Altera Seeks Ninth Circuit Rehearing in Cost-Sharing Reg Case

ALTERA CORPORATION & SUBSIDIARIES,
Petitioner–Appellee,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent–Appellant.

(Before the Honorable Sidney R. Thomas, C.J., and Susan P.
Graber and Kathleen M. O'Malley, JJ.
Opinion filed June 7, 2019)

IN THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

Appeal from the United States Tax Court, Nos. 6253-12 & 9963-12

PETITION FOR REHEARING EN BANC OF PETITIONER-
APPELLEE ALTERA CORPORATION & SUBSIDIARIES

Ginger D. Anders
MUNGER TOLLES & OLSON LLP
1155 F Street NW
Washington, DC 20004 (202) 220-1100

Mark R. Yohalem
MUNGER TOLLES & OLSON LLP
350 S. Grand Avenue
Los Angeles, CA 90071 (213) 683-9100

A. Duane Webber
Phillip J. Taylor
Joseph B. Judkins
BAKER & MCKENZIE LLP
815 Connecticut Avenue NW
Washington, DC 20006
(202) 452-7000

Nicole A. Saharsky
Brian D. Netter
MAYER BROWN LLP
1999 K Street NW
Washington, DC 20006
(202) 263-3000
nsaharsky@mayerbrown.com

Donald M. Falk
MAYER BROWN LLP
3000 El Camino Real #300
Palo Alto, CA 94306
(650) 331-2000

Thomas Kittle-Kamp
William G. McGarrity
MAYER BROWN LLP
71 S. Wacker Drive
Chicago, IL 60606
(312) 782-0600

Counsel for Petitioner-Appellee

CORPORATE DISCLOSURE STATEMENT

Intel Corporation is the parent corporation of Altera Corporation and subsidiaries. Intel is a publicly traded corporation.

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TABLE OF CONTENTS 

Corporate Disclosure Statement

Table of Authorities

Introduction and Rule 35(b) Statement

Statement

Reasons for Granting the Petition

Conclusion

Appendices

Panel's Opinion

Tax Court's Opinion

Public Companies Affected by the Altera Issue

TABLE OF AUTHORITIES

Cases

Altera Corp. v. Comm'r, Nos. 16-70496 & 16-70497, 2018 WL 3542989 (9th Cir. July 24, 2018)

Chevron USA, Inc. v. NRDC, Inc., 467 U.S. 837 (1984)

Chisom v. Roemer, 501 U.S. 380 (1991)

Comm'r v. First Sec. Bank of Utah, N.A., 405 U.S. 394 (1972)

Dep't of Commerce v. New York, 139 S. Ct. 2551 (2019)

Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117 (2016)

FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009)

Golsen v. Comm'r, 54 T.C. 742 (1970)

Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158 (2007)

Pine Mountain Preserve, LLLP v. Comm'r, No. 8956-13, 2018 WL 6841801 (T.C. Dec. 27, 2018)

Procacci v. Comm'r, 94 T.C. 397 (1990)

SEC v. Chenery, 332 U.S. 194 (1947)

Xilinx Inc. v. Comm'r, 125 T.C. 37 (2005)

Xilinx Inc. v. Comm'r, 598 F.3d 1191 (9th Cir. 2010)

Yovino v. Rizo, 139 S. Ct. 706 (2019)

Statutes

5 U.S.C. § 551 et seq.

5 U.S.C. § 553(b)

5 U.S.C. § 553(c)

26 U.S.C. § 482

Regulations

26 C.F.R. § 1.482-1(a)(1)

26 C.F.R. § 1.482-1(b)

26 C.F.R. § 1.482-1(b)(1)

26 C.F.R. § 1.482-1(c)

26 C.F.R. § 1.482-7(d)(1) (1995)

26 C.F.R. § 1.482-7(d)(2) (2003)

26 C.F.R. § 1.482-7(d)(3)

Art. 45-1(b), Regulations 86 (1935)

Compensatory Stock Options Under Section 482, 67 Fed. Reg. 48,997 (proposed July 22, 2002)

Compensatory Stock Options Under Section 482, 68 Fed. Reg. 51,171 (Aug. 26, 2003)

