuit articulated the right scope of review on that issue, so that Altera's claim is just that the Ninth Circuit made a mistake in application of the arbitrary and capricious standard.  The Supreme Court is generally not a court to correct errors in the Courts of Appeals, but to take cases of true systemic importance to issue new guidance or perhaps affirm old guidance for the proper application in the courts in the future. For example, if the Ninth Circuit had erroneously stated the standard it was applying in a way that would be precedential in the Ninth Circuit and perhaps influential in other Circuits (including their lower courts, which include the Tax Court), there might be some systemic importance to the Supreme Court addressing the issue to insure that the inferior courts can know and properly articulate the correct standard.  But if the Ninth Circuit articulated the correct standard (as it certainly did) and, at worst, only made a mistake in its application, that does not seem to me to be worthy of the Court's attention at this time. [The redlined text was added 6/11/20.]

What Altera (and its amici) really complain about is the Ninth Circuit's resolution of the merits.  The Ninth Circuit's merits resolution diminishes U.S. taxpayer's ability to shift income outside the U.S. tax net; Altera (and its amici) prefer to have more freedom to shift outcome outside the U.S. tax net.  The merits issue is whether, in granting a QCSA cost sharing safe harbor under § 482, the IRS can require as a condition to the safe harbor that income from intangibles be share based on all of the costs in developing the intangibles.  It is unclear to me what is not to understand by “all.”  Or whether all costs is a reasonable interpretation of the safe harbor authority under § 482 or § 482 itself.  Compare United States v. Correll, 389 U.S. 299 (1967) (saying, in the Treasury adoption of the sleep or rest requirement for away from home business deduction, that “The role of the judiciary in cases of this sort begins and ends with assuring that the Commissioner's regulations fall within his authority to implement the congressional mandate in some reasonable manner.”)  In the QCSA requirements, the IRS has done that in requiring that income be shared based on all costs.

Even sharing income based on all costs for research done in the United States will still permit shifting of income offshore because the “value” of an assembled workforce to do the work and incur the costs is considerable and has cost the U.S. participant a lot before the intangible development occurs, so that that value of the assembled workforce value is not even reflected in out of pocket costs during development.  If we were to use the arm’s length metaphor, an arm’s length party would surely charge for that value as well as the actual out of pocket costs during the development period.  (At least I think that is what a profit motivated third party unrelated to the other participant(s) would do; I have done something comparable in my billing rates; initially, as a younger lawyer after entering private practice, I had a low billing rate; then as I matured as a lawyer and got some reputation (deserved or otherwise), I began to charge more, not because my costs would be any different but because I had the equivalent of an assembled work force based on all past costs of my experience and reputation; that reminds me of a great anecdote involving the tax icon, Marty Ginsburg, husband of Justice Ginsburg, who justified what appeared to be a very high bill relative to time spent, by saying that he brought to the table in that short period of time (30 minutes at most, with no opinion letter) the experience of years of work on collapsible corporations and could not charge for all that time, but he could charge more -- significantly more -- than the time for routine legal advice.)

There is, of course, no conflict among the Circuits, which has historically been one of the most compelling reasons for the Supreme Court to grant a petition for writ of certiorari.  Nor should it be assumed that the Tax Court even will hold consistently with its earlier now reversed Altera decision in the next case it decides.  Even the Tax Court can correct its errors after a Court of Appeals calls them out.  E.g., Graev . Commissioner, 149 T.C. 485 (2017) (reviewed opinion).  And there is no reason to believe, other than pure speculation, that another Court of Appeals would hold differently than the Ninth Circuit.  In any event, some opportunity to fully develop the issue with the views of both the Tax Court in the next case and other Courts of Appeals will help sharpen the need for and focus of any review by the Supreme Court.

At any rate, that is my story and I’m sticking to it.

Finally, I will say that, as a former professor of tax law, I am always concerned when the Supreme Court gets involved in tax cases.  The only value of a Supreme Court opinion in the tax law (and I suspect other areas) is not that they get it right but to settle the issue (at least for the time being as in Plessy v. Ferguson).  With the current ideological makeup of the Supreme Court with an underlying theme of fear (perhaps ideologically imagined) of the administrative state, who knows what mischief taking cert in Altera would cause?  That is why I think it is particularly important for other courts to weigh in further to see whether, as they say, there is any there there.