91

ALTERA CORPORATION AND SUBSIDIARIES, PETITIONER v. 

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 6253–12, 9963–12. Filed July 27, 2015. 

In Xilinx Inc. v. Commissioner, 125 T.C. 37 (2005), aff ’d, 

598 F.3d 1191 (9th Cir. 2010), we held that, under the 1995 

cost-sharing regulations, controlled entities entering into 

qualified cost-sharing agreements (QCSAs) need not share 

stock-based compensation (SBC) costs because parties operating at arm’s length would not do so. In 2003 Treasury 

issued sec. 1.482–7(d)(2), Income Tax Regs. (final rule). The 

final rule requires controlled parties entering into QCSAs to 

share SBC costs. P is an affiliated group of corporations that 

filed consolidated returns for the years in issue. A–US, the 

parent company, is a Delaware corporation, and A–I, a subsidiary of A–US, is a Cayman Islands corporation. A–US and 

A–I entered into a QCSA. During its 2004–07 taxable years 

A–US granted SBC to its employees. A–US did not share the 

SBC costs with A–I. R determined deficiencies based on I.R.C. 

sec. 482 allocations R made pursuant to the final rule. P and 

R have filed cross-motions for partial summary judgment. P 

contends that the final rule is arbitrary and capricious under 

5 U.S.C. sec. 706(2)(A) and Motor Vehicle Mfrs. Ass’n of the 

U.S. v. State Farm Mut. Auto Ins. Co., 463 U.S. 29 (1983). R 

contends that the final rule is valid under Chevron, U.S.A., 

Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), or 

alternatively, under State Farm. Held: The final rule is a 

legislative rule—i.e., it is not an interpretive rule under 5 

U.S.C. sec. 553(b)—because it has the force of law. See Am. 

Mining Cong. v. Mine Safety & Health Admin., 995 F.2d 1106, 

1109 (D.C. Cir. 1993). The final rule has the force of law 

because in I.R.C. sec. 7805(a) ‘‘Congress has delegated legislative power to’’ Treasury, id., and Treasury ‘‘intended to exercise that power’’ when it issued the final rule, id. Held, further, whether State Farm or Chevron supplies the standard of 

review is immaterial because Chevron step 2 incorporates the 

reasoned decisionmaking standard of State Farm, see 

Judulang v. Holder, 565 U.S. ll, ll, 132 S. Ct. 476, 483 

n.7 (2011), and we are being asked to decide whether 

Treasury reasonably concluded that the final rule is consistent with the arm’s-length standard. Held, further, 

Treasury failed to support its belief that unrelated parties 

would share SBC costs with any evidence in the administrative record, see State Farm, 463 U.S. at 43; failed to articulate 

why all QCSAs should be treated identically, see id.; and 

failed to respond to significant comments, see Home Box 

Office, Inc. v. FCC, 567 F.2d 9, 35 (D.C. Cir. 1977). Additionally, Treasury’s ‘‘explanation for its decision * * * runs 
92 145 UNITED STATES TAX COURT REPORTS (91) 

1 Unless otherwise indicated, all section references are to the Internal 

Revenue Code (Code) in effect at all relevant times, and all Rule references 

are to the Tax Court Rules of Practice and Procedure. All APA section references are to the Administrative Procedure Act (APA), 5 U.S.C. secs. 551– 

559, 701–706 (2012). 

counter to the evidence before’’ it. State Farm, 463 U.S. at 43. 

Held, further, the harmless error rule of 5 U.S.C. sec. 706 is 

inapplicable because it is not clear that Treasury would have 

adopted the final rule if it had been determined to be inconsistent with the arm’s-length standard. Held, further, the final 

rule fails to satisfy State Farm’s reasoned decisionmaking 

standard and is therefore invalid. See 5 U.S.C. sec. 706(2)(A); 

State Farm, 463 U.S. at 43. 

Andrew P. Crousore, Donald M. Falk, Joseph B. Judkins, 

Thomas Lee Kittle-Kamp, William G. McGarrity, Kristyn A. 

Medina, Brian D. Netter, Phillip J. Taylor, and Allen Duane 

Webber, for petitioner. 

Farhad Asghar, Kevin G. Croke, Anne O’Brien 

Hintermeister, Allan Lang, Aaron T. Vaughan, and Mary E. 

Wynne, for respondent. 

OPINION 

MARVEL, Judge: These consolidated cases are before the 

Court on the parties’ cross-motions for partial summary judgment under Rule 121. 1 The issue presented by the parties’ 

cross-motions is whether section 1.482–7(d)(2), Income Tax 

Regs. (final rule)—which the Department of the Treasury 

(Treasury) issued in 2003 and which requires participants in 

qualified cost-sharing arrangements (QCSAs) to share stockbased compensation costs to achieve an arm’s-length result— 

is arbitrary and capricious and therefore invalid. 

Background 

Petitioner is an affiliated group of corporations that filed 

consolidated Federal income tax returns for the years at 

issue. During all relevant years, Altera Corp. (Altera U.S.), 

the parent company, was a Delaware corporation, and Altera 

International, a subsidiary of Altera U.S., was a Cayman 

Islands corporation. When petitioner filed its petitions with 

this Court, the principal place of business of Altera U.S. was 

in California. 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 93

I. Petitioner’s R&D Cost-Sharing Agreement 

Petitioner develops, manufactures, markets, and sells 

programmable logic devices (PLDs) and related hardware, 

software, and pre-defined design building blocks for use in 

programming the PLDs (programming tools). Altera U.S. and 

Altera International entered into concurrent agreements that 

became effective May 23, 1997: a master technology license 

agreement (technology license agreement) and a technology 

research and development cost-sharing agreement (R&D 

cost-sharing agreement). 

Under the technology license agreement, Altera U.S. 

licensed to Altera International the right to use and exploit, 

everywhere except the United States and Canada, all of 

Altera U.S.’ intangible property relating to PLDs and 

programming tools that existed before the R&D cost-sharing 

agreement (pre-cost-sharing intangible property). In 

exchange for the rights granted under the technology license 

agreement, Altera International paid royalties to Altera U.S. 

in each year from 1997 through 2003. As of December 31, 

2003, Altera International owned a fully paid-up license to 

use the pre-cost-sharing intangible property in its territory. 

Under the R&D cost-sharing agreement, Altera U.S. and 

Altera International agreed to pool their respective resources 

to conduct research and development using the pre-costsharing intangible property. Under the R&D cost-sharing 

agreement, Altera U.S. and Altera International agreed to 

share the risks and costs of research and development activities they performed on or after May 23, 1997. The R&D costsharing agreement was in effect from May 23, 1997, through 

2007. 

During each of petitioner’s taxable years ending December 

31, 2004, December 30, 2005, December 29, 2006, and 

December 28, 2007 (2004–07 taxable years), Altera U.S. 

granted stock options and other stock-based compensation to 

certain of its employees. Certain of the employees of Altera 

U.S. who performed research and development activities subject to the R&D cost-sharing agreement received stock 

options or other stock-based compensation. The employees’ 

cash compensation was included in the cost pool under the 

R&D cost-sharing agreement. Their stock-based compensation was not included. 
94 145 UNITED STATES TAX COURT REPORTS (91) 

Pursuant to the R&D cost-sharing agreement, Altera International made the following cost-sharing payments to Altera 

U.S. for its 2004–07 taxable years: 

Year Cost-sharing payment 

2004 .............................. $129,469,233

2005 .............................. 160,722,953

2006 .............................. 164,836,577

2007 .............................. 192,755,438

II. Petitioner’s Tax Reporting and Respondent’s Section 482 

Allocations 

Petitioner timely filed its Forms 1120, U.S. Corporation 

Income Tax Return, for its 2004–07 taxable years. 

Respondent timely mailed notices of deficiency to petitioner 

with respect to its 2004–07 taxable years. The notices of deficiency allocated, pursuant to section 482, income from Altera 

International to Altera U.S. by increasing Altera International’s cost-sharing payments for 2004–07 by the following amounts: 

Year

Cost-sharing 

payment adjustment 

2004 .............................. $24,549,315

2005 .............................. 23,015,453

2006 .............................. 17,365,388

2007 .............................. 15,463,565

Bringing petitioner into compliance with the final rule was 

the sole purpose of the cost-sharing adjustments in the notice 

of deficiency. 

III. Section 482 

A. Arm’s-Length Standard 

Section 482 authorizes the Commissioner to allocate 

income and expenses among related entities to prevent tax 

evasion and to ensure that taxpayers clearly reflect income 

relating to transactions between related entities. The first 

sentence of section 482 provides, in relevant part, as follows: 

In any case of two or more organizations, trades, or businesses * * * 

owned or controlled directly or indirectly by the same interests, the Sec-
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 95

2The term ‘‘Secretary’’ means the Secretary of the Treasury or his delegate. Sec. 7701(a)(11)(B). 3The term ‘‘controlled taxpayer’’ means ‘‘any one of two or more taxpayers owned or controlled directly or indirectly by the same interests, and 

includes the taxpayer that owns or controls the other taxpayers.’’ Sec. 

1.482–1(i)(5), Income Tax Regs. 

retary[2] may distribute, apportion, or allocate gross income, deductions, 

credits, or allowances between or among such organizations, trades, or 

businesses, if he determines that such distribution, apportionment, or 

allocation is necessary in order to prevent evasion of taxes or clearly to 

reflect the income of any of such organizations, trades, or businesses. 

* * * 

Section 1.482–1(a)(1), Income Tax Regs., explains the purpose of section 482 as follows: 

The purpose of section 482 is to ensure that taxpayers clearly reflect 

income attributable to controlled transactions and to prevent the avoidance of taxes with respect to such transactions. Section 482 places a controlled taxpayer[3] on a tax parity with an uncontrolled taxpayer by 

determining the true taxable income of the controlled taxpayer. * * * 

Section 1.482–1(b)(1), Income Tax Regs., provides that 

[i]n determining the true taxable income of a controlled taxpayer, the 

standard to be applied in every case is that of a taxpayer dealing at 

arm’s length with an uncontrolled taxpayer. A controlled transaction 

meets the arm’s length standard if the results of the transaction are consistent with the results that would have been realized if uncontrolled 

taxpayers had engaged in the same transaction under the same circumstances (arm’s length result). However, because identical transactions can rarely be located, whether a transaction produces an arm’s 

length result generally will be determined by reference to the results of 

comparable transactions under comparable circumstances. * * * 

The arm’s-length standard is also incorporated into 

numerous income tax treaties between the United States and 

foreign countries. See, e.g., Convention for the Avoidance of 

Double Taxation and the Prevention of Fiscal Evasion With 

Respect to Taxes on Income and on Capital Gains, U.S.-U.K. 

(2001 U.S.-U.K. Income Tax Convention), art. 9, July 24, 

2001, Tax Treaties (CCH) para. 10,901.09, at 201,019; U.S. 

Model Income Tax Convention of Nov. 15, 2006 (2006 U.S. 

Model Income Tax Convention), art. 9, Tax Treaties (CCH) 

para. 209.09, at 10,559; Treasury Department Technical 

Explanation of the 2001 U.S.-U.K. Income Tax Convention, 

art. 9, Tax Treaties (CCH) para. 10,911, at 201,306 (‘‘This 

Article incorporates in the Convention the arm’s-length prin-
96 145 UNITED STATES TAX COURT REPORTS (91) 

ciple reflected in the U.S. domestic transfer pricing provisions, particularly Code section 482.’’); Treasury Department 

Technical Explanation of the 2006 U.S. Model Income Tax 

Convention, art. 9, Tax Treaties (CCH) para. 215, at 10,640 

(same). 

B. Commensurate-With-Income Standard 

In 1986 Congress amended section 482 by adding, in relevant part, the following sentence: ‘‘In the case of any 

transfer (or license) of intangible property * * *, the income 

with respect to such transfer or license shall be commensurate with the income attributable to the intangible.’’ Tax 

Reform Act of 1986, Pub. L. No. 99–514, sec. 1231(e)(1), 100 

Stat. at 2562. 

The House report that accompanied the House version of 

the 1986 amendment to section 482 states, in relevant part, 

as follows: 

Many observers have questioned the effectiveness of the ‘‘arm’s length’’ 

approach of the regulations under section 482. A recurrent problem is 

the absence of comparable arm’s length transactions between unrelated 

parties, and the inconsistent results of attempting to impose an arm’s 

length concept in the absence of comparables. 