Section 482: Methods to Determine Taxable Income in Connection With a Cost Sharing Agreement, 76 Fed. Reg. 80,082 (Dec. 22, 2011)

Other Authorities

A Study of Intercompany Pricing Under Section 482 of the Code, IRS Notice 88-123, 1988-2 C.B. 458

Alphabet Inc., Form 10-K (Feb. 3, 2017)

Peter J. Connors et al., A Second Bite at the APA: Altera's Rehearing and the Potential Invalidity of Cost-Sharing Regulations, Bloomberg Daily Tax Report (Oct. 31, 2018)

Groupon, Inc., Form 10-K (Feb. 12, 2016)

IRS, Report on Application and Administration of Section 482 (1992)

Silicon Laboratories Inc., Form 10-K (Feb. 5, 2016)

Tripadvisor, Inc., Form 10-K (Feb. 17, 2017)

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 INTRODUCTION AND RULE 35(B) STATEMENT

A divided panel of this Court reversed a 15-0 decision of the Tax Court on an important issue of tax law. The issue affects companies across the United States, to the tune of billions of dollars. The panel's decision upends settled law, creates an intra-circuit conflict, and threatens the uniform enforcement of the tax laws. This Court should rehear the case en banc.

The issue is whether commonly controlled companies that work together to develop intangible property, and agree to share research-and-development costs, must include stock-based compensation as a shared cost. This Court said no in Xilinx Inc. v. Commissioner, 598 F.3d 1191 (9th Cir. 2010). In that case, which addressed a 1995 Treasury regulation, the Court applied tax law's settled arm's-length transaction standard. Under that standard, whether related parties must share a cost depends on whether unrelated parties would do so. Because unrelated parties do not share stock-based compensation, the Xilinx Court held that related parties do not have to share it, either.

 While Xilinx was pending, Treasury promulgated its 2003 regulation — the regulation at issue here — again requiring related companies to share stock-based compensation. In the rulemaking, the agency acknowledged that the arm's-length standard applied. But it did not provide any evidence that unrelated parties share stock-based compensation as part of their research-and-development agreements. And all of the evidence submitted by industry groups, tax professionals, and others was to the contrary. To justify its rule, the agency relied only on a hypothetical and its own unsupported belief. Not surprisingly, the Tax Court unanimously found the regulation arbitrary and capricious.

On appeal, the government changed position. It abandoned the settled arm's-length standard in favor of its own “internal” standard under which stock-based compensation always must be shared. IRS C.A. Br. 50-51. The IRS is not allowed to do that; a regulation can be sustained only on the administrative record, and an agency that shifts position mid-stream runs head-long into SEC v. Chenery, 332 U.S. 194 (1947). Two judges accepted the IRS's newfound justification for the regulation; one judge dissented. The result is remarkable: The panel allowed the IRS to say that it is complying with the arm's-length standard, while imposing a result that is exactly the opposite of what companies actually do at arm's length.

The panel's decision is contrary to longstanding principles of tax law. It turns the Administrative Procedure Act on its head, and it is irreconcilable with Xilinx. If allowed to stand, it will subject taxpayers to inconsistent rules based merely on geography and will require companies to pay billions of dollars based on a standard the IRS made up in litigation. This is a paradigmatic case for rehearing en banc.

STATEMENT

A. Factual Background

Altera Corporation was the U.S. parent company of a group of companies that made programmable logic devices and related hardware and software. Altera entered into an agreement with a foreign subsidiary to work together to develop intangible property, where the companies would share research-and-development costs, and each would own part of the property created. ER 145-89.

Agreements like this are common. Unrelated companies routinely enter into them to share the costs and the risks of a new venture; if the venture is successful, each company can use the jointly developed intellectual property without paying a royalty. See T.C. Op. 24. The IRS has long recognized that cost-sharing arrangements serve valid business purposes by spreading the risk of often highly speculative research-and-development activities. See A Study of Intercompany Pricing Under Section 482 of the Code, IRS Notice 88-123, 1988-2 C.B. 458, 493 (White Paper).

