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The Wall Street Journal

Tech giants on the hook for billions of dollars after Supreme Court rejects tax-law challenge

2003 IRS regulations over stock-based compensation upheld

The U.S. Supreme Court in Washington.

Associated Press

WASHINGTON — 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. INTC, -0.05% . 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. FB, +1.66% , Alphabet Inc. GOOGL, +0.58% GOOG, +0.49% and Twitter Inc. TWTR, +2.09% . 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.

An expanded version of this report appears on WSJ.com:

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