Opinion ID: 4404666
Heading Depth: 4
Heading Rank: 1

Heading: Before 1986

Text: “The 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.” Comm’r v. First Sec. Bank of Utah, 405 U.S. 394, 400 (1972) (quoting Treas. Reg. § 1.482-1(b)(1) (1971)). The “touchstone” of this tax parity inquiry is the arm’s length standard. Xilinx II, 598 F.3d at 1198 n.1 (Fisher, J., concurring). Indeed, the first sentence of § 482 states that, “[i]n any case of two or more organizations, trades, or businesses . . . owned or controlled directly or indirectly by the same interests, the Secretary may . . . allocate gross income . . . if he determines that such . . . allocation is necessary in order to prevent evasion of ALTERA CORP. V. CIR 53 taxes or clearly to reflect the income of any of such organizations, trades, or businesses.” This sentence has always been viewed as requiring an arm’s length standard. See First Sec. Bank of Utah, 405 U.S. at 400; Barclays Bank PLC v. Franchise Tax Bd. of Cal., 512 U.S. 298, 305 (1994). Since the 1930s, Treasury regulations consistently have explained 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.” Treas. Reg. § 1.482-1(b)(1) (2003) (emphasis added). That is, income and deductions are to be allocated among related companies in the same way that unrelated companies negotiating at arm’s length would allocate income and deductions. As far back as 1968, Treasury’s regulations also required that, “[i]n order for the sharing of costs and risks to be considered on an arm’s length basis, the terms and conditions must be comparable to those which would have been adopted by unrelated parties similarly situated had they entered into such an arrangement.” Allocation of Income and Deductions Among Taxpayers, 33 Fed. Reg. 5848, 5854 (April 16, 1968) (emphasis added). That same regulation provided that Treasury may not allocate income with respect to QCSAs involving the development of intangible property unless doing so would be consistent with the arm’s length standard. Id. (providing that, in “a bona fide cost sharing arrangement with respect to the development of intangible property, the district director shall not make allocations with respect to such acquisition except as may be appropriate to reflect each participant’s arm’s length share of the costs and risks of developing the property.”). Therefore, at the time Congress enacted the 1986 amendment, Treasury’s own regulations explicitly required a determination of what an arm’s length result would show and 54 ALTERA CORP. V. CIR required a comparability analysis to reach that result where comparable transactions exist. The majority attempts to water down the text of Treasury’s own regulations at the time. It contends that, “[a]lthough the Secretary adopted the arm’s length standard, courts did not hold related parties to the standard by exclusively requiring the examination of comparable transactions.” Op. 9. To support its position, the majority cites this court’s decision in Frank v. Int’l Canadian Corp., 308 F.2d 520, 528–29 (9th Cir. 1962), which disagreed that “‘arm’s length bargaining’ is the sole criterion for applying the statutory language of [§ 482] in determining what the ‘true net income’ is of each ‘controlled taxpayer.’” But, in Oil Base, Inc. v. Commissioner of Internal Revenue, 362 F.2d 212, 214 n.5 (9th Cir. 1966), this court clarified that the holding in Frank was an outlier, limited only to the peculiar facts of that case. Frank’s departure from the arm’s length analysis, the court held, was justified, in part, because “there was no evidence that arm’s-length bargaining upon the specific commodities sold had produced a higher return” and because “the complexity of the circumstances surrounding the services rendered by the subsidiary” made it “difficult for the court to hypothesize an arm’s-length transaction.” Id. Significantly, the parties in Frank had stipulated to applying a standard other than the arm’s length standard. Id. There really can be no doubt that, prior to the 1986 amendment, this Circuit believed that an arm’s length standard based on comparable transactions was the sole basis for allocating costs and income under the statute in all but the narrow circumstances outlined in Frank—including the presence of the stipulation therein. The majority’s attempt to breathe life back into Frank is, simply, unpersuasive. ALTERA CORP. V. CIR 55