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March 1 — Six months after the U.S. Tax Court struck down IRS regulations on cost-sharing of stock options, few U.S. corporations are booking tax benefits as a result.
Many companies have concluded that, because Altera Corp. v. Commissioner is on appeal, it's too early to address making adjustments, according to a search of financial filings with the Securities and Exchange Commission.
The filings encompass annual and quarterly reports submitted between Dec. 1 and March 1 by about three dozen companies, including Twitter Inc., Yahoo Inc., EBay Inc., Groupon Inc., Microsoft Corp., Facebook Inc. and Paypal Holdings Inc., among others.
One of the few companies to kick any solid numbers around is Google's parent, Alphabet Inc., and the number it dropped Feb. 11 in its 10-K annual report was an eye-popping $3.5 billion.
That's the amount of tax benefits Alphabet said it would reap from past compensation costs as a result of the Altera decision. However, the company also said that figure is offset by $3.5 billion in projected future tax liabilities on the “potential repatriation of associated contingent foreign earnings.”
The company said it can't guarantee that offshore earnings will be permanently reinvested abroad.
Mark Nebergall, president of the Software Finance and Tax Executives Council (SoFTEC), told Bloomberg BNA that the two entries are a wash from a balance sheet standpoint.
“These are all book impacts and have no tax impact,” he said.
Going forward, however, the story could be different for Alphabet, because the company also reported a tax benefit of $522 million related to 2015 stock-based compensation expenses; it reported no offsetting liability for that sum.
Calculation Depends on Position
Altera Corp., recently acquired by Intel Corp., is a California-based manufacturer of programmable semiconductors and related products, with $1.8 billion in sales worldwide. It challenged the validity of 2003 regulations that specifically required stock options to be included in the pool of costs under cost-sharing arrangements.
In a July 27 division opinion, the Tax Court, ruling on cross-motions for summary judgment, held that Regs. §1.482-7(d)(2) violates the arm's-length standard because there is no evidence that unrelated parties ever share such costs (144 DTR K-4, 7/28/15).
The case, which was finalized Dec. 28, is now on appeal to the U.S. Court of Appeals for the Ninth Circuit. Further, as many companies noted, Treasury hasn't rescinded the challenged regulations. In fact, the IRS and Altera are engaged in another round of litigation involving the same issue, but for later tax years.
In the meantime, public companies with cost-sharing arrangements must make some determination about how the Tax Court opinion affects their financial statements.
Whether or how companies calculate an adjustment will be largely a function of the position they have taken on the issue in the past, Nebergall explained.
“There likely are a variety of situations companies find themselves in,” he said. “At the first level, you will have companies that followed the reg and those that didn't. Companies that followed the reg might have refund claims.”
“Regardless of whether a refund claim was filed, if the year is under audit and the statute on assessment is still open because of extensions, then it's still alive,” he added.
Companies that didn't follow the regulations fall into two categories—those that booked a reserve for uncertain tax positions and those that didn't, he said.
“It is likely that only companies that booked a reserve are going to be [able] to say with some degree of certainly what the number will be for them.”
Tax Benefits Cited
Several other companies reported tax benefits as a result of the decision, but none are close to the sums recorded by Alphabet.
TripAdvisor Inc. said it recognized a tax benefit of $13 million for 2015 because of Altera. Juniper Networks Inc. reported a similar net benefit for the year—$13.2 million.
Lam Research Corp. said its effective tax rate, for the six months ended Dec. 27, 2015, had declined partly because of the impact of the Altera decision. For the period, the effective rate dropped from 6.9 percent to 1.1 percent.
McKesson Corp. reported that it had recognized a “discrete tax benefit of $25 million based on our historical tax filing position” as a direct result of Altera.
Silicon Laboratories Inc. said it recorded a tax benefit of $29.6 million for 2015. Of that sum, the company said, $25.9 million represents “the benefit of a future intercompany transaction that will result from the reversal of the inclusion of stock-based compensation in the Company's cost-sharing arrangement as a result of stock-based awards that have already vested.”
The remaining $3.7 million represents the impact of the Altera decision.
Like Alphabet, Silicon Laboratories noted that the change in the cost-sharing of stock options will increase the company's cumulative foreign earnings. In fiscal 2015, the company said, it had accrued a deferred tax liability of $27.5 million “as a result of management's intent to repatriate the foreign earnings generated when the inclusion of stock-based compensation in its cost-sharing arrangement is reversed.”
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