The Supreme Court Monday said it won’t consider a tech company’s appeal of a lower-court ruling on corporate taxation that could cost companies billions of dollars.
Photo: Stefani Reynolds/Zuma PressWASHINGTON—The U.S. Supreme Court declined to hear a challenge to corporate tax regulations, delivering a victory to the IRS that will cost tech companies billions of dollars.
The court, in a brief written order, said Monday it wouldn’t consider an appeal brought by Altera Corp., now owned by Intel Corp. That leaves intact a lower-court ruling that upheld Internal Revenue Service regulations issued in 2003.
The regulations determine how companies split costs with their foreign subsidiaries, which are typically in lower-taxed jurisdictions. The costs at issue here are stock-based compensation, often used in the tech industry. Tax law generally requires that companies determine those internal splits based on what unrelated companies would do in a similar transaction, but the IRS approaches for how to determine that have come under repeated scrutiny.
Companies wanted more of the costs to be allocated to U.S. operations. Doing so would increase their U.S. deductions and reduce their income at the relatively high U.S. tax rates that prevailed until 2018. Having lower costs abroad means higher profits abroad, taxed at lower rates.
Affected companies include Facebook Inc., Alphabet Inc. and Twitter Inc. The total tax revenue at stake exceeds $2 billion and could be much more because some companies have waited to record the effect in their books until the court case was resolved. Facebook said it paid $1.6 billion in November 2019 related to the appeals-court ruling. Alphabet, the parent of Google, said the ruling cost it $418 million. Twitter reported an $80 million impact.
The high court on Monday also declined to consider a case that challenged one of the laws used to carry out President Trump’s tariffs, Section 232 of the Trade Expansion Act of 1962, effectively ending that attempt to overturn the tariffs. The Trump administration has used the law to impose global tariffs on steel and aluminum imports to the U.S., and to threaten tariffs on automobile imports. The law authorizes such tariffs to protect U.S. national security.
The challenge, filed by a group representing U.S. steel and aluminum importers, argued that the law improperly delegates trade powers to the president that ought to belong to Congress, in violation of the Constitution.
A separate law, Section 301, has been used for most of the administration’s tariffs against China and the European Union, and would not have been directly affected by the case. A number of separate cases have been filed against other aspects of the administration’s handling of the trade war.
In the corporate tax case, companies that have already paid the IRS based on the lower-court ruling won’t get their money back. Companies that had been waiting for the Supreme Court to hear the case will now have to account for the impact. The ruling is unlikely to have much effect on current corporate tax strategies because of changes made in the 2017 tax law.
Nicole Saharsky, a partner at Mayer Brown LLP who represented Altera, declined to comment on the court’s decision. Intel and the IRS didn’t immediately comment.
The legal case didn’t turn on whether the IRS rule was correct policy. Instead, the sides argued about whether the IRS and the Treasury Department followed the proper procedures in writing the regulations and filling in gaps when statutes are vague.
Altera, which has since been purchased by Intel, sued in 2012 after the IRS challenged transactions between the company’s parent and a Cayman Islands subsidiary. The U.S. Tax Court ruled in favor of the company in 2015, but the 9th U.S. Circuit Court of Appeals overturned that ruling.
“Altera may end up being more a case where something bad almost happened but didn’t,” said Daniel Shaviro, a tax law professor at New York University.
The Supreme Court doesn’t take many tax cases, but some lawyers had thought it might take this one to address broader issues about how the government writes and enforces regulations.
In recent years, courts have started treating the IRS more like other regulatory agencies and requiring that tax regulations follow more of the procedures used in other areas.
“This is a clear case of administrative agency overreaching, rubber-stamped by a court of appeals,” Altera’s lawyers wrote in their request for the Supreme Court to take the case. They argued that the IRS changed its rationale during the court proceedings, depriving the public and interested companies of the chance to comment on its regulatory approach as required.
“This case vividly illustrates just how far an agency will go if left unchecked,” they wrote. “The IRS is seeking to impose tax liability essentially by administrative fiat.”
The government’s lawyers, in response, said the appeals court was correct and that the IRS was well within its authority to determine methods for analyzing corporate transactions. They also note the absence of other appeals-court rulings on this subject, since splits between circuits are often what prompt the Supreme Court to take a case.
“If a substantial division of authority concerning the validity of the 2003 final rule develops in the future, this Court’s review may be warranted at that time,” the lawyers for the government wrote. “But petitioners identify no pressing reason for the Court to intervene now.”
Even though the Supreme Court didn’t take the case, the lower court’s ruling affirmed the idea that tax rules are subject to review like those in other contexts, said Kristin Hickman, a law professor at the University of Minnesota.
“The IRS and Treasury will need to be more thorough in drafting their regulatory preambles to explain the choices that they are making when they are exercising discretion,” said Ms. Hickman, who was a special adviser to the Office of Information and Regulatory Affairs during the Trump administration as that office began reviewing tax rules before release.
—Josh Zumbrun contributed to this article.
Write to Richard Rubin at richard.rubin@wsj.com
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