In this article, Patricia Sweeney, Alan Horowitz and Andrew Howlett discuss the Tax Court's decision in Altera Corp. v. Commissioner, which put the Internal Revenue Service (IRS) and U.S. Department of the Treasury on notice that when promulgating regulations premised on "an empirical determination," factual premises underlying the regulations must be based on evidence or known transactions, not assumptions or theories. Otherwise, the regulations do not comply with the requirements of the Administrative Procedure Act (APA). "Because of its specific impact on the regulation of cost sharing agreements and, more generally, because it could open the door to APA challenges to other regulations, including but not limited to other transfer pricing rules, the government will strongly consider an appeal of this decision," the authors said.

Sweeney, Horowitz and Howlett provided background context for the dispute, discussed the Tax Court's analysis (which agreed with the taxpayer and invalidated cost-sharing regulation amendments under the APA), and outlined challenges for the Treasury and considerations for taxpayers. The authors said taxpayers and other commentators should consider the Tax Court's reasoning in Altera in developing comments to proposed regulations, stating "Altera demonstrates that such comments can be important in laying a foundation for future judicial challenge even if the commentators are not successful in persuading Treasury."

This article was originally published as a Miller & Chevalier Tax Alert, which is available here.