B. Statutory and Regulatory Background

Federal law authorizes the Secretary of the Treasury to allocate income, deductions, credits, or allowances between related organizations “clearly to reflect the income” of each organization. 26 U.S.C. § 482. “[C]learly to reflect the income” incorporates the tax parity principle — the principle that related parties should be treated the same as unrelated parties for tax purposes. Comm'r v. First Sec. Bank of Utah, N.A., 405 U.S. 394, 400 (1972); see 26 C.F.R. § 1.482-1(a)(1).

To ensure tax parity, Treasury regulations mandate that the Commissioner use the arm's-length standard “in every case” under Section 482. 26 C.F.R. § 1.482-1(b)(1). The regulations specify how the arm's-length standard works: It depends on “the results of comparable transactions” between unrelated parties “under comparable circumstances,” id. — meaning evidence of how unrelated parties actually behave, id. § 1.482-1(c). This empirical analysis of unrelated-party behavior is “essentially and intensely factual.” Procacci v. Comm'r, 94 T.C. 397, 412 (1990).

Federal tax law has incorporated the arm's-length standard for 80 years, see Art. 45-1(b), Regulations 86 (1935), and the United States has exported that standard to other nations through tax treaties, T.C. Op. 8-9; Altera C.A. Br. 9-10.

In 1986, Congress added language to Section 482 to address a different issue — how to value transfers of existing intangible property from one related entity to another. Altera C.A. Br. 10-11. Congress provided that “[i]n the case of any transfer (or license) of intangible property,” an organization's “income with respect to such transfer or license shall be commensurate with the income attributable to” that property. 26 U.S.C. § 482. That language clarifies that existing intangible property is valued by considering the income it actually generates, rather than industry averages or the parties' forecasted expectations. E.g., White Paper 472. It was not meant to address intangible property yet to be created, Op. 78 (O'Malley, J., dissenting), and Congress “intended no departure from the arm's length standard” embodied in the first sentence of Section 482, White Paper 475 & n.149.

C. The 1995 Cost-Sharing Regulation and the Xilinx Decision

As stock-based compensation became more common, Treasury decided to require related parties to share that item when they jointly develop intangible property. In 1995, Treasury promulgated a regulation requiring related taxpayers to share “all of the costs” of developing intangibles, 26 C.F.R. § 1.482-7(d)(1) (1995), and it interpreted “all of the costs” to include stock-based compensation, Xilinx Inc. v. Comm'r, 125 T.C. 37, 52 (2005), aff'd, 598 F.3d 1191 (9th Cir. 2010).

The agency provided no evidence that unrelated parties would consider one company's stock-based compensation to be a shared research-and-development cost. That is unsurprising, because stock-based compensation is speculative, difficult to value, and depends on factors outside the company's control. Xilinx, 125 T.C. at 59; see T.C. Op. 25-26.

Xilinx challenged the IRS's position that related companies must share stock-based compensation. Xilinx, 125 T.C. at 54. The Tax Court held that the Commissioner failed to satisfy the arm's-length standard because he “presented no evidence or testimony establishing that his determinations are arm's length.” Id.

This Court affirmed. Judge Noonan's opinion for the Court explained that the “paramount” purpose of Section 482 is “parity between taxpayers in uncontrolled transactions and taxpayers in controlled transactions,” which requires analyzing “how parties operating at arm's length would behave.” 598 F.3d at 1196. Because the government “d[id] not dispute” that “unrelated parties would not share [stock-based compensation],” the government could not require related parties to share it. Id. at 1194, 1196.

In his concurring opinion, Judge Fisher expressed concern that the IRS raised new arguments before this Court to justify its position, depriving taxpayers of “fair notice of how the regulations will affect them.” 598 F.3d at 1198. Judge Reinhardt dissented, but he expressed “serious doubts” about the IRS's view and was “particularly troubled by the international tax consequences” of it. Id. at 1200.