* * * * * * * 

The problems are particularly acute in the case of transfers of highprofit potential intangibles. Taxpayers may transfer such intangibles to 

foreign related corporations or to possession corporations at an early 

stage, for a relatively low royalty, and take the position that it was not 

possible at the time of the transfers to predict the subsequent success 

of the product. Even in the case of a proven high-profit intangible, taxpayers frequently take the position that intercompany royalty rates may 

appropriately be set on the basis of industry norms for transfers of much 

less profitable items. 

Certain judicial interpretations of section 482 suggest that pricing 

arrangements between unrelated parties for items of the same apparent 

general category as those involved in the related party transfer may in 

some circumstances be considered a ‘‘safe harbor’’ for related party 

pricing arrangements, even though there are significant differences in 

the volume and risks involved, or in other factors.* * * 

In many cases firms that develop high profit-potential intangibles tend 

to retain their rights or transfer them to related parties in which they 

retain an equity interest in order to maximize their profits. * * * 

Industry norms for transfers to unrelated parties of less profitable intangibles frequently are not realistic comparables in these cases. 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 97

There are extreme difficulties in determining whether the arm’s length 

transfers between unrelated parties are comparable. The committee thus 

concludes that it is appropriate to require that the payment made on a 

transfer of intangibles to a related foreign corporation or possessions corporation be commensurate with the income attributable to the intangible. * * * 

* * * * * * * 

The basic requirement of the bill is that payments with respect to 

intangibles that a U.S. person transfers to a related foreign corporation 

or possessions corporation must be commensurate with the income 

attributable to the intangible. * * * 

In making this change, the committee intends to make it clear that 

industry norms or other unrelated party transactions do not provide a 

safe-harbor minimum payment for related party intangibles transfers. 

Where taxpayers transfer intangibles with a high profit potential, the 

compensation for the intangibles should be greater than industry averages or norms. * * * 

* * * * * * * 

In requiring that payments be commensurate with the income stream, 

the bill does not intend to mandate the use of the ‘‘contract manufacturer’’ or ‘‘cost-plus’’ methods of allocating income or any other particular 

method. As under present law, all the facts and circumstances are to be 

considered in determining what pricing methods are appropriate in cases 

involving intangible property, including the extent to which the transferee bears real risks with respect to its ability to make a profit from 

the intangible or, instead, sells products produced with the intangible 

largely to related parties (which may involve little sales risk or activity) 

and has a market essentially dependent on, or assured by, such related 

parties’ marketing efforts. However, the profit or income stream generated by or associated with intangible property is to be given primary 

weight. 

[H.R. Rept. No. 99–426, at 423–426 (1985), 1986–3 C.B. (Vol. 2) 1, 

423–426.] 

The conference report that accompanied the 1986 amendment to section 482 states, in relevant part, as follows: 

In view of the fact that the objective of these provisions—that the division of income between related parties reasonably reflect the relative 

economic activity undertaken by each—applies equally to inbound transfers, the conferees concluded that it would be appropriate for these principles to apply to transfers between related parties generally if income 

must otherwise be taken into account. 

* * * * * * * 

The conferees are also aware that many important and difficult issues 

under section 482 are left unresolved by this legislation. The conferees 
98 145 UNITED STATES TAX COURT REPORTS (91) 

believe that a comprehensive study of intercompany pricing rules by the 

Internal Revenue Service should be conducted and that careful consideration should be given to whether the existing regulations could be modified in any respect. 

In revising section 482, the conferees do not intend to preclude the use 

of certain bona fide research and development cost-sharing arrangements as an appropriate method of allocating income attributable to 

intangibles among related parties, if and to the extent such agreements 

are consistent with the purposes of this provision that the income allocated among the parties reasonably reflect the actual economic activity 

undertaken by each. Under such a bona fide cost-sharing arrangement, 

the cost-sharer would be expected to bear its portion of all research and 

development costs, on unsuccessful as well as successful products within 

an appropriate product area, and the costs of research and development 

at all relevant development stages would be included. In order for costsharing arrangements to produce results consistent with the changes 

made by the Act to royalty arrangements, it is envisioned that the 

allocation of R&D cost-sharing arrangements generally should be proportionate to profit as determined before deduction for research and 

development. In addition, to the extent, if any, that one party is actually 

contributing funds toward research and development at a significantly 

earlier point in time than the other, or is otherwise effectively putting 

its funds at risk to a greater extent than the other, it would be expected 

that an appropriate return would be required to such party to reflect its 

investment. 

[H.R. Conf. Rept. No. 99–841 (Vol. II), at II–637 through II–638 

(1986), 1986–3 C.B. (Vol. 4) 1, 637–638.] 

C. Treasury’s Position That the Commensurate-WithIncome Standard Was Intended To Work Consistently 

With the Arm’s-Length Standard 

As the conference report suggested, Treasury and the 

Internal Revenue Service (IRS) conducted a comprehensive 

study of the regulations under section 482, the results of 

which they published in Notice 88–123, 1988–2 C.B. 458 

(1988 White Paper). 

The 1988 White Paper concluded that the arm’s-length 

standard is the international norm for making transfer 

pricing adjustments. Id., 1988–2 C.B. at 475 (‘‘The arm’s 

length standard is embodied in all U.S. tax treaties; it is in 

each major model treaty, including the U.S. Model Convention; it is incorporated into most tax treaties to which the 

United States is not a party; it has been explicitly adopted 

by international organizations that have addressed themselves to transfer pricing issues; and virtually every major 

industrial nation takes the arm’s length standard as its 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 99

frame of reference in transfer pricing cases.’’ (Fn. ref. 

omitted.)). The 1988 White Paper further concluded that 

Congress intended for the commensurate-with-income 

standard to work consistently with the arm’s-length 

standard. See id. (‘‘To allay fears that Congress intended the 

commensurate with income standard to be implemented in a 

manner inconsistent with international transfer pricing 

norms and U.S. treaty obligations, Treasury officials publicly 

stated that Congress intended no departure from the arm’s 

length standard, and that the Treasury Department would so 

interpret the new law.’’). 

The 1988 White Paper explained that the commensuratewith-income standard is consistent with the arm’s-length 

standard because 

[l]ooking at the income related to the intangible and splitting it 

according to relative economic contributions is consistent with what 

unrelated parties do. The general goal of the commensurate with income 

standard is, therefore, to ensure that each party earns the income or 

return from the intangible that an unrelated party would earn in an 

arm’s length transfer of the intangible. [Id., 1988–2 C.B. at 472.] 

Accordingly, in technical explanations to numerous income 

tax treaties that the United States has entered into since 

then, Treasury has repeatedly affirmed that Congress 

intended for the commensurate-with-income standard to 

work consistently with the arm’s-length standard. See, e.g., 

Treasury Department Technical Explanation of the 2001 

U.S.-U.K. Income Tax Convention, art. 9, Tax Treaties (CCH) 

para. 10,911, at 201,307 (‘‘It is understood that the ‘commensurate with income’ standard for determining appropriate 

transfer prices for intangibles, added to Code section 482 by 

the Tax Reform Act of 1986, was designed to operate consistently with the arm’s-length standard.’’); Treasury Department Technical Explanation of the 2006 U.S. Model Income 

Tax Convention, art. 9, Tax Treaties (CCH) para. 215, at 

10,640–10,641 (same). 

IV. 1995 Cost-Sharing Regulations 

We have previously considered whether controlled taxpayers must include stock-based compensation in the pool of 

costs to be shared. Most recently, in Xilinx Inc. v. Commissioner, 125 T.C. 37 (2005), aff ’d, 598 F.3d 1191 (9th Cir. 

2010), we addressed the treatment of stock-based compensa-
100 145 UNITED STATES TAX COURT REPORTS (91) 

tion with respect to taxable years subject to cost-sharing 

regulations that Treasury finalized in 1995 (1995 costsharing regulations). Because our findings and conclusions, 

and the conclusions of the U.S. Court of Appeals for the 

Ninth Circuit, in Xilinx are relevant in these cases, we 

briefly review the 1995 cost-sharing regulations, our Opinion 

in Xilinx, and the opinions of the U.S. Court of Appeals for 

the Ninth Circuit in that case. 

A. Regulatory Provisions 

The 1995 cost-sharing regulations prohibited the District 

Director from making allocations under section 482 ‘‘except 

to the extent necessary to make each controlled participant’s 

share of the costs * * * of intangible development under the 

qualified cost-sharing arrangement equal to its share of 

reasonably anticipated benefits attributable to such development’’. T.D. 8632, 1996–1 C.B. 85, 90. The 1995 cost-sharing 

regulations further provided that ‘‘a controlled participant’s 

costs of developing intangibles * * * [include] all of the costs 

incurred by that participant related to the intangible 

development area’’. Id., 1996–1 C.B. at 92. 

B. Our Opinion in Xilinx 

In Xilinx Inc. v. Commissioner, 125 T.C. 37, the taxpayer 

challenged deficiencies determined under the 1995 costsharing regulations on the basis of the Commissioner’s determination that the taxpayer should have included the value 

of stock-based compensation in the intangible development 

cost pool. Assuming arguendo that the value of stock-based 

compensation is a cost under the 1995 cost-sharing regulations, we held that the Commissioner’s allocations failed to 

satisfy the arm’s-length standard of section 1.482–1(b)(1), 

Income Tax Regs. See id. at 53. 

In reaching this holding we concluded that, consistent with 

the 1995 cost-sharing regulations, (1) in determining the true 

taxable income of a controlled taxpayer, the arm’s-length 

standard applies in all cases, see id. at 54–55; (2) the arm’slength standard requires an analysis of what unrelated entities would do, see id. at 53–54; (3) the commensurate-withincome standard was never intended to supplant the arm’slength standard, see id. at 56–58; and (4) unrelated parties 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 101

4The exercise spread value is the spread between the option strike price 

and the price of the underlying stock when the option is exercised. See 

Xilinx Inc. v. Commissioner, 125 T.C. 37, 47 (2005), aff ’d, 598 F.3d 1191 

(9th Cir. 2010). The grant date value is the fair market value of the option 

on its grant date. See id. at 50. 

would not share the exercise spread or grant date value 4 of 

stock-based compensation, see id. at 58–62. 

In concluding that unrelated parties would not share either 

the exercise spread or grant date value of stock-based compensation, (1) we observed that the Commissioner’s expert 

agreed that unrelated parties would not explicitly share the 

exercise spread or grant date value of stock-based compensation because unrelated parties would find it hard to agree 

how to measure such value and because doing so would leave 

them open to potential disputes, see id. at 58; (2) we found 

that the taxpayers proved that companies do not take into 

account either the exercise spread or grant date value of 

stock-based compensation for product pricing purposes, see 

id. at 59; (3) we observed that the Commissioner produced no 

credible evidence showing that unrelated parties implicitly 

share the exercise spread or grant date value of stock-based 

compensation, see id.; (4) we credited the testimony of the 

taxpayers’ numerous fact witnesses who testified that unrelated parties do not share either the exercise spread or grant 

date value of stock-based compensation in cost-sharing agreements, see id.; (5) we found that the taxpayers proved that 

‘‘if unrelated parties believed that the spread and grant date 

value were costs’’, they ‘‘would be very explicit about their 

treatment’’, id.; (6) we credited the testimony of the taxpayers’ expert who testified that unrelated parties would not 

agree to share spread-based cost because doing so would 

create perverse incentives for each party to diminish the 

stock price of the other, see id. at 61; and (7) we observed 

that during the years in issue the grant value of stock-based 

compensation was generally not treated as an expense for tax 

and financial accounting purposes, see id. at 61–62. 

C. The Ninth Circuit Opinions in Xilinx 

The U.S. Court of Appeals for the Ninth Circuit initially 

reversed our Opinion in Xilinx. The majority opinion by 

Judge Fisher reasoned that ‘‘[b]ecause the all costs requirement [of the 1995 cost-sharing regulations] is irreconcilable 
102 145 UNITED STATES TAX COURT REPORTS (91) 

with the arm’s length standard,’’ the more specific all costs 

requirement controls. Xilinx Inc. v. Commissioner, 567 F.3d 

482, 489 (9th Cir. 2009), rev’g and remanding 125 T.C. 37, 

withdrawn, 592 F.3d 1017 (9th Cir. 2010). The dissenting 

opinion by Judge Noonan agreed that the regulations were 

irreconcilable, see id. at 497 (Noonan, J., dissenting), but concluded that the all costs requirement should be construed as 

not applying to stock-based compensation because (1) the 

regulations should be interpreted in the light of the dominant purpose of the statute—‘‘parity between taxpayers in 

uncontrolled transactions and taxpayers in controlled transactions’’, id. at 498; (2) any inconsistencies in the regulations 

should be construed against the Government, see id.; and (3) 

Treasury’s technical explanation of the income tax convention between the United States and Ireland confirms that the 

commensurate-with-income standard is meant to work 

consistently with the arm’s-length standard, see id. at 

498–500 (‘‘This article incorporates in the Convention the 

arm’s[-]length principle reflected in the U.S. domestic 

transfer pricing provision, particularly Code section 482. 

