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The Internal Revenue is appealing a court decision that it lost last year to a chip maker in a case involving stock-based compensation.

The IRS lost the case, Altera Corp. v Commissioner, 145 T.C. No. 3 (2015), in Tax Court last July. The agency has now appealed the decision to the Ninth Circuit.

The Tax Court invalidated regulations under section 482 of the Code that require the sharing of stock-based compensation. In the July 27, 2015 reviewed opinion, the 15-judge panel agreed with Altera Corp. that the regulations were arbitrary and capricious because they were not the product of a reasoned decision making standard as required by the Supreme Court in its State Farm decision.

The court ruled that an earlier case, Xilinx Inc. v Commissioner, 125 T.C. 37 (2005), held that, under 1995 cost-sharing regulations, controlled entities entering into qualified cost-sharing agreements need not share stock-based compensation costs because parties operating at arm’s length  would not do so. In 2003, the Treasury Department issued regulations requiring controlled parties entering into such cost–sharing agreements to share stock-based compensation costs.

The IRS made deficiency determinations based on section 482 allocations it made under the regulations. Both the IRS and Altera filed cross-motions for partial summary judgment, with Altera contending that the regulation is arbitrary and capricious.

The Tax Court held that the regulation is a legislative rule, not an interpretive rule, and is, therefore, subject to the Administrative Procedures Act.’

The Tax Court said the Treasury failed to support its belief that unrelated parties would share stock-based compensation costs with any evidence in the administrative record. “The final rule fails to satisfy State Farm’s reasoned decision-making standard and is therefore invalid,” the court stated.

Altera was acquired by Intel last year.

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