D. The 2003 Regulation and the Present Dispute

In 2003, Treasury issued a new cost-sharing regulation, this time specifically mandating that related parties that enter into cost-sharing agreements share stock-based compensation. See Compensatory Stock Options Under Section 482, 68 Fed. Reg. 51,171 (Aug. 26, 2003) (promulgating 26 C.F.R. § 1.482-7(d)(2) (2003)). As before, Treasury purported to use the arm's-length standard, calling it an “established principle[ ]” of tax law. Id. at 51,172. Also as before, Treasury provided no evidence to support its belief that unrelated parties would share stock-based compensation in their research-and-development agreements. See T.C. Op. 22-28.

Many companies that would be affected by the regulation participated in the notice-and-comment process. They provided undisputed evidence showing that unrelated parties do not share stock-based compensation in any kind of transaction, including in comparable research-and-development agreements. T.C. Op. 22-26; see 68 Fed. Reg. at 51,172-73. Treasury dismissed that evidence, instead relying on its own “belie[f ]” that related parties should be required to share those costs, and on a hypothetical comparable transaction the agency made up to support its belief. 68 Fed. Reg. at 51,173. The agency never announced that it was adopting a wholly new approach to cost-sharing.

The IRS applied its new regulation to Altera and issued notices of deficiency for 2004 through 2007. Altera challenged those determinations.

E. The Tax Court's Decision

In a 15-0 decision, the Tax Court invalidated the 2003 regulation, concluding that it was not the product of reasoned decisionmaking. The Tax Court recognized that Section 482 and its implementing regulations require the agency to use the arm's-length standard. T.C. Op. 44-45. It concluded that the agency failed to justify the new regulation under that standard because it did not provide “any evidence of any actual transaction between unrelated parties” in which stock-based compensation was shared or any “expert opinions, empirical data, or published or unpublished articles, papers, surveys, or reports” supporting its view. Id. at 27. In fact, the Tax Court found, all evidence in the administrative record — including evidence of comparable transactions — supported Altera's view. Id. at 66.

The Tax Court concluded that the government's “ipse dixit conclusion, coupled with its failure to respond to contrary arguments resting on solid data, epitomize[d] arbitrary and capricious decisionmaking.” T.C. Op. 69-70 (internal quotation marks omitted). All judges on the Tax Court understood the government to be using the settled arm's-length standard; no judge read the 2003 regulation to dispense with that standard. See id. at 45 (“[T]he preamble to the final rule does not justify the final rule on the basis of any modification or abandonment of the arm's-length standard.”).

F. The Panel's Decision

On appeal, the IRS changed position. Rather than using the settled arm's-length standard, the IRS claimed that the 2003 regulation “changed the legal landscape” so that now “comparability analysis plays no role in determining” what costs must be shared “in order to achieve an arm's length result.” IRS C.A. Br. 30.According to the IRS, the “commensurate with the income” language in Section 482 allows the IRS to make its own “internal” judgment about what would be an “arm's length result.” Id. at 44.¹

The IRS's new, “internal” standard has nothing to do with how companies actually transact at arm's length; instead, it depends on the IRS's own view of the “relative benefits realized by the parties.” IRS C.A. Br. 50-51. In essence, the IRS has now mandated for all taxpayers the rule the Xilinx Court already rejected for one taxpayer. And needless to say, this new approach appeared nowhere in the rulemaking record.

A divided panel of this Court accepted the IRS's argument and reversed. See Altera Corp. v. Comm'r, Nos. 16-70496 & 16-70497, 2018 WL 3542989 (9th Cir. July 24, 2018). Judge Reinhardt was a member of the panel majority, and the opinion was issued after his death. See Yovino v. Rizo, 139 S. Ct. 706, 707 n.* (2019) (per curiam). The Court withdrew the opinion and reheard the case with a new judge. 898 F.3d 1266 (9th Cir. 2018).

The new panel again reversed, again over a dissent. The panel majority first asked whether the IRS's re-interpretation of the statute was “permissible” under Chevron USA, Inc. v. NRDC, Inc., 467 U.S. 837 (1984), Op. 24-33 — even though the Tax Court found the regulation procedurally defective and therefore ineligible for Chevron deference. Relying on the “commensurate with the income” language, the panel accepted the IRS's view that it could ignore all evidence of what unrelated parties do and use its own “purely internal methodology” instead. Id. at 27-31, 39.