* * * It is understood that the ‘commensurate with income’ 

standard for determining appropriate transfer prices for 

intangibles, added to Code section 482 by the Tax Reform Act 

of 1986, was designed to operate consistently with the arm’slength standard.’’ (quoting Treasury Department Technical 

Explanation of the Convention for the Avoidance of Double 

Taxation and the Prevention of Fiscal Evasion with Respect 

to Taxes on Income and Capital Gains Signed at Dublin on 

July 28, 1997, and the Protocol Signed at Dublin on July 28, 

1997 (1997 U.S.-Ir. Income Tax Convention and Protocol), 

U.S.-Ir., Tax Treaties (CCH) para. 4435, at 103,223)). 

The Court of Appeals subsequently withdrew its opinion in 

Xilinx and issued a new opinion affirming our Opinion in 

Xilinx. The new opinion by Judge Noonan was in substance 

similar to his original dissenting opinion, with the exception 

that the new opinion did not rest its reasoning on the notion 

that inconsistencies in the regulations should be resolved 

against the Government. See Xilinx Inc. v. Commissioner, 

598 F.3d at 1191–1197 (Noonan, J.). 

Judge Fisher’s concurring opinion first explained the parties’ ‘‘dueling interpretations of the ‘arm’s length standard’ ’’. 

Id. at 1197 (Fisher, J., concurring). According to Judge 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 103

Fisher, Xilinx contended that the arm’s-length standard 

required ‘‘controlled parties * * * [to] share only those costs 

uncontrolled parties share.’’ Id. By contrast, the Commissioner contended that 

analyzing comparable transactions is unhelpful in situations where 

related and unrelated parties always occupy materially different circumstances. As applied to sharing * * * [employee-stock-option (ESO)] 

costs, the Commissioner argues (consistent with the tax court’s findings) 

that the reason unrelated parties do not, and would not, share ESO costs 

is that they are unwilling to expose themselves to an obligation that will 

vary with an unrelated company’s stock price. Related companies are 

less prone to this concern precisely because they are related—i.e., 

because XI is wholly owned by Xilinx, it is already exposed to variations 

in Xilinx’s overall stock price, at least in some respects. * * * [Id.] 

Judge Fisher concluded ‘‘that Xilinx’s understanding of the 

regulations is the more reasonable even if the Commissioner’s current interpretation may be theoretically plausible.’’ Id. at 1198. He further explained that ‘‘we need not 

defer to * * * [the Commissioner’s interpretation of the 

arm’s-length standard] because he has not clearly articulated 

his rationale until now.’’ Id. (citing United States v. Thompson/Ctr. Arms Co., 504 U.S. 505, 518–519 & n.9 (1992)). In 

a footnote Judge Fisher added: ‘‘It is an open question 

whether these flaws have been addressed in the new 

regulations Treasury issued after the tax years at issue 

in this case.’’ Id. n.4. Notwithstanding Judge Fisher’s concerns, Judge Reinhardt, dissenting, would have continued to 

adhere to the panel’s original opinion. See id. at 1199–1200 

(Reinhardt, J., dissenting). 

V. 2003 Cost-Sharing Regulations 

A. Notice of Proposed Rulemaking 

In July 2002 Treasury issued a notice of proposed rulemaking and notice of a public hearing (NPRM) with respect 

to proposed amendments to the 1995 cost-sharing regulations. The NPRM set a public hearing on the proposed 

amendments for November 20, 2002. See 67 Fed. Reg. 48997 

(July 29, 2002). The preamble to the NPRM states that the 

proposed amendments to the 1995 cost-sharing regulations 

sought to clarify 
104 145 UNITED STATES TAX COURT REPORTS (91) 

5Tax Analysts prepared a written transcript of the November 20, 2002, 

hearing. Treasury did not request or pay for the transcript and did not 

identify it as an ‘‘official’’ transcript. 

that stock-based compensation must be taken into account in determining operating expenses under § 1.482–7(d)(1)[, Income Tax Regs.,] 

and to provide rules for measuring stock-based compensation costs * * * 

[, and] to include express provisions to coordinate the cost sharing rules 

of § 1.482–7[, Income Tax Regs.,] with the arm’s length standard as set 

forth in § 1.482–1[, Income Tax Regs.]. [Id. at 48998.] 

B. Comments Submitted in Response to the Proposed Regulations 

In response to the NPRM the following persons and 

organizations submitted written comments to Treasury: (1) 

American Electronics Association (AeA); (2) Baker & 

McKenzie, LLP, on behalf of the Software Finance and Tax 

Executives Council (SoFTEC); (3) Deloitte & Touche, LLP; (4) 

Ernst & Young LLP, on behalf of the Global Competitiveness 

Coalition (Global); (5) Fenwick & West, LLP (Fenwick); (6) 

Financial Executives International (FEI); (7) Information 

Technology Association of America; (8) Information Technology Industry Council; (9) KPMG, LLP; (10) PricewaterhouseCoopers, LLP (PwC); (11) Irish Office of the Revenue 

Commissioners; (12) Joseph A. Grundfest, W.A. Franke Professor of Law and Business, Stanford Law School; (13) Xilinx 

Inc. Additionally, the following four persons spoke at the 

November 20, 2002, public hearing: (1) Eric D. Ryan, of PwC; 

(2) Ron Schrotenboer, of Fenwick; (3) John M. Peterson, Jr., 

of Baker & McKenzie, LLP and on behalf of SoFTEC; and (4) 

Caroline Graves Hurley, of AeA. 5

Several of the commentators informed Treasury that they 

knew of no transactions between unrelated parties, including 

any cost-sharing arrangement, service agreement, or other 

contract, that required one party to pay or reimburse the 

other party for amounts attributable to stock-based compensation. 

AeA provided to Treasury the results of a survey of its 

members. AeA member companies reviewed their arm’slength codevelopment and joint venture agreements and 

found none in which the parties shared stock-based compensation. For those agreements that did not explicitly 

address the treatment of stock-based compensation, the 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 105

6 EDGAR is maintained by the Securities and Exchange Commission 

(SEC) and is a public and searchable database that provides users with 

free access to registration statements, periodic reports, and other forms 

filed by companies, including ‘‘material contracts’’ that are required by law 

to be attached as exhibits to certain SEC forms. 7 Respondent admits that Treasury never had any discussions with the 

AeA member companies regarding the arm’s-length cost-sharing agreements that the AeA member companies offered to discuss. 

companies reviewed their accounting records and found none 

in which any costs associated with stock-based compensation 

were shared. 

AeA and PwC represented to Treasury that they conducted 

multiple searches of the Electronic Data Gathering, Analysis, 

and Retrieval (EDGAR) system 6 and found no cost-sharing 

agreements between unrelated parties in which the parties 

agreed to share either the exercise spread or grant date 

value of stock-based compensation. 

Several commentators identified arm’s-length agreements 

in which stock-based compensation was not shared or 

reimbursed. For example, (1) AeA identified, and PwC provided, a 1997 collaboration agreement between Amylin 

Pharmaceuticals, Inc., and Hoechst Marion Roussel, Inc. 

(Amylin-HMR collaboration agreement), that did not include 

stock options in the pool of costs to be shared; (2) PwC identified a joint development agreement between the biotechnology company AgraQuest, Inc., and Rohm & Haas 

under which only ‘‘out-of-pocket costs’’ would be shared; (3) 

PwC identified a 1999 cost-sharing agreement between software companies Healtheon Corp. and Beech Street Corp. 

that expressly excluded stock options from the pool of 

expenses to be shared. Additionally, in written comments, 

and again at the November 20, 2002, hearing, Ms. Hurley 

offered to provide Treasury with more detailed information 

regarding several agreements involving AeA member companies, provided that the companies received adequate assurances that their proprietary information would not be disclosed. 7

FEI submitted model accounting procedures from the 

Council of Petroleum Accountant Societies (COPAS) for 

sharing costs among joint operating agreement partners in 

the petroleum industry. FEI noted that COPAS recommends 

that joint operating agreements should not allow stock 
106 145 UNITED STATES TAX COURT REPORTS (91) 

8Federal acquisition regulations prohibit contractors from charging the 

Government for stock-based compensation. See 48 C.F.R. sec. 31.205–6(i) 

(2013). 

options to be charged against the joint account because they 

are difficult to accurately value. 

AeA, SoFTEC, KPMG, and PwC cited the practice of the 

Federal Government, which regularly enters into costreimbursement contracts at arm’s length. They noted that 

Federal acquisition regulations prohibit reimbursement of 

amounts attributable to stock-based compensation. 8

AeA, Global, and PwC explained that, from an economic 

perspective, unrelated parties would not agree to share or 

reimburse amounts related to stock-based compensation 

because the value of stock-based compensation is speculative, 

potentially large, and completely outside the control of the 

parties. SoFTEC provided a detailed economic analysis from 

economists William Baumol and Burton Malkiel reaching the 

same conclusion. 

Finally, the Baumol and Malkiel analysis concluded that 

there is no net economic cost to a corporation or its shareholders from the issuance of stock-based compensation. Similarly, Mr. Grundfest asserted that a company’s ‘‘decision to 

grant options to employees * * * does not change its operating expenses’’ and does not factor into its pricing decisions. 

C. Final Rule 

1. Regulatory Provisions 

In August 2003 Treasury issued the final rule. The final 

rule explicitly required parties to QCSAs to share stockbased compensation costs. See sec. 1.482–7(d)(2), Income Tax 

Regs. The final rule also added sections 1.482–1(b)(2)(i) 

through 1.482–7(a)(3), Income Tax Regs., to provide that a 

QCSA produces an arm’s-length result only if the parties’ 

costs are determined in accordance with the final rule. See 

T.D. 9088, 2003–2 C.B. 841, 847–848. 

The final rule provides two methods for measuring the 

value of stock-based compensation: a default method and an 

elective method. Under the default method, ‘‘the costs attributable to stock-based compensation generally are included as 

intangible development costs upon the exercise of the option 

and measured by the spread between the option strike price 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 107

and the price of the underlying stock.’’ Id., 2003–2 C.B. at 

844. Under the elective method, ‘‘the costs attributable to 

stock options are taken into account in certain cases in 

accordance with the ‘fair value’ of the option, as reported for 

financial accounting purposes either as a charge against 

income or in footnoted disclosures.’’ Id. The elective method, 

however, is available only with respect to options on stock 

that is publicly traded ‘‘on an established United States securities market and is issued by a company whose financial 

statements are prepared in accordance with United States 

generally accepted accounting principles for the taxable 

year.’’ Sec. 1.482–7(d)(3)(iii)(B)(2), Income Tax Regs. 

2. Lack of Evidence From Uncontrolled Transactions 

When it issued the final rule, the files maintained by 

Treasury relating to the final rule did not contain any expert 

opinions, empirical data, or published or unpublished articles, papers, surveys, or reports supporting a determination 

that the amounts attributable to stock-based compensation 

must be included in the cost pool of QCSAs to achieve an 

arm’s-length result. Those files also did not contain any 

record that Treasury searched any database that could have 

contained agreements between unrelated parties relating to 

joint undertakings or the provision of services. Additionally, 

Treasury was unaware of any written contract between unrelated parties, whether in a cost-sharing arrangement or 

otherwise, that required one party to pay or reimburse the 

other party for amounts attributable to stock-based compensation; or any evidence of any actual transaction between 

unrelated parties, whether in a cost-sharing arrangement or 

otherwise, in which one party paid or reimbursed the other 

party for amounts attributable to stock-based compensation. 

