Amicus Addresses Commensurate-With-Income Questions in Altera Case

October 23, 2018

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

Re: Altera Corp. v. Commissioner, Nos. 16-70496, 16-70497
(Argued Oct. 16, 2018) (Thomas, C.J., and Graber and O'Malley, JJ.)

Dear Ms. Dwyer:

Amicus Cisco Systems, Inc. provides supplemental authority regarding commensurate-with-income (“CWI”) questions raised by Judge Graber at oral argument. Cisco submitted two amicus briefs addressing CWI, and, like other multinationals, has used cost-sharing for many years to facilitate global development of intangibles without the need to separately value and transfer each intangible as it is created.

Judge Graber asked whether a qualified cost-sharing arrangement (“QCSA”) involves a license or transfer of intangible property, causing application of CWI under the second sentence of § 482. [16:42-17:15]. The answer is “no”.

Treasury in 1988 explained that rights in cost-shared intangibles arise “ab initio” so that QCSAs “avoid[ ] section 482 transfer pricing issues related to the licensing or other transfer of intangibles.” (White Paper, Notice 88-123, 1988-2 C.B. at 474). Consistent with this, Treasury's cost-sharing regulations make clear that the rules governing transfers of intangibles don't apply to the way parties are assigned rights in cost-shared intangibles. For example, those rules don't apply if one party gets an interest in intangible property from the other party “in consideration for bearing a share of the costs of the intangible's development.” § 1.482-7A(a)(2). By bearing its share of QCSA R&D costs, a party is treated as directly “developing intangibles,” not as getting them from another party. § 1.482-7A(h)(1).

Judge Graber suggested a QCSA is “about future royalties or licenses,” because otherwise there would be nothing to share. [17:39-17:49]. A QCSA isn't about future royalties or licenses. Clearly, neither party owns rights in not-yet-developed intangibles. Only if and when the R&D creates new intangibles do the parties get their rights in those intangibles — which they can commercially exploit as they see fit (e.g., through manufacturing products, providing services, or licensing to others).

An interpretation of § 482 that applies CWI to QCSAs would be contrary to Treasury's cost-sharing regulations, which only require parties to share R&D costs, not pay amounts commensurate with income attributable to cost-shared intangibles. U.S. multinationals have long relied on the cost-sharing regulations to facilitate global business and avoid cross-border intangible transfers (which could give rise to transfer pricing disputes).

Please distribute this letter to the panel.

Respectfully submitted,

Roderick K. Donnelly
Morgan, Lewis & Bockius LLP
Palo Alto, CA