The panel also concluded that the regulation was not arbitrary or capricious. It took the view that the passing “citations to legislative history” of the “commensurate with the income” language gave sufficient notice during the rulemaking that the agency was “do[ing] away with analysis of comparable transactions.” Op. 38-39. And because the agency abandoned the settled standard, it was not required to respond to the many comments establishing that unrelated parties would not share stock-based compensation. Id. at 40-42.

In dissent, Judge O'Malley explained that the panel violated foundational principles of administrative law by upholding the regulation on a “justification [the agency] never provided” during the rulemaking process. Op. 50-51. She agreed with the Tax Court that the regulation is arbitrary and capricious, id. at 61-70, and explained that the panel cannot save a procedurally invalid regulation by invoking Chevron, id. at 70-77. In her view, Xilinx controls this case. Id. at 78.

REASONS FOR GRANTING THE PETITION

I. THE PANEL'S DECISION UPSETS SETTLED PRINCIPLES OF TAX LAW

The arm's-length standard has been a settled feature of tax law for decades. See, e.g., First Sec. Bank of Utah, N.A., 405 U.S. at 400; see also Altera C.A. Br. 7-10. Indeed, the IRS has conceded that the arm's-length standard is “[i]mplicit” in the statute. IRS C.A. Br. 49-50. Federal regulations explain that the arm's-length standard applies “in every case” and is judged “by reference to the results of comparable transactions under comparable circumstances,” meaning actual evidence of unrelated-party behavior. 26 C.F.R. § 1.482-1(b)-(c).

In the rulemaking proceeding here, Treasury repeatedly insisted that it was applying the arm's-length standard, and it understood the arm's-length standard to require evidence of unrelated-party behavior. 68 Fed. Reg. at 51,172-73. The parties that submitted comments and the experts on the Tax Court understood that Treasury was attempting to justify its rule under that settled standard. T.C. Op. 46 (explaining that the regulation rests on “an empirical determination” and “in no way depends on [an] interpretation of section 482”).

Yet a panel of this Court allowed the government to cast aside the settled arm's-length standard, in favor of a new standard the government belatedly discovered in the “commensurate with the income” language. The panel concluded that the 2003 regulation reflects the government's considered decision to “do away with analysis of comparable transactions” in favor of its “internal” view, Op. 38-39 — even though the rulemaking record contains no such determination, and existing regulations require the government to use the arm's-length standard “in every case,” 26 C.F.R. § 1.482-1(b)(1). The panel also concluded that the arm's-length standard is “fluid” and does not require consideration of unrelated-party behavior, Op. 10, 29 — even though federal regulations say just the opposite, 26 C.F.R. § 1.482-1(b)-(c); see Xilinx, 598 F.3d at 1195.

By accepting the IRS's “purely internal” standard, the panel has upended tax law. Tax professionals previously understood and relied on the arm's-length standard; now, they must figure out how to comply with the IRS's new “purely internal” standard — a standard made up for litigation and never explained (or even mentioned) during the rulemaking process. This standard does not depend on how arm's-length parties behave in the real world; indeed, the results are directly contrary to all evidence of arm's-length behavior. The consequences of this reimagining of Section 482 potentially are far-reaching; nothing in the panel's decision limits the “purely internal” standard to stock-based compensation.

Those impacts could extend beyond U.S. law. The United States has included the arm's-length standard in numerous tax treaties. If the United States moves away from the settled understanding of that standard, other nations may follow suit, resulting in a patchwork of regulations that subjects companies to double-taxation. See Software & Information Indus. Assoc. Amicus Br. 15-16 (SIIA Amicus Br.); see also Xilinx, 598 F.3d at 1200 (Reinhardt, J., dissenting) (noting the “particularly troubl[ing] . . . international tax consequences” of the IRS's view). As the IRS itself has warned, “[a]ny deviation from the arm's length standard would contradict long-standing international norms and would raise substantial concerns among U.S. treaty partners.” IRS, Report on Application and Administration of Section 482 4-12 (1992).