3. Response to Comments 

The preamble to the final rule responded to comments that 

asserted that the proposed amendments to the 1995 costsharing regulations were inconsistent with the arm’s-length 

standard, in relevant part, as follows: 

Treasury and the IRS continue to believe that requiring stock-based 

compensation to be taken into account for purposes of QCSAs is consistent with the legislative intent underlying section 482 and with the 

arm’s length standard (and therefore with the obligations of the United 
108 145 UNITED STATES TAX COURT REPORTS (91) 

States under its income tax treaties and with the OECD transfer pricing 

guidelines). The legislative history of the Tax Reform Act of 1986 

expressed Congress’s intent to respect cost sharing arrangements as consistent with the commensurate with income standard, and therefore consistent with the arm’s length standard, if and to the extent that the 

participants’ shares of income ‘‘reasonably reflect the actual economic 

activity undertaken by each.’’ See H.R. Conf. Rep[t]. No. 99–481 [Vol. II], 

at II–638 (1986). * * * In order for the costs incurred by a participant 

to reasonably reflect its actual economic activity, the costs must be 

determined on a comprehensive basis. Therefore, in order for a QCSA to 

reach an arm’s length result consistent with legislative intent, the QCSA 

must reflect all relevant costs, including such critical elements of cost as 

the cost of compensating employees for providing services related to the 

development of the intangibles pursuant to the QCSA. Treasury and the 

IRS do not believe that there is any basis for distinguishing between 

stock-based compensation and other forms of compensation in this context. 

Treasury and the IRS do not agree with the comments that assert that 

taking stock-based compensation into account in the QCSA context 

would be inconsistent with the arm’s length standard in the absence of 

evidence that parties at arm’s length take stock-based compensation into 

account in similar circumstances. Section 1.482–1(b)(1)[, Income Tax 

Regs.,] provides that a ‘‘controlled transaction meets the arm’s length 

standard if the results of the transaction are consistent with the results 

that would have been realized if uncontrolled taxpayers had engaged in 

the same transaction under the same circumstances.’’ * * * While the 

results actually realized in similar transactions under similar circumstances ordinarily provide significant evidence in determining 

whether a controlled transaction meets the arm’s length standard, in the 

case of QCSAs such data may not be available. As recognized in the 

legislative history of the Tax Reform Act of 1986, there is little, if any, 

public data regarding transactions involving high-profit intangibles. H.R. 

Rep[t]. No. 99–426, at 423-[4]25 (1985). The uncontrolled transactions 

cited by commentators do not share enough characteristics of QCSAs 

involving the development of high-profit intangibles to establish that 

parties at arm’s length would not take stock options into account in the 

context of an arrangement similar to a QCSA. Government contractors 

that are entitled to reimbursement for services on a cost-plus basis 

under government procurement law assume substantially less entrepreneurial risk than that assumed by service providers that participate in 

QCSAs, and therefore the economic relationship between the parties to 

such an arrangement is very different from the economic relationship 

between participants in a QCSA. The other agreements highlighted by 

commentators establish arrangements that differ significantly from 

QCSAs in that they provide for the payment of markups on cost or of 

non-cost-based service fees to service providers within the arrangement 

or for the payment of royalties among participants in the arrangement. 

Such terms, which may have the effect of mitigating the impact of using 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 109

a cost base to be shared or reimbursed that is less than comprehensive, 

would not be permitted by the QCSA regulations. * * * 

The regulations relating to QCSAs have as their focus reaching results 

consistent with what parties at arm’s length generally would do if they 

entered into cost sharing arrangements for the development of highprofit intangibles. These final regulations reflect that at arm’s length the 

parties to an arrangement that is based on the sharing of costs to 

develop intangibles in order to obtain the benefit of an independent right 

to exploit such intangibles would ensure through bargaining that the 

arrangement reflected all relevant costs, including all costs of compensating employees for providing services related to the arrangement. Parties dealing at arm’s length in such an arrangement based on the 

sharing of costs and benefits generally would not distinguish between 

stock-based compensation and other forms of compensation. 

For example, assume that two parties are negotiating an arrangement 

similar to a QCSA in order to attempt to develop patentable pharmaceutical products, and that they anticipate that they will benefit equally 

from their exploitation of such patents in their respective geographic 

markets. Assume further that one party is considering the commitment 

of several employees to perform research with respect to the arrangement. That party would not agree to commit employees to an arrangement that is based on the sharing of costs in order to obtain the benefit 

of independent exploitation rights unless the other party agrees to 

reimburse its share of the compensation costs of the employees. Treasury 

and the IRS believe that if a significant element of that compensation 

consists of stock-based compensation, the party committing employees to 

the arrangement generally would not agree to do so on terms that ignore 

the stock-based compensation. 

[T.D. 9088, 2003–2 C.B. at 842–843.] 

The preamble to the final rule responded to comments that 

asserted that stock-based compensation does not constitute 

an economic cost, or relevant economic cost, as follows: 

Treasury and the IRS continue to believe that requiring stock-based 

compensation to be taken into account in the context of QCSAs is appropriate. The final regulations provide that stock-based compensation must 

be taken into account in the context of QCSAs because such a result is 

consistent with the arm’s length standard. Treasury and the IRS agree 

that the disposition of financial reporting issues does not mandate a particular result under these regulations. [Id., 2003–2 C.B. at 843.] 

The preamble to the final rule responded to comments that 

asserted that parties at arm’s length would not share either 

the exercise spread or grant date value of stock-based compensation because they would produce results that are too 

speculative or not sufficiently related to the employee services that are compensated, as follows: 
110 145 UNITED STATES TAX COURT REPORTS (91) 

9The notice of proposed rulemaking must include ‘‘(1) a statement of the 

time, place, and nature of public rule making proceedings; (2) reference to 

the legal authority under which the rule is proposed; and (3) either the 

terms or substance of the proposed rule or a description of the subjects and 

issues involved.’’ APA sec. 553(b). 

Treasury and the IRS believe that it is appropriate for regulations to 

prescribe guidance in this context that is consistent with the arm’s 

length standard and that also is objective and administrable. As long as 

the measurement method is determined at or before grant date, either 

of the prescribed measurement methods can be expected to result in an 

appropriate allocation of costs among QCSA participants and therefore 

would be consistent with the arm’s length standard. [Id., 2003–2 C.B. at 

844.] 

Finally, the preamble to the final rule states that ‘‘[i]t has 

also been determined that [APA] section 553(b) * * * does 

not apply to these regulations.’’ Id., 2003–2 C.B. at 847. 

Discussion 

I. Summary Judgment 

Rule 121(a) provides that either party may move for summary judgment upon all or any part of the legal issues in 

controversy. Full or partial summary judgment may be 

granted only if it is demonstrated that there is no genuine 

dispute as to any material fact and that a decision may be 

rendered as a matter of law. See Rule 121(b); Sundstrand 

Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff ’d, 17 

F.3d 965 (7th Cir. 1994). We conclude that there is no genuine dispute as to any material fact relating to the issue presented by the parties’ cross-motions for partial summary 

judgment and that the issue may be decided as a matter of 

law. 

II. Applicable Principles of Administrative Law 

A. Notice and Comment Rulemaking 

Pursuant to APA sec. 553, in promulgating regulations 

through informal rulemaking an agency must (1) publish a 

notice of proposed rulemaking in the Federal Register, 9 see 

APA sec. 553(b); (2) provide ‘‘interested persons an opportunity to participate in the rule making through submission 

of written data, views, or arguments with or without opportunity for oral presentation’’, id. subsec. (c); and (3) ‘‘[a]fter 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 111

10We have previously referred to regulations issued pursuant to specific 

grants of rulemaking authority as legislative regulations and regulations 

issued pursuant to Treasury’s general rulemaking authority, under sec. 

7805(a), as interpretive regulations. See, e.g., Tutor-Saliba Corp. v. Commissioner, 115 T.C. 1, 7 (2000). Because the terms ‘‘legislative’’ and ‘‘interpretive’’ have different meanings in the administrative law context, see 

Hemp Indus. Ass’n v. DEA, 333 F.3d 1082, 1087 (9th Cir. 2003), we will 

refer to regulations issued pursuant to specific grants of rulemaking authority as specific authority regulations and regulations issued pursuant to 

Treasury’s general rulemaking authority, under sec. 7805(a), as general 

authority regulations. 

consideration of the relevant matter presented, * * * incorporate in the rules adopted a concise general statement of 

their basis and purpose’’, id. These requirements do not 

apply to interpretive rules, 10 see id. subsec. (b)(A), or when 

an agency for good cause finds—and incorporates its findings 

in the rules issued—that ‘‘notice and public procedure 

thereon are impracticable, unnecessary, or contrary to the 

public interest’’, id. para. (B). 

Generally, interpretive rules merely explain preexisting 

substantive law. See Hemp Indus. Ass’n v. DEA, 333 F.3d 

1082, 1087 (9th Cir. 2003). Substantive (or legislative) rules 

by contrast, ‘‘create rights, impose obligations, or effect a 

change in existing law’’. Id. Stated simply, ‘‘legislative rules, 

unlike interpretive rules, have the ‘force of law.’ ’’ Id. (quoting 

Am. Mining Cong. v. Mine Safety & Health Admin., 995 F.2d 

1106, 1109 (D.C. Cir. 1993)); see also Chrysler Corp. v. 

Brown, 441 U.S. 281, 301–302 (1979). 

A rule has the force of law ‘‘only if Congress has delegated 

legislative power to the agency and if the agency intended to 

exercise that power in promulgating the rule.’’ Am. Mining 

Cong., 995 F.2d at 1109 (citing Am. Postal Workers Union v. 

USPS, 707 F.2d 548, 558 (D.C. Cir. 1983)). The U.S. Court 

of Appeals for the Ninth Circuit, to which an appeal in these 

cases appears to lie absent a stipulation to the contrary, see 

sec. 7482(b)(1)(B), (2), has held that we can infer that an 

agency intends for a rule to have the force of law in any of 

the following circumstances: ‘‘(1) when, in the absence of the 

rule, there would not be an adequate legislative basis for 

enforcement action; (2) when the agency has explicitly 

invoked its general legislative authority; or (3) when the rule 

effectively amends a prior legislative rule,’’ Hemp Indus., 333 
112 145 UNITED STATES TAX COURT REPORTS (91) 

11 ‘‘[O]nly comments which, if true, raise points relevant to the agency’s 

decision and which, if adopted, would require a change in an agency’s proposed rule cast doubt on the reasonableness of a position taken by the 

agency. Moreover, comments which themselves are purely speculative and 

do not disclose the factual or policy basis on which they rest require no 

response.’’ Home Box Office, Inc. v. FCC, 567 F.2d 9, 35 n.58 (D.C. Cir. 

1977); see also Am. Mining Cong. v. EPA, 965 F.2d 759, 771 (9th Cir. 1992) 

(citing Home Box Office, 567 F.2d at 35 & n.58). 

F.3d at 1087 (citing Am. Mining Cong., 995 F.2d 1106), or 

‘‘effect[s] a change in existing law or policy’’, D.H. Blattner & 

Sons, Inc. v. Sec’y of Labor, Mine Safety & Health Admin., 

152 F.3d 1102, 1109 (9th Cir. 1998) (alteration in original) 

(quoting Powderly v. Schweiker, 704 F.2d 1092, 1098 (9th 

Cir. 1983)). In determining whether a rule is interpretive or 

legislative we ‘‘need not accept the agency characterization at 

face value.’’ Hemp Indus., 333 F.3d at 1087 (citing Gunderson 

v. Hood, 268 F.3d 1149, 1154 n.27 (9th Cir. 2001)). 

The notice and comment requirements of APA sec. 553 ‘‘are 

intended to assist judicial review as well as to provide fair 

treatment for persons affected by a rule.’’ Home Box Office, 

Inc. v. FCC, 567 F.2d 9, 35 (D.C. Cir. 1977). Accordingly, 

‘‘there must be an exchange of views, information, and criticism between interested persons and the agency.’’ Id. 

Additionally, because ‘‘the opportunity to comment is meaningless unless the agency responds to significant points 

raised by the public’’, an agency is required to respond to 

significant comments. 11 Id. at 35–36. However, ‘‘[t]he failure 

to respond to comments is significant only insofar as it demonstrates that the agency’s decision was not based on a 

consideration of the relevant factors.’’ Sherley v. Sebelius, 689 

F.3d 776, 784 (D.C. Cir. 2012) (quoting Covad Commc’ns v. 

FCC, 450 F.3d 528, 550 (D.C. Cir. 2006)). 

