Government Responds to Amicus Letter in Ninth Circuit Altera Appeal

October 24, 2018

Molly C. Dwyer, Esquire
Clerk, U.S. Court of Appeals for the Ninth Circuit
95 Seventh Street
San Francisco, CA 94103

Re: Altera Corp. & Subs. v. Commissioner of Internal Revenue (9th Cir. — Nos. 16-70496, 16-70497)
(Argued Oct. 16, 2018 — Thomas, C.J., and Graber and O'Malley, JJ.)

Dear Ms. Dwyer:

This letter responds to amicus Cisco's letter to the Court dated October 23, 2018, which purports to “provide[ ] supplemental authority regarding” whether a cost-sharing arrangement involves a “transfer” within the meaning of the commensurate-with-income requirement of I.R.C. § 482.¹

Treas. Reg. § 1.482-7A(a)(2), cited by Cisco, refers to the situation where “a controlled taxpayer acquires an interest in intangible property from another controlled taxpayer (other than in consideration for bearing a share of the costs of the intangible development).” (Emphasis added.) The obvious implication of that language is that one way a foreign subsidiary can acquire an interest in intangible property from its U.S. parent — the hallmark of a “transfer” — is by making cost-sharing payments. See Reply Br. 17-18 (citing § 1.482-7(a)([2]) (1995)). And that language precludes Cisco's claim (Letter 2) that the words “developing intangibles” in § 1.482-7A(h)(1) somehow signify that the foreign subsidiary is “not . . . getting [the intangibles] from another party.”

For the reasons discussed in our briefs (Reply Br. 17-19; Supp. Br. 33-34), Cisco's “transfer” argument is meritless. And, even if the word “transfer” in § 482 could not reasonably be construed as encompassing a foreign subsidiary's acquisition of ownership rights from its U.S. parent in exchange for cost-sharing payments, the enacting legislation — separate and apart from its legislative history — conclusively establishes that Congress intended commensurate-with-income principles to apply to cost-sharing arrangements. See Tax Reform Act of 1986, Pub. L. No. 99-514, § 1231(a)(1)(B), 100 Stat. 2085, 2561 (adding a sentence to the existing cost-sharing provision in §936(h)(5)(C)(i) — dealing with Puerto Rican subsidiaries — providing that, in the case of certain intangibles, the cost-sharing payment could not be less than the amount that would be required under § 367(d)(2)(A)(ii) or § 482 if the subsidiary were a foreign corporation).²

Kindly distribute this letter to the panel.

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

TRAVIS A. GREAVES
Deputy Assistant Attorney General

GILBERT S. ROTHENBERG (202) 514-3361
RICHARD FARBER (202) 514-2959
ARTHUR T. CATTERALL (202) 514-2937
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044