III. THE PANEL'S DECISION VALIDATES BAD RULEMAKING

The requirements of the Administrative Procedure Act, 5 U.S.C. § 551 et seq., are not mere formalities. The APA mandates notice-and-comment rulemaking for regulations that have the force of law so that regulated parties have “fair notice” and can provide input to help the agency develop a well-reasoned, workable rule. Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 174 (2007); see 5 U.S.C. § 553(b)-(c); see also U.S. Chamber Amicus Br. 18-20. The APA requires agencies to give reasoned explanations for their decisions “to ensure that agencies offer genuine justifications for important decisions, reasons that can be scrutinized by courts and the interested public.” Dep't of Commerce v. New York, 139 S. Ct. 2551, 2575-76 (2019).

The panel's decision turns the APA on its head by allowing the IRS to assess billions of dollars in taxes based on reasoning that appeared nowhere in the administrative record and thus never was subject to public scrutiny. In the rulemaking proceeding, everyone understood that the settled arm's-length standard applied, and that the agency could require related parties to share stock-based compensation only if evidence established that unrelated parties operating at arm's length would do so. See 68 Fed. Reg. at 51,171-77 (mentioning arm's-length standard 33 times). Accounting firms, organizations of tax professionals, industry groups, and other experts provided evidence demonstrating that unrelated parties would not share stock-based compensation, including examples of arm's-length joint-development agreements in which parties did not share it; surveys of their members and searches of databases finding no agreements in which parties shared it; and model accounting procedures and federal government regulations that prohibit that sharing. T.C. Op. 22-26; see Altera C.A. Br. 18-23.

Only after the IRS lost in the Tax Court did it abandon the settled understanding of the arm's-length standard and seek to achieve its desired result by interpreting “commensurate with the income” to permit a new standard. IRS C.A. Br. 48-52. No one involved in the rulemaking thought the IRS was interpreting “commensurate with the income” to justify a new standard that did not depend on empirical evidence. The notice of proposed rulemaking mentioned the “commensurate with the income” language to support the existing arm's-length standard, not to justify a new standard. Compensatory Stock Options Under Section 482, 67 Fed. Reg. 48,997, 48,998 (proposed July 29, 2002). The final rule mentioned the “commensurate with the income” language only once, to reaffirm that it is “consistent with the arm's length standard.” 68 Fed. Reg. at 51,172 (emphasis added). If the agency had given any indication that it was making a dramatic change to the arm's-length standard, the tax community no doubt would have submitted extensive comments addressing whether that change is allowed and what the new standard should be. See Chisom v. Roemer, 501 U.S. 380, 396 n.23 (1991).

And if the agency wanted to change position, it would have had to acknowledge and explain that change. See Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2125-26 (2016); FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009). Tellingly, not one of the fifteen Tax Court judges — experts who closely analyzed the rulemaking record — understood the agency to be using a new, “purely internal” standard instead of the settled, empirical arm's-length standard. See T.C. Op. 45, 49.

The panel's decision violates the foundational principle of administrative law that courts “must judge the propriety of [the agency's] action solely by the grounds invoked by the [agency]” in the administrative record. Chenery, 332 U.S. at 196. That is the point Judge Fisher made in Xilinx: When the IRS makes “complex, theoretical” arguments to justify its interpretation of regulations for the first time in litigation, “taxpayers have not been given clear, fair notice of how the regulations will affect them.” 598 F.3d at 1198 (Fisher, J., concurring).

The panel could not cure the deficiencies in the rulemaking record by resorting to Chevron deference. Chevron deference is not available when a regulation is “procedurally defective” because (for example) the agency failed to give “adequate reasons for its decisions.” Encino Motorcars, LLC, 136 S. Ct. at 2125. In those circumstances, the regulation is “arbitrary and capricious and so cannot carry the force of law.” Id.

III. THE PANEL'S DECISION IS IRRECONCILABLE WITH XILINX AND PREVENTS UNIFORM APPLICATION OF THE TAX LAWS

The panel's decision stands in stark contrast to the Court's prior decision in Xilinx. The two cases raise the same issue: whether “related companies engaged in a joint venture to develop intangible property must include the value of certain stock option compensation one participant gives to its employees in the pool of costs to be shared under a cost sharing agreement.” 598 F.3d at 1192. Although Xilinx concerned the 1995 regulation, and this case concerns the 2003 regulation, the government took the same position in both cases, requiring related parties to share stock-based compensation even though it had no evidence that unrelated parties would do so.