B. Judicial Review of Agency Decisionmaking—State Farm 

Review 

Pursuant to APA sec. 706(2)(A), a court must ‘‘hold unlawful and set aside agency action, findings, and conclusions’’ 

that the court finds to be ‘‘arbitrary, capricious, an abuse of 

discretion, or otherwise not in accordance with law’’. A 

court’s review under this ‘‘standard is narrow and a court is 

not to substitute its judgment for that of the agency.’’ Motor 

Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto. Ins. 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 113

Co., 463 U.S. 29, 43 (1983); see also Judulang v. Holder, 565 

U.S. ll, ll, 132 S. Ct. 476, 483 (2011); Citizens to Pres. 

Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971), abrogated on other grounds by Califano v. Sanders, 430 U.S. 99 

(1977). However, a reviewing court must ensure that the 

agency ‘‘engaged in reasoned decisionmaking.’’ Judulang, 565 

U.S. at ll, 132 S. Ct. at 484. To engage in reasoned 

decisionmaking, ‘‘the agency must examine the relevant data 

and articulate a satisfactory explanation for its action 

including a ‘rational connection between the facts found and 

the choice made.’ ’’ State Farm, 463 U.S. at 43 (quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168 

(1962)). 

In reviewing an agency action a court must determine 

‘‘whether the decision was based on a consideration of the 

relevant factors and whether there has been a clear error of 

judgment.’’ Id. (quoting Bowman Transp., Inc. v. ArkansasBest Freight Sys., Inc., 419 U.S. 281, 285 (1974)); see also 

Judulang, 565 U.S. at ll, 132 S. Ct. at 484. ‘‘Normally, an 

agency rule would be arbitrary and capricious if the agency 

has relied on factors which Congress has not intended it to 

consider, entirely failed to consider an important aspect of 

the problem, offered an explanation for its decision that runs 

counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or 

the product of agency expertise.’’ State Farm, 463 U.S. at 43. 

In providing a reasoned explanation for agency action that 

departs from an agency’s prior position the agency must ‘‘display awareness that it is changing position.’’ FCC v. Fox 

Television Stations, Inc., 556 U.S. 502, 515 (2009) (citing 

United States v. Nixon, 418 U.S. 683, 696 (1974)). However, 

the agency need not demonstrate ‘‘that the reasons for the 

new policy are better than the reasons for the old one’’. Id. 

In examining an agency’s explanation for issuing a rule a 

reviewing court ‘‘ ‘may not supply a reasoned basis for the 

agency’s action that the agency itself has not given.’ ’’ State 

Farm, 463 U.S. at 43 (quoting SEC v. Chenery Corp., 332 

U.S. 194, 196 (1947)); see also Carpenter Family Invs., LLC 

v. Commissioner, 136 T.C. 373, 380, 396 n.30 (2011). Similarly, when an agency ‘‘relie[s] on multiple rationales (and 

has not done so in the alternative), and * * * [a reviewing 

court] conclude[s] that at least one of the rationales is defi-
114 145 UNITED STATES TAX COURT REPORTS (91) 

12The Supreme Court explained that ‘‘Chevron deference is appropriate 

‘when it appears that Congress delegated authority to the agency generally 

to make rules carrying the force of law, and that the agency interpretation 

claiming deference was promulgated in the exercise of that authority.’ ’’ 

Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44, 57 

(2011) (quoting United States v. Mead Corp., 533 U.S. 218, 226–227 

(2001)). The Supreme Court concluded that when Treasury issues general 

authority regulations after full notice and comment procedures, these conditions are met and those regulations are therefore entitled to Chevron deference. See id. at 56–57. 

cient,’’ Nat’l Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 

839 (D.C. Cir. 2006) (citing Allied-Signal, Inc. v. U.S. 

Nuclear Regulatory Comm’n, 988 F.2d 146, 150–151 (D.C. 

Cir. 1993), and Consol. Edison Co. of N.Y. v. FERC, 823 F.2d 

630, 641–642 (D.C. Cir. 1987)), the court cannot sustain the 

agency action on the basis of the sufficient rationale unless 

the court is certain that the agency would have taken the 

same action ‘‘even absent the flawed rationale’’, id. However, 

the reviewing court must ‘‘uphold a decision of less than 

ideal clarity if the agency’s path may reasonably be discerned.’’ State Farm, 463 U.S. at 43 (quoting Bowman 

Transp., 419 U.S. at 286). 

C. Judicial Review of Agency Statutory Construction— 

Chevron Review 

A court reviews an agency’s authoritative construction of a 

statute under the two-step test first articulated in Chevron, 

U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 

842 (1984). See Mayo Found. for Med. Educ. & Research v. 

United States, 562 U.S. 44, 55–58 (2011). In Mayo Found., 

the Supreme Court clarified that both specific authority regulations and general authority regulations are to be accorded 

Chevron deference. 12 See id. 

Under Chevron step 1, ‘‘applying the ordinary tools of 

statutory construction,’’ City of Arlington v. FCC, 569 U.S. 

ll, ll, 133 S. Ct. 1863, 1868 (2013), a court must determine ‘‘whether Congress has directly spoken to the precise 

question at issue. If the intent of Congress is clear, that is 

the end of the matter; for the court, as well as the agency, 

must give effect to the unambiguously expressed intent of 

Congress.’’ Chevron, 467 U.S. at 842–843. Under Chevron 

step 2, a court must defer to the agency’s authoritative 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 115

interpretation of an ambiguous statute ‘‘unless it is ‘arbitrary 

or capricious in substance, or manifestly contrary to the 

statute.’ ’’ Mayo Found., 562 U.S. at 53 (quoting Household 

Credit Servs., Inc. v. Pfennig, 541 U.S. 232, 242 (2004)); see 

also Judulang, 565 U.S. at ll, 132 S. Ct. at 483 n.7. 

Chevron deference applies even where an agency adopts a 

construction that conflicts with a prior judicial construction 

of the statute. See Nat’l Cable & Telecomms. Ass’n v. Brand 

X Internet Servs., 545 U.S. 967, 982–983 (2005). However, if 

a precedential case holds that a statute unambiguously 

expresses a congressional intent that is contrary to the 

agency’s construction of the statute, the prior judicial 

construction controls. See id.; see also United States v. Home 

Concrete & Supply, LLC, 566 U.S. ll, ll, 132 S. Ct. 

1836, 1844 (2012). 

D. Harmless Error 

APA sec. 706 instructs reviewing courts to take ‘‘due 

account * * * of the rule of prejudicial error.’’ See also Nat’l 

Ass’n of Home Builders v. Defenders of Wildlife, 551 U.S. 644, 

659–660 (2007) (‘‘In administrative law, as in federal civil 

and criminal litigation, there is a harmless error rule[.]’’ 

(quoting PDK Labs. Inc. v. DEA, 362 F.3d 786, 799 (D.C. Cir. 

2004))). This rule reflects the notion that ‘‘[i]f the agency’s 

mistake did not affect the outcome, if it did not prejudice the 

petitioner, it would be senseless to vacate’’ the agency action. 

PDK Labs., 362 F.3d at 799. 

III. Preliminary Administrative Law Issues 

The parties disagree whether the final rule is a legislative 

rule or an interpretive rule. The parties also disagree 

regarding the standard of review that we should apply. We 

therefore address these issues before considering the validity 

of the final rule. 

A. APA Sec. 553 Applies to the Final Rule. 

Petitioner contends that the final rule is a legislative rule 

under APA sec. 553(b) and is therefore subject to the notice 

and comment requirements of APA sec. 553 because, if valid, 

it would have the force of law. Alternatively, petitioner contends that if the final rule were an interpretive rule, it would 

‘‘not have the force and effect of law’’, Shalala v. Guernsey 
116 145 UNITED STATES TAX COURT REPORTS (91) 

13The current version of Internal Revenue Manual pt. 32.1.5.4.7.3(1) 

(Oct. 20, 2014) omits the second sentence. 

Mem’l Hosp., 514 U.S. 87, 99 (1995), and therefore the final 

rule would not be binding on this Court. Respondent agrees 

that the final rule has the force of law but disagrees with 

petitioner’s contention that it is a legislative rule. However, 

respondent declined to argue this issue on brief or at oral 

argument. 

Instead, respondent contends that we need not decide this 

issue because Treasury complied with the notice and comment requirements. However, petitioner contends that 

Treasury failed to adequately explain the basis of the final 

rule, and Treasury’s obligation to explain the basis of the 

final rule depends, at least in part, on its being a legislative 

rule subject to the notice and comment requirements of APA 

sec. 553. See APA sec. 553(c); cf. Internal Revenue Manual 

pt. 32.1.5.4.7.5.1(2) (Sept. 30, 2011) (‘‘[M]ost IRS/Treasury 

regulations will be interpretative regulations because they 

fill gaps in legislation or have a prior existence in the law.’’); 

id. pt. 32.1.5.4.7.3(1) (‘‘In the Explanation of Provisions section, the drafting team should describe the substantive provisions of the regulation in clear, concise, plain language 

* * *. It is not necessary to justify the rules that are being 

proposed or adopted or alternatives that were considered.’’). 13 Petitioner also contends that Treasury failed to 

respond to significant comments, and Treasury’s obligation to 

respond to significant comments is derived, at least in part, 

from the notice and comment requirements of APA sec. 553. 

See Home Box Office, 567 F.2d at 35–36. Moreover, we 

cannot avoid this issue because petitioner alternatively contends that the final rule would not bind this Court if it were 

an interpretive rule. Consequently, we will decide this issue. 

Pursuant to section 7805(a) the Secretary is authorized to 

‘‘prescribe all needful rules and regulations for the enforcement of ’’ the Code. Such regulations carry the force of law, 

and the Code imposes penalties for failing to follow them. 

See, e.g., sec. 6662(b)(1). We therefore conclude that ‘‘Congress has delegated legislative power to’’ Treasury. Am. 

Mining Cong., 995 F.2d at 1109. 

We further conclude that Treasury intended for the final 

rule to have the force of law for the following reasons: (1) the 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 117

parties stipulated—and we agree, see Xilinx Inc. v. Commissioner, 125 T.C. 37—that the adjustments to petitioner’s 

income can be sustained only on the basis of the final rule, 

see Hemp Indus., 333 F.3d at 1087, and (2) in promulgating 

the final rule Treasury invoked its general legislative rulemaking authority under section 7805(a), see id. The final rule 

is therefore a legislative rule. See Am. Mining Cong., 995 

F.2d at 1109. 

Because it is a legislative rule and Treasury did not find 

for good cause that notice and comment were impracticable, 

unnecessary, or contrary to the public interest, see APA sec. 

553(b)(A) and (B), APA sec. 553 applies to the final rule. We 

must therefore also consider whether Treasury satisfied its 

obligations under APA sec. 553(b) and (c) in issuing the final 

rule. 

B. The Final Rule Must Satisfy State Farm’s Reasoned 

Decisionmaking Standard. 

Petitioner contends that we should review the final rule 

under State Farm. Respondent contends that we should 

review the final rule under Chevron. For the reasons that follow, we conclude that—regardless of the ultimate standard of 

review—the final rule must satisfy State Farm’s reasoned 

decisionmaking standard. 

Respondent contends that State Farm review is not appropriate because the interpretation and implementation of section 482 do not require empirical analysis. Similarly, 

respondent repeatedly argues that section 482 does not 

require allocations to be made with reference to uncontrolled 

party conduct. But ‘‘[t]he purpose of section 482 is to place 

a controlled taxpayer on a tax parity with an uncontrolled 

taxpayer, by determining according to the standard of an 

uncontrolled taxpayer, the true taxable income from the 

property and business of a controlled taxpayer. * * * The 

standard to be applied in every case is that of an uncontrolled taxpayer dealing at arm’s length with another uncontrolled taxpayer.’’ Commissioner v. First Sec. Bank of Utah, 

405 U.S. 394, 400 (1972) (quoting section 1.482–1(b)(1), 

Income Tax Regs. (1971)); accord sec. 1.482–1(a)(1), (b)(1), 

Income Tax Regs.; Treasury Department Technical Explanation of the 2001 U.S.-U.K. Income Tax Convention, art. 9; 

Treasury Department Technical Explanation of the 1997 
118 145 UNITED STATES TAX COURT REPORTS (91) 

14For example, the preamble does not say that controlled transactions 

can never be comparable to uncontrolled transactions because related and 

unrelated parties always occupy materially different circumstances. Cf. 

