Abbott Laboratories is currently litigating a tax adjustment of approximately USD 417 million for the 2019 tax year before the U.S. Tax Court, involving several Transfer Pricing controversies. Chief among them, Abbott is challenging the validity of IRS regulations requiring stock-based compensation to be included in cost sharing arrangements.
The core issue is a familiar one: whether stock-based compensation must be factored into the shared cost pool between a parent company and its foreign affiliates.
While the Ninth Circuit upheld the IRS rule in Altera back in 2019, Abbott’s appeal would go to a different circuit—and under a markedly changed legal landscape following the end of Chevron deference. This article breaks down what is at stake, why Altera did not permanently settle the issue, and what this litigation means for multinational groups sharing development costs with subsidiaries across Latin America.
Here is the translation into clear, idiomatic American English tailored for a professional tax and legal audience. It avoids robotic phrasing or typical translation tropes while preserving all technical transfer pricing terminology and legal nuances.
What is at issue in Abbott v. Commissioner?
The IRS issued tax adjustments to Abbott related to transactions with its foreign subsidiaries. Among the disputed matters, Abbott contends that the IRS regulations governing cost sharing arrangements and stock-based compensation are invalid.
In a Cost Sharing Arrangement (CSA), participants fund the development of intangibles in proportion to their expected benefits. When stock-based compensation for employees developing those intangibles is added to the cost pool, it increases the overall cost base on which participants must make their contributions.
The core legal question is whether mandatory inclusion of these costs is consistent with Section 482 and the arm’s length standard. Taxpayers challenging this rule have argued that uncontrolled parties entering into comparable arrangements do not typically share the costs of employee stock-based compensation.
What did Altera decide, and why is the debate still open?
On June 7, 2019, the Ninth Circuit reversed the Tax Court in Altera Corp. v. Commissioner, upholding the Treasury regulation that mandated the inclusion of stock-based compensation in qualified cost sharing arrangements.
The majority concluded, among other things, that Section 482 granted Treasury sufficient authority to promulgate the regulation, relying on the Chevron deference framework. The dissent countered that Treasury could not depart from the traditional comparability analysis without adequate justification.
There are three key reasons why Altera does not necessarily dictate the outcome of future litigation:
Territorial scope. The Ninth Circuit’s decision is binding precedent within its own circuit, but it does not bind the Seventh Circuit. Because Abbott is headquartered in Illinois, an appeal of its case would normally lie with the Seventh Circuit, which is free to reach its own conclusion.
The end of Chevron deference. On June 28, 2024, in Loper Bright Enterprises v. Raimondo, the Supreme Court overruled the Chevron doctrine, holding that courts must exercise independent judgment in determining whether an agency acted within its statutory authority. Consequently, Chevron no longer provides the analytical framework for a court reviewing the validity of such regulations for the first time.
Prior precedents remain intact. The Supreme Court explicitly clarified in Loper Bright that earlier decisions decided under Chevron are not automatically invalidated. Their holdings remain subject to statutory principles of stare decisis, and the mere fact that a court applied Chevron in the past is not a sufficient reason to overturn its decision.
Thus, Altera remains binding law in the Ninth Circuit. What has changed is the framework under which other federal courts will evaluate administrative regulations.
If the Seventh Circuit eventually reaches a different conclusion on the validity of the regulation, it would create a circuit split on a substantially identical issue—one of the primary factors that prompts the Supreme Court to grant certiorari, though Supreme Court review is never guaranteed.
Why does this matter for multinational groups with Latin American subsidiaries?
While this is a U.S. tax debate, its economic impact extends directly to the foreign side of the transaction.
From a transfer pricing perspective, when a Latin American subsidiary participates in a cost sharing arrangement with its U.S. parent, or receives intragroup service allocations whose cost base includes stock-based compensation, the treatment of these expenses directly alters the amounts charged to each entity.
This frequently leads to cross-border tax friction. While U.S. rules prescribe what costs must be included in a CSA cost pool, local tax authorities in Latin America will review those charges under their own domestic rules—including local transfer pricing regulations, deductibility criteria, and documentation requirements.
Maintaining alignment between parent-level and subsidiary-level documentation is therefore vital.
An eventual split among U.S. circuit courts would introduce another layer of complexity, as the applicable judicial standard could depend heavily on which circuit has jurisdiction over the case.
At TPC Group, we review the inclusion of stock-based compensation in cost bases across all cost sharing and intragroup service analyses. We ensure consistency between parent companies and their regional subsidiaries to establish arm’s length charges that remain defensible before both the IRS and Latin American tax authorities.