Market Overview

Altera Battling the IRS

Chip-maker Altera (NASDAQ: ALTR) is fighting the IRS in U.S. Tax Court over how the company has handled employee stock-based compensation and one of its units in the Cayman Islands.

According to Reuters, the issue at the center of the dispute is so-called "transfer pricing," or how companies allocate assets and money globally with the purpose of reducing their tax burden. The IRS is accusing Altera of wrongly booking expenses for employee stock-based compensation in the United States as tax deductible between 2004 to 2007.

The IRS is seeking $27 million from the San Jose-based company. According to the Feds, Altera should have split its costs between its U.S. parent and a unit of the company in the Cayman Islands. If the costs had been treated this way, Reuters reported that, "Altera would lose the U.S. tax deductibility of employee costs allocated to the Caymans." According to Altera, the IRS rules were written in 2003 and are impossible to follow.

According to tax lawyers who spoke with Reuters, most companies are currently following the 2003 rules and foregoing potential tax benefits. Reuters sources noted that many of these companies have, "provisions in place that would trigger tax treatment changes if the 2003 rules are deemed invalid in court." For this reason, this is an important case.

Paul Dau, an international tax lawyer at the law firm of McDermott Will & Emery told Reuters, "This is a very important issue to a lot of companies, especially technology-oriented companies where research and development is critical." A trial date has not been scheduled in the Altera case. The company is the first to challenge the 2003 rules in Tax Court, and it could be a tough challenge. "Altera has basically got to attack and overturn the explicit rule," said Eric Ryan, a partner with DLA Piper. "It will be a significantly harder road for them to take."

Posted-In: Cayman Islands Eric Ryan Internal Revenue Service McDermott Will & EmeryNews Legal Global Economics

 

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