Xilinx Inc. v. Commissioner, 598 F.3d at 1197 (Fisher, J., concurring) (‘‘The 

Commissioner * * * contends that analyzing comparable transactions is 

unhelpful in situations where related and unrelated parties always occupy 

materially different circumstances.’’). 15The preamble states that ‘‘Treasury and the IRS do not agree with the 

comments that assert that taking stock-based compensation into account 

in the QCSA context would be inconsistent with the arm’s length standard 

U.S.-Ir. Income Tax Convention and Protocol, art. 9, Tax 

Treaties (CCH) para. 4435, at 103,223; Treasury Department 

Technical Explanation of the 2006 U.S. Model Income Tax 

Convention, art. 9. For these reasons we have previously 

stated that ‘‘the determination under section 482 is essentially and intensely factual’’. Procacci v. Commissioner, 94 

T.C. 397, 412 (1990). 

Section 1.482–1(b)(1), Income Tax Regs., provides that ‘‘[i]n 

determining the true taxable income of a controlled taxpayer, 

the standard to be applied in every case is that of a taxpayer 

dealing at arm’s length with an uncontrolled taxpayer.’’ In 

Xilinx Inc. v. Commissioner, 125 T.C. at 53–55, we held that 

the arm’s-length standard always requires an analysis of 

what unrelated entities do under comparable circumstances. 

Similarly, in promulgating the final rule Treasury explicitly 

considered whether unrelated parties would share stockbased compensation costs in the context of a QCSA. See T.D. 

9088, 2003–2 C.B. at 843 (‘‘Treasury and the IRS believe that 

if a significant element of that compensation consists of 

stock-based compensation, the party committing employees 

to the arrangement generally would not agree to do so on 

terms that ignore the stock-based compensation.’’). Treasury 

necessarily decided an empirical question when it concluded 

that the final rule was consistent with the arm’s-length 

standard. 

Respondent counters that Treasury should be permitted to 

issue regulations modifying—or even abandoning—the arm’slength standard. But the preamble to the final rule does not 

justify the final rule on the basis of any modification or 

abandonment of the arm’s-length standard, 14 and respondent 

concedes that the purpose of section 482 is to achieve tax 

parity. 15 The preamble also did not dismiss any of the evi-
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 119

in the absence of evidence that parties at arm’s length take stock-based 

compensation into account in similar circumstances.’’ T.D. 9088, 2003–2 

C.B. 841, 842. However, the preamble never suggests that the final rule 

could be consistent with the arm’s-length standard if evidence showed that 

unrelated parties would not share stock-based compensation costs or that 

an evidentiary inquiry was unnecessary. See id., 2003–2 C.B. at 842–843. 

dence submitted by commentators regarding unrelated party 

conduct as addressing an irrelevant or inconsequential factor. 

See id., 2003–2 C.B. at 842–843. We therefore need not 

decide whether, under Brand X, 545 U.S. at 982–983, 

Treasury would be free to modify or abandon the arm’slength standard because it has not done so here. See Chenery 

Corp., 332 U.S. at 196; Carpenter Family Invs., LLC v. 

Commissioner, 136 T.C. at 380, 396 n.30. 

The validity of the final rule therefore turns on whether 

Treasury reasonably concluded, see State Farm, 463 U.S. at 

43, that it is consistent with the arm’s-length standard, and 

that is necessarily an empirical determination. The reasonableness of Treasury’s conclusion in no way depends on its 

interpretation of section 482 or any other statute. As the 

Supreme Court recently articulated, State Farm review is 

‘‘the more apt analytic framework’’ where the challenged 

regulation does not rely on an agency’s interpretation of a 

statute. Judulang, 565 U.S. at ll n.7, 132 S. Ct. at 483. 

Nevertheless, respondent contends that we should not 

review the final rule under State Farm because the Supreme 

Court has never, and this Court has rarely, reviewed 

Treasury regulations under State Farm. However, 

respondent concedes that Treasury is subject to the APA, and 

respondent has not advanced any justification for exempting 

Treasury regulations from State Farm review. The Supreme 

Court has stated that ‘‘[i]n the absence of such justification, 

we are not inclined to carve out an approach to administrative review good for tax law only. To the contrary, we have 

expressly ‘[r]ecogniz[ed] the importance of maintaining a uniform approach to judicial review of administrative action.’ ’’ 

Mayo Found., 562 U.S. at 55 (quoting Dickinson v. Zurko, 

527 U.S. 150, 154 (1999) (alteration in original)); see also 

Dominion Res., Inc. v. United States, 681 F.3d 1313, 1319 

(Fed. Cir. 2012) (invalidating the associated-property rule in 

section 1.263A–11(e)(1)(ii)(B), Income Tax Regs., under State 

Farm). 
120 145 UNITED STATES TAX COURT REPORTS (91) 

16The parties agree that sec. 482 is ambiguous. These cases would therefore be resolved at Chevron step 2. 

Ultimately, however, whether State Farm or Chevron supplies the standard of review is immaterial because Chevron 

step 2 16 incorporates the reasoned decisionmaking standard 

of State Farm. See Judulang, 565 U.S. at ll n.7, 132 S. Ct. 

at 483 (stating that, under either standard, the ‘‘analysis 

would be the same, because under Chevron step two, we ask 

whether an agency interpretation is ‘arbitrary or capricious 

in substance’ ’’ (quoting Mayo Found., 562 U.S. at 53)); 

Torres-Valdivias v. Holder, 766 F.3d 1106, 1114 n.5 (9th Cir. 

2014) (citing Judulang, 565 U.S. at ll n.7, 132 S. Ct. at 

483); Agape Church, Inc. v. FCC, 738 F.3d 397, 410 (D.C. Cir. 

2013) (citing Judulang, 565 U.S. at ll n.7, 132 S. Ct. at 

483). Because the validity of the final rule turns on whether 

Treasury reasonably concluded that it is consistent with the 

arm’s-length standard, the final rule must—in any event— 

satisfy State Farm’s reasoned decisionmaking standard. 

Accordingly, we will examine whether the final rule satisfies 

that standard without deciding whether Chevron or State 

Farm provides the ultimate standard of review. 

IV. Whether the Final Rule Satisfies State Farm’s Reasoned 

Decisionmaking Standard 

Petitioner contends that the final rule is invalid because 

(A) it lacks a basis in fact, (B) Treasury failed to rationally 

connect the choice it made with the facts it found, (C) 

Treasury failed to respond to significant comments, and (D) 

the final rule is contrary to the evidence before Treasury. 

Respondent disagrees. 

A. The Final Rule Lacks a Basis in Fact. 

Petitioner contends that the final rule lacks a basis in fact 

because Treasury issued the final rule without any evidence 

that unrelated parties would ever agree to share stock-based 

compensation costs. Respondent contends that (1) Treasury 

did not rely solely on its belief that unrelated parties 

entering into QCSAs would generally share stock-based compensation costs but also on the commensurate-with-income 

standard and (2) Treasury was sufficiently experienced with 

cost-sharing agreements to conclude that unrelated parties 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 121

17 In its response to comments asserting that stock-based compensation 

does not constitute an economic cost to the issuing corporation, Treasury 

appears to have relied exclusively on the arm’s-length standard. See T.D. 

9088, 2003–2 C.B. at 843 (‘‘Treasury and the IRS continue to believe that 

requiring stock-based compensation to be taken into account in the context 

of QCSAs is appropriate. The final regulations provide that stock-based 

compensation must be taken into account in the context of QCSAs because 

such a result is consistent with the arm’s length standard.’’). 18 ‘‘A tax treaty is negotiated by the United States with the active participation of the Treasury. The Treasury’s reading of the treaty is ‘entitled 

to great weight.’ ’’ Xilinx Inc. v. Commissioner, 598 F.3d at 1196–1197 

(Noonan, J.) (quoting United States v. Stuart, 489 U.S. 353, 369 (1989)), 

aff ’g 125 T.C. 37 (2005). Therefore, ‘‘[e]ven if the treaty and the Technical 

Explanation should be held not to operate as law trumping the hapless 

* * * [final rule], treaty and explanation act as guides. They tell us what 

the Treasury * * * had in mind’’, Xilinx Inc. v. Commissioner, 567 F.3d 

482, 500–501 (9th Cir. 2009) (Noonan, J., dissenting), rev’g and remanding 

125 T.C. 37, withdrawn, 592 F.3d 1017 (9th Cir. 2010), in issuing the final 

rule. 

entering into QCSAs would generally share stock-based compensation costs. 

1. The Commensurate-With-Income Standard Cannot Justify the Final Rule. 

Although Treasury referred to the commensurate-withincome standard in the preamble to the final rule, it relied 

on its belief that the final rule was required by—or was at 

least consistent with—the arm’s-length standard. 17 In Xilinx 

Inc. v. Commissioner, 125 T.C. at 56–58, we concluded that 

Congress never intended for the commensurate-with-income 

standard to supplant the arm’s-length standard. In the 1988 

White Paper, Treasury and the IRS similarly concluded that 

Congress intended for the commensurate-with-income 

standard to work consistently with the arm’s-length 

standard. See Notice 88–123, 1988–2 C.B. 458, 472, 475. 

Treasury has since repeatedly reinforced this conclusion in 

technical explanations to numerous income tax treaties. 18

See, e.g., Treasury Department Technical Explanation of the 

2001 U.S.-U.K. Income Tax Convention, art. 9, Tax Treaties 

(CCH) para. 10,911, at 201,306–201,307; Treasury Department Technical Explanation of the 1997 U.S.-Ir. Income Tax 

Convention and Protocol, Tax Treaties (CCH) para. 4435, at 

103,223; Treasury Department Technical Explanation of the 

2006 U.S. Model Income Tax Convention, art. 9, Tax Treaties 
122 145 UNITED STATES TAX COURT REPORTS (91) 

19 Even were we to conclude that Treasury intended to adopt a more expansive understanding of the commensurate-with-income standard, we 

would be unable to sustain the final rule on that basis because Treasury 

never acknowledged that it was changing its position. See FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009) (citing United States v. 

Nixon, 418 U.S. 683, 696 (1974)). 

(CCH) para. 215, at 10,640–10,641. The preamble to the final 

rule does not indicate that Treasury intended to abandon 

this conclusion and we conclude that it did not. 19

Moreover, because Treasury did not rely exclusively on the 

commensurate-with-income standard, we cannot sustain the 

final rule solely on that basis if we decide that Treasury’s 

reliance on the arm’s-length standard in issuing the final 

rule was unreasonable. See Chenery Corp., 332 U.S. at 196; 

Nat’l Fuel Gas Supply, 468 F.3d at 839 (citing Allied-Signal, 

988 F.2d at 150–151, and Consol. Edison, 823 F.2d at 641– 

642). Accordingly, the commensurate-with-income standard, 

as interpreted by Treasury, cannot provide a sufficient basis 

for the final rule. 

2. Treasury’s Unsupported Assertion Cannot Justify the 

Final Rule. 

A court will generally not override an agency’s ‘‘reasoned 

judgment about what conclusions to draw from technical evidence or how to adjudicate between rival scientific [or economic] theories’’. Tripoli Rocketry Ass’n v. Bureau of Alcohol, 

Tobacco, Firearms & Explosives, 437 F.3d 75, 83 (D.C. Cir. 

2006). However, ‘‘where an agency has articulated no reasoned basis for its decision—where its action is founded on 

unsupported assertions or unstated inferences—* * * [a 

court] will not ‘abdicate the judicial duty carefully to ‘‘review 

the record to ascertain that the agency has made a reasoned 

decision based on reasonable extrapolations from some reliable evidence.’’ ’ ’’ Id. (quoting Am. Mining Cong. v. EPA, 907 

F.2d 1179, 1187 (D.C. Cir. 1990)). 

Respondent concedes that (1) in adopting the final rule, 

Treasury took the position that it was not obligated to 

engage in fact finding or to follow evidence gathering procedures; (2) the files maintained by Treasury relating to the 

final rule did not contain any empirical or other evidence 

supporting Treasury’s belief that unrelated parties entering 

into QCSAs would generally share stock-based compensation 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 123

20Treasury’s failure to conduct any factfinding before issuing the final 

rule is also evident in the preamble to the final rule. See T.D. 9088, 2003– 

2 C.B. at 842 (‘‘While the results actually realized in similar transactions 

under similar circumstances ordinarily provide significant evidence in determining whether a controlled transaction meets the arm’s length standard, in the case of QCSAs such data may not be available.’’ (Emphasis 

added.)). 

costs; (3) the files maintained by Treasury relating to the 

final rule did not have any record that Treasury searched 

any database that could have contained agreements between 

unrelated parties; and (4) Treasury was unaware of any written agreement—or of any transaction—between unrelated 

parties that required one party to pay or reimburse the other 

party for amounts attributable to stock-based compensation. 20

The preamble to the final rule offered only Treasury’s 

belief that unrelated parties entering into QCSAs would generally share stock-based compensation costs. Specifically, the 

preamble to the final rule states that, in the context of a 

hypothetical QCSA between unrelated parties to develop 

patentable pharmaceutical products, ‘‘Treasury and the IRS 

believe that if a significant element of that compensation 

consists of stock-based compensation, the party committing 

employees to the arrangement generally would not agree to 

do so on terms that ignore the stock-based compensation.’’ 

