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Xilinx Supports Rehearing in Ninth Circuit Cost-Sharing Reg Case

JUL. 31, 2019

Altera Corp. et al. v. Commissioner

DATED JUL. 31, 2019
DOCUMENT ATTRIBUTES
  • Case Name
    Altera Corp. et al. v. Commissioner
  • Court
    United States Court of Appeals for the Ninth Circuit
  • Docket
    No. 16-70496
    No. 16-70497
  • Institutional Authors
    Fenwick & West LLP
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2019-29535
  • Tax Analysts Electronic Citation
    2019 TNTI 149-20
    2019 TNTF 149-12

Altera Corp. et al. v. Commissioner

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

IN THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

On Appeal from the United States Tax Court

BRIEF OF XILINX, INC. AMICUS CURIAE IN SUPPORT OF ALTERA CORPORATION'S PETITION FOR EN BANC REHEARING

Larissa B. Neumann
lneumann@fenwick.com
Adam R. Gahtan
agahtan@fenwick.com
Michael D. Knobler
mknobler@fenwick.com
FENWICK & WEST LLP
Silicon Valley Center
801 California Street
Mountain View, CA 94041
Telephone: 650.988.8520

Counsel for the Amicus Curiae

CORPORATE DISCLOSURE STATEMENT

In accordance with Federal Rules of Appellate Procedure 26.1 and 29(c), Xilinx, Inc. hereby states that it has no parent corporation and there is no publicly held corporation that owns 10% or more of its stock.


TABLE OF CONTENTS

CORPORATE DISCLOSURE STATEMENT

TABLE OF CONTENTS

TABLE OF AUTHORITIES

INTEREST OF THE AMICUS CURIAE

SUMMARY OF THE ARGUMENT

ARGUMENT

I. STARE DECISIS MANDATES THAT THIS COURT'S RULING IN XILINX CONTROL THE RESOLUTION OF ALTERA.

II. THE XILINX PANEL CONSIDERED AND REJECTED COMMENSURATE-WITH-INCOME ARGUMENTS.

III. THE AMENDED COST