Yet the Xilinx Court and the panel here applied different reasoning and reached the opposite results. The Xilinx Court applied the settled arm's-length standard and recognized that the government could not

require related parties to share stock-based compensation when unrelated parties operating at arm's length would not do so. 598 F.3d at 1194, 1196. The panel in this case allowed the agency to “do away with” arm's-length evidence in favor of its own belief about what items should be shared. Op. 31.

If the panel had applied the reasoning in Xilinx, it would have upheld the Tax Court's determination that the regulation is arbitrary and capricious. See Op. 78 (O'Malley, J., dissenting). This Court should grant rehearing en banc to reconcile those divergent decisions.

En banc review also is warranted because the panel's decision threatens the uniform application of the tax laws. In a 15-0, unanimous decision, the Tax Court concluded that the 2003 regulation is invalid. T.C. Op. 69. The Tax Court has nationwide jurisdiction, and it is not bound by the panel's decision in cases outside this Circuit. See Golsen v. Comm'r, 54 T.C. 742, 757 (1970). In a case arising in a different Circuit, the Tax Court undoubtedly would apply its unanimous view that the regulation is invalid. See, e.g., Pine Mountain Preserve, LLLP v. Comm'r, No. 8956-13, 2018 WL 6841801, at *14 (T.C. Dec. 27, 2018).

The result is that taxpayers in California almost certainly will be treated differently from taxpayers in Massachusetts, Illinois, and Texas, simply because of geography. That is not a mere theoretical possibility; companies from each of those States have reported that they are affected by the issue in this case.²

IV. THE STOCK-BASED COMPENSATION ISSUE IS EXCEPTIONALLY IMPORTANT

Whether related parties must share stock-based compensation is an important and recurring issue. The issue already has been to this Court twice in less than ten years. Many interested parties filed amicus briefs in both cases, demonstrating the importance of the issue. See Nos. 06-74246, 06-74269 Docket (five amicus briefs in Xilinx); Nos. 16-70496, 16-70497 Docket (nine amicus briefs in this case).

This issue affects a wide range of companies across the United States, including companies in the software, finance, chemistry, semiconductor, biotechnology, and manufacturing industries. SIIA Amicus Br. 1-5.Many publicly-held companies have mentioned the stock-based compensation issue in their annual reports to the SEC. See App. C. And many more companies no doubt are affected as well. See SIIA Amicus Br. 5-6 (explaining that all companies with cross-border operations potentially are impacted by this case).

Further, the dollar amounts involved are enormous. The issue affects tax years 2004 to the present.³ Billions of dollars are at stake.⁴ In light of the overwhelming importance of this case, this Court should grant rehearing en banc.

CONCLUSION

The Court should grant rehearing en banc and affirm the decision of the Tax Court.

Dated: July 22, 2019

Respectfully submitted,

Ginger D. Anders
MUNGER TOLLES & OLSON LLP
1155 F Street NW
Washington, DC 20004
(202) 220-1100

Mark R. Yohalem
MUNGER TOLLES & OLSON LLP
350 S. Grand Avenue
Los Angeles, CA 90071
(213) 683-9100

A. Duane Webber
Phillip J. Taylor
Joseph B. Judkins
BAKER & MCKENZIE LLP
815 Connecticut Avenue NW
Washington, DC 20006
(202) 452-7000

Nicole A. Saharsky
Brian D. Netter
MAYER BROWN LLP
1999 K Street NW
Washington, DC 20006
(202) 263-3000
nsaharsky@mayerbrown.com

Donald M. Falk
MAYER BROWN LLP
3000 El Camino Real #300
Palo Alto, CA 94306
(650) 331-2000

Thomas Kittle-Kamp
William G. McGarrity
MAYER BROWN LLP
71 S. Wacker Drive
Chicago, IL 60606
(312) 782-0600

Counsel for Petitioner-Appellee