T.D. 9088, 2003–2 C.B. at 843. Treasury, however, failed to 

provide a reasoned basis for reaching this conclusion from 

any evidence in the administrative record. See Tripoli Rocketry, 437 F.3d at 83. Indeed, ‘‘every indication in the record 

points the other way’’. State Farm, 463 U.S. at 57 (internal 

quotation omitted); see infra part IV.C. 

Respondent defends Treasury’s failure to provide a reasoned basis for its conclusion from any evidence in the 

administrative record on the notion that ‘‘[t]here are some 

propositions for which scant empirical evidence can be marshaled’’. See Fox Television, 556 U.S. at 519. This may be 

true regarding certain propositions, see id. (‘‘the harmful 

effect of broadcast profanity on children is one of them’’), but 

we do not agree that the belief that unrelated parties would 

share stock-based compensation costs in the context of a 

QCSA is one of them. First, commentators submitted significant evidence regarding this proposition. See infra part IV.C. 
124 145 UNITED STATES TAX COURT REPORTS (91) 

Second, we were able to reach a definitive factual determination on the basis of significant evidence regarding this very 

proposition in Xilinx. See Xilinx Inc. v. Commissioner, 125 

T.C. at 58–62. Third, Treasury could not have rationally concluded that this is a proposition ‘‘for which scant empirical 

evidence can be marshaled’’, see Fox Television, 556 U.S. at 

519, without attempting to marshal empirical evidence in the 

first instance, which respondent concedes it did not do. 

Relying on Peck v. Thomas, 697 F.3d 767 (9th Cir. 2012), 

respondent further contends that we must defer to Treasury’s expertise with respect to whether the parties operating 

at arm’s length would share stock-based compensation. At 

issue in Peck was a regulation issued by the Bureau of 

Prisons that denied early release to inmates with a felony 

conviction for certain enumerated offenses. In issuing the 

regulation the Bureau of Prisons expressly relied on its 

‘‘ ‘correctional experience’ ’’ in determining which offenses 

warrant preclusion from early release but did not disclose 

any statistical studies to support its conclusions. See id. at 

773 (quoting 74 Fed. Reg. 1895 (Jan. 14, 2009)). The U.S. 

Court of Appeals for the Ninth Circuit rejected an inmate’s 

argument that the Bureau of Prisons violated the APA in 

issuing this regulation because it did not develop statistical 

evidence to support its conclusions. See id. at 775–776. The 

Court of Appeals reasoned that the Bureau of Prisons was 

entitled to rely on its experience and the APA did not require 

it to develop statistical evidence to support its conclusions. 

See id. (citing Sacora v. Thomas, 628 F.3d 1059, 1067, 1069 

(9th Cir. 2010)). 

Respondent’s reliance on Peck is misplaced. First, in Peck, 

the Bureau of Prisons relied on its extensive correctional 

experience in determining which offenses warrant preclusion 

from early release. Here, by contrast, Treasury admits that 

it had no knowledge of any transactions in which parties 

operating at arm’s length shared stock-based compensation. 

Second, the preamble to the regulation at issue in Peck 

expressly relied on the Bureau of Prisons’ extensive, handson correctional experience. Here, by contrast, the preamble to 

the final rule does not rely on Treasury’s experience as a 

party to arm’s-length cost-sharing agreements—or even on 

any experience Treasury may have had in examining the 

arm’s-length cost-sharing agreements of taxpayers it regu-
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 125

lates. Indeed, the preamble to the final rule all but disclaimed Treasury’s reliance on any such experience. 

Third, the administrative record for the regulation at issue 

in Peck contained no evidence contradicting the Bureau of 

Prisons’ correctional experience. Here, by contrast, commentators introduced significant evidence showing that parties operating at arm’s length would not share stock-based 

compensation. See infra part IV.C. Peck does not support the 

contention that an agency can rely on unsupported assertions 

in the face of significant contrary evidence in the administrative record. 

We conclude that (1) by failing to engage in any fact 

finding, Treasury failed to ‘‘examine the relevant data’’, State 

Farm, 463 U.S. at 43, and (2) Treasury failed to support its 

belief that unrelated parties would share stock-based compensation costs in the context of a QCSA with any evidence 

in the record. Accordingly, the final rule lacks a basis in fact. 

B. Treasury Failed To Rationally Connect the Choice It 

Made With the Facts It Found. 

Petitioner contends that the preamble to the final rule fails 

to rationally connect the choice that Treasury made in 

issuing a uniform final rule with the facts on which it purported to rely. See id. The preamble to the final rule 

indicates that Treasury relied on its belief that unrelated 

parties entering into QCSAs to develop ‘‘high-profit intangibles’’ would share stock-based compensation if the stockbased compensation was a ‘‘significant element’’ of the compensation. T.D. 9088, 2003–2 C.B. at 842–843. However, petitioner alleges, and respondent does not dispute, that (1) 

many QCSAs do not deal with ‘‘high-profit intangibles’’ and 

(2) stock-based compensation is often not a ‘‘significant element’’ of the compensation of the employees of taxpayers that 

enter into QCSAs. Yet the final rule does not distinguish 

between QCSAs to develop ‘‘high-profit intangibles’’ in which 

stock-based compensation was a ‘‘significant element’’ of the 

compensation and QCSAs in which these elements are not 

present. Petitioner contends—and we agree—that the preamble’s explanation for Treasury’s decision is therefore inadequate. See State Farm, 463 U.S. at 43. 

Indeed, respondent does not directly refute petitioner’s 

contention. Instead, respondent defends the final rule’s 
126 145 UNITED STATES TAX COURT REPORTS (91) 

21 Respondent also argues that petitioner cannot complain if the final 

rule sometimes produces results that are inconsistent with the arm’slength standard because the QCSA regime provides an ‘‘elective assured 

treatment’’. However, Treasury rejected commentators’ suggestion to issue 

the final rule as a safe harbor, see T.D. 9088, 2003–2 C.B. at 843–844, and 

we conclude that petitioner has not forfeited its right to challenge the validity of the final rule because it chose to structure the R&D cost-sharing 

agreement as a QCSA. 22The preamble to the final rule discusses administrability only with respect to Treasury’s selection of the exercise spread method and the elective 

grant date method as the only available valuation methods. See T.D. 9088, 

2003–2 C.B. at 844. 23We also note that unlike the statutory provision at issue in Mayo 

Found., sec. 482 purports only to empower the Secretary to allocate income 

among controlled entities but not to directly govern taxpayer conduct. See 

sec. 1.482–1(a)(3), Income Tax Regs. (‘‘If necessary to reflect an arm’s 

length result, a controlled taxpayer may report * * * the results of its controlled transactions based upon prices different from those actually 

charged.’’ (Emphasis added.)). It is accordingly unclear whether administrability concerns are relevant in the context of sec. 482. However, because we cannot reasonably discern that Treasury relied on administrability concerns here, we need not resolve this question. 

inflexibility by arguing that the final rule is reasonable 

because it eases administrative burdens. 21

Improving administrability can be a reasonable basis for 

agency action. See Mayo Found., 562 U.S. at 59 (‘‘[Treasury] 

reasonably concluded that its full-time employee rule would 

‘improve administrability[.]’ ’’ (quoting T.D. 9167, 2005–1 C.B. 

261, 262)). However, Treasury failed to give this—or any 

other—explanation for treating all QCSAs identically in the 

preamble to the final rule, 22 cf. id., and we cannot reasonably discern, see State Farm, 463 U.S. at 43, that this was 

Treasury’s rationale for adopting a uniform final rule 

because the administrative benefits of a uniform final rule 

are entirely speculative. 23

Moreover, even if we could discern that this was Treasury’s 

intent, we would be unable to sustain the final rule on that 

basis because Treasury did not disclose its factual findings 

and we would therefore be unable to evaluate whether 

Treasury reasonably concluded that the purported administrative benefits of a uniform final rule can justify erroneously 

allocating income in some of those cases. We therefore conclude that, by treating all QCSAs identically, Treasury failed 

to articulate a ‘‘rational connection between the facts found 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 127

and the choice made.’’ State Farm, 463 U.S. at 43 (quoting 

Burlington Truck Lines, 371 U.S. at 168). 

C. Treasury Failed To Respond to Significant Comments. 

Petitioner contends that Treasury failed to respond to 

significant comments submitted by commentators. 

Respondent contends that Treasury was not persuaded by 

the submitted comments. 

Several commentators informed Treasury that they knew 

of no evidence of any transaction between unrelated parties 

that required one party to reimburse the other party for 

amounts attributable to stock-based compensation. Additionally, AeA informed Treasury that a survey of its member 

companies’ arm’s-length codevelopment and joint venture 

agreements found none in which the parties agreed to share 

stock-based compensation costs. We found similar evidence to 

be relevant in Xilinx. See Xilinx Inc. v. Commissioner, 125 

T.C. at 59. Treasury never directly responded to this evidence. Instead, Treasury reasoned that the final rule would 

not be inconsistent with the arm’s-length standard in the 

absence of evidence that unrelated parties share stock-based 

compensation costs because relevant data may not be available. See T.D. 9088, 2003–2 C.B. at 842. Treasury’s response, 

however, in no way refutes the commentators’ evidence that 

unrelated parties never share such compensation. 

AeA and PwC further represented to Treasury that they 

conducted multiple searches of the EDGAR system and found 

no cost-sharing agreements between unrelated parties in 

which the parties agreed to share either the exercise spread 

or grant date value of stock-based compensation. Treasury 

never responded to this evidence. 

Several commentators identified arm’s-length agreements 

in which stock-based compensation was not shared or 

reimbursed. Treasury responded to these comments by 

stating that ‘‘[t]he uncontrolled transactions cited by commentators do not share enough characteristics of QCSAs 

involving the development of high-profit intangibles to establish that parties at arm’s length would not take stock options 

into account in the context of an arrangement similar to a 

QCSA.’’ Id. In particular, Treasury stated that 
128 145 UNITED STATES TAX COURT REPORTS (91) 

24The Amylin-HMR collaboration agreement also would permit the sharing of stock-based compensation based on the intrinsic value method, 

under which options issued in-the-money would be recognized as an expense. However, the treatment of in-the-money stock options is not at 

issue here, and the final rule explicitly rejected the use of the intrinsic 

value method. See T.D. 9088, 2003–2 C.B. at 844. 25Treasury appears to require a similar approach in analyzing comparability under the sec. 482 regulations. See sec. 1.482–1(d), Income Tax 

Regs. 

[t]he other agreements highlighted by commentators establish arrangements that differ significantly from QCSAs in that they provide for the 

payment of markups on cost or of non-cost-based service fees to service 

providers within the arrangement or for the payment of royalties among 

participants in the arrangement. Such terms, which may have the effect 

of mitigating the impact of using a cost base to be shared or reimbursed 

that is less than comprehensive, would not be permitted by the QCSA 

regulations. * * * [Id.] 

However, the Amylin-HMR collaboration agreement that AeA 

identified and PwC submitted did not ‘‘provide for the payment of markups on cost or of non-cost-based service fees to 

service providers within the arrangement or for the payment 

of royalties among participants in the arrangement.’’ Id. 

Respondent contends that the Amylin-HMR collaboration 

agreement is not comparable to a QCSA for other reasons, 

but Treasury failed to identify those reasons in the preamble 

to the final rule. 24 See Chenery Corp., 332 U.S. at 196; Carpenter Family Invs., LLC v. Commissioner, 136 T.C. at 380, 

396 n.30. More significantly, Treasury did not explain why 

identical transactions are necessary to prove whether unrelated parties would share stock-based compensation costs in 

the context of a QCSA. In Xilinx Inc. v. Commissioner, 125 

T.C. at 58–62, we found that unrelated parties would not 

share the exercise spread or grant date value of stock-based 

compensation, and in doing so we did not rely on transactions that were identical or substantially similar to QCSAs. 

Rather, we relied on the behavior of uncontrolled parties in 

comparable business transactions as well as on other evidence. See id. 25

FEI provided model accounting procedures from COPAS 

that recommended against sharing stock-based compensation 

because it is difficult to value. Treasury never responded to 

this evidence. 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 129

AeA, SoFTEC, KPMG, and PwC cited regulations that prohibit contractors from charging the Federal Government for 

stock-based compensation. Treasury responded to this evidence by stating that ‘‘[g]overnment contractors that are 

entitled to reimbursement for services on a cost-plus basis 

under government procurement law assume substantially 

less entrepreneurial risk than that assumed by service providers that participate in QCSAs’’. See T.D. 9088, 2003–2 

C.B. at 842. However, this distinction rings hollow in the face 

of other evidence submitted by commentators that showed 

that even parties to agreements in which the parties assume 

considerable entrepreneurial risk do not share stock-based 

compensation costs. 

AeA, Global, and PwC explained that, from an economic 

perspective, unrelated parties would be unwilling to share 

stock-based compensation costs because the value of stockbased compensation is speculative, potentially large, and 

completely outside the control of the parties. SoFTEC submitted Baumol and Malkiel’s detailed economic analysis 

reaching the same conclusion. We found similar evidence to 

be relevant in Xilinx. See Xilinx Inc. v. Commissioner, 125 

T.C. at 61. Treasury never directly responded to this evidence. Instead, Treasury construed these comments as objections to Treasury’s selection of the exercise spread method 

and the grant date method as the only available valuation 

methods. See T.D. 9088, 2003–2 C.B. at 844. Treasury 

responded that these methods are consistent with the arm’slength standard and are administrable. See id. Treasury, 

however, never explained how these methods could be consistent with the arm’s-length standard if unrelated parties 

would not share them or why unrelated parties would share 

stock-based compensation costs in any other way. 

The Baumol and Malkiel analysis also concluded that there 

is no net economic cost to a corporation or its shareholders 

from the issuance of stock-based compensation. Treasury 

identified this evidence in the preamble to the final rule but 

did not directly respond to it. See id., 2003–2 C.B. at 843. 

Instead, the preamble states that ‘‘[t]he final regulations provide that stock-based compensation must be taken into 

account in the context of QCSAs because such a result is consistent with the arm’s length standard.’’ Id. Treasury, however, never explained why unrelated parties would share 
130 145 UNITED STATES TAX COURT REPORTS (91) 

26 Respondent contends that the final rule is consistent with the commensurate-with-income standard because stock-based compensation is economic activity even if it is not an economic cost. However, Treasury never 

made this distinction in the preamble to the final rule, see SEC v. Chenery 

Corp., 332 U.S. 194, 196 (1947); Carpenter Family Invs., LLC v. Commissioner, 136 T.C. 373, 380, 396 n.30 (2011), and it did not explain why unrelated parties would share items that are not economic costs. 

stock-based compensation costs—or how the commensuratewith-income standard could justify the final rule—if stockbased compensation is not an economic cost to the issuing 

corporation or its shareholders. 26

Mr. Grundfest informed Treasury that companies do not 

factor stock-based compensation into their pricing decisions. 

We found similar evidence to be relevant in Xilinx. See Xilinx 

Inc. v. Commissioner, 125 T.C. at 59. Treasury never 

responded to this evidence. 

Indeed, Treasury failed to respond directly to any of the 

evidence that unrelated parties would not share stock-based 

compensation costs, other than by asserting that the transactions cited by the commentators did not ‘‘share enough 

characteristics of QCSAs involving the development of highprofit intangibles’’ to be relevant. T.D. 9088, 2003–2 C.B. at 

842. This was a mere assertion; Treasury offered no analysis 

addressing the extent of the supposed differences or 

explaining why any differences make the cited transactions 

irrelevant or unpersuasive. By contrast, in Xilinx we examined a broad array of evidence to determine whether unrelated parties would share such costs. See Xilinx Inc. v. 

Commissioner, 125 T.C. at 58–62. Tellingly, respondent does 

not even attempt to explain why Treasury failed to address 

similar evidence in the preamble to the final rule. 

Although Treasury’s failure to respond to an isolated comment or two would probably not be fatal to the final rule, 

Treasury’s failure to meaningfully respond to numerous relevant and significant comments certainly is. See Home Box 

Office, 567 F.2d at 35–36. Meaningful judicial review and fair 

treatment of affected persons require ‘‘an exchange of views, 

information, and criticism between interested persons and 

the agency.’’ Id. at 35. Treasury’s failure to adequately 

respond to commentators frustrates our review of the final 

rule and was prejudicial to affected entities. 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 131

D. The Final Rule Is Contrary to the Evidence Before 

Treasury. 

Petitioner contends that the final rule is contrary to the 

evidence before Treasury when it issued the final rule. We 

agree. 

We have already discussed Treasury’s failure to cite any 

evidence supporting its belief that unrelated parties to 

QCSAs would share stock-based compensation costs, see 

supra part IV.A; the significant evidence submitted by commentators showing that unrelated parties to QCSAs would 

not share stock-based compensation costs, see supra part 

IV.C; and Treasury’s failure to respond to much of the submitted evidence, see id. 

Significantly, Treasury never said that it found any of the 

submitted evidence incredible. Treasury also seemed to 

accept the commentators’ economic analyses, which concluded that—and explained why—unrelated parties to a 

QCSA would be unwilling to share the exercise spread or 

grant date value of stock-based compensation. Finally, 

respondent has not identified any evidence in the administrative record that supports Treasury’s belief that unrelated 

parties to QCSAs would generally share stock-based compensation costs. 

Although we are mindful that ‘‘a court is not to substitute 

its judgment for that of the agency’’, State Farm, 463 U.S. at 

43, we conclude that Treasury’s ‘‘explanation for its decision 

* * * runs counter to the evidence before’’ it, see id. 

V. Harmless Error 

Respondent contends that, pursuant to the harmless error 

rule of APA sec. 706, any deficiencies in Treasury’s reasoning 

should not invalidate the final rule because (1) Treasury had 

sufficient alternative reasons for adopting the final rule and 

(2) in the years following Treasury’s adoption of the final rule 

the Financial Accounting Standards Board (FASB), the International Accounting Standards Board (IASB), and the 

Organisation for Economic Cooperation and Development 
132 145 UNITED STATES TAX COURT REPORTS (91) 

27 In 2004 the OECD published a report on the impact of employee stock 

options on transfer pricing that ‘‘start[ed] with the premise that employee 

stock options are remuneration.’’ OECD, Employee Stock Option Plans: Impact on Transfer Pricing 1. In 2005, however, the OECD published a policy 

study that again started with the same premise but recognized that the 

arm’s-length standard required more analysis. See OECD, The Taxation of 

Employee Stock Options, Tax Policy Studies No. 11, at 165 (‘‘Of course, 

whether in-kind remuneration, including stock options, should be taken 

into account in any particular case depends on a determination of what 

independent parties acting at arm’s length would do in the facts and circumstances of that case.’’). 

28 Each of the policy positions that respondent now contends support the 

2003 final rule was published after Treasury promulgated the final rule. 

See, e.g., Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (revised 2004), Share-Based Payment; 

International Financial Reporting Standard No. 2, Share-based Payment, 

February 2004; OECD, Employee Stock Option Plans: Impact on Transfer 

Pricing; see also OECD, the Taxation of Employee Stock Options, OECD 

Tax Policy Studies No. 11. 

(OECD) 27 have adopted policy positions that concur with 

Treasury’s. 28

A. Alternative Reasons for Adopting the Final Rule 

Although the preamble refers to the commensurate-withincome standard, we have already concluded that Treasury 

never indicated that it was prepared to independently rely on 

the commensurate-with-income standard—or any other reason—as a basis for adopting the final rule. See supra parts 

III.B and IV.A.1. Moreover, because the arm’s-length 

standard is incorporated into numerous income tax treaties, 

see, e.g., 2001 U.S.-U.K. Income Tax Convention, art. 9; 2006 

U.S. Model Income Tax Convention, art. 9; Treasury Department Technical Explanation of the 2001 U.S.-U.K. Income 

Tax Convention, art. 9, Tax Treaties (CCH) para. 10,911, at 

201,306–201,307; Treasury Department Technical Explanation of the 2006 U.S. Model Income Tax Convention, art. 

9; Tax Treaties (CCH) para. 215, at 10,640–10,641, 

respondent cannot reasonably contend that Treasury would 

have clearly adopted the final rule had it concluded that the 

final rule conflicted with that standard. See PDK Labs., 362 

F.3d at 799. 
(91) ALTERA CORP. & SUBS. v. COMMISSIONER 133

29 Because we conclude that the final rule fails to satisfy State Farm’s 

reasoned decisionmaking standard, the final rule would be invalid even if 

we were to conclude that Chevron supplies the ultimate standard of review. See supra part III.B. The analysis under Chevron would proceed as 

follows: The parties agree that sec. 482 is ambiguous. We would therefore 

proceed to Chevron step 2. Under Chevron step 2, we would conclude the 

final rule is invalid because it is ‘‘arbitrary or capricious in substance’’, 

Judulang v. Holder, 565 U.S. ll, ll n.7, 132 S. Ct. 476, 483 (2011) 

(quoting Mayo Found., 562 U.S. at 53), and therefore cannot be justified 

Continued 

B. Settled Policy 

Respondent’s argument that the policy debate underlying 

the final rule has long been settled is irrelevant and misapprehends the role of this Court under State Farm. It is 

irrelevant because Treasury expressly disavowed reliance on 

financial reporting standards when it issued the final rule, 

see T.D. 9088, 2003–2 C.B. at 843 (‘‘Treasury and the IRS 

agree that the disposition of financial reporting issues does 

not mandate a particular result under these regulations.’’), 

and the policy positions to which respondent refers did not 

exist and were therefore unavailable to Treasury when it 

issued the final rule, see Chenery Corp., 332 U.S. at 196; Carpenter Family Invs., LLC v. Commissioner, 136 T.C. at 380, 

396 n.30. Respondent’s argument misapprehends the role of 

this Court because, under State Farm, our role is not to 

decide whether the final rule is good policy—it is simply to 

‘‘ensur[e] that * * * [Treasury] engaged in reasoned decisionmaking.’’ Judulang, 565 U.S. at ll, 132 S. Ct. at 483–484. 

Because it is not clear that Treasury would have adopted 

the final rule had it concluded that the final rule is inconsistent with the arm’s-length standard, the harmless error 

rule is inapplicable. 

VI. Conclusion 

Because the final rule lacks a basis in fact, Treasury failed 

to rationally connect the choice it made with the facts found, 

Treasury failed to respond to significant comments when it 

issued the final rule, and Treasury’s conclusion that the final 

rule is consistent with the arm’s-length standard is contrary 

to all of the evidence before it, we conclude that the final rule 

fails to satisfy State Farm’s reasoned decisionmaking 

standard and therefore is invalid. 29 See APA sec. 706(2)(A); 
134 145 UNITED STATES TAX COURT REPORTS (91) 

as being a reasonable interpretation of what sec. 482 requires. 

State Farm, 463 U.S. at 43. Indeed, Treasury’s ‘‘ipse dixit 

conclusion, coupled with its failure to respond to contrary 

arguments resting on solid data, epitomizes arbitrary and 

capricious decisionmaking.’’ Ill. Pub. Telecomms. Ass’n v. 

FCC, 117 F.3d 555, 564 (D.C. Cir. 1997). 

By reason of the above respondent erred in making the section 482 allocations at issue, and petitioner is therefore entitled to partial summary judgment. We will grant petitioner’s 

motion and deny respondent’s motion. 

We have considered the parties’ remaining arguments, and 

to the extent not discussed above, conclude those arguments 

are irrelevant, moot, or without merit. 

To reflect the foregoing, 

An appropriate order will be issued. 

Reviewed by the Court. 

THORNTON, COLVIN, HALPERN, FOLEY, VASQUEZ, GALE, 

GOEKE, HOLMES, PARIS, KERRIGAN, BUCH, LAUBER, NEGA, 

and ASHFORD, JJ., agree with this opinion of the Court. 

MORRISON and PUGH, JJ., did not participate in the consideration of this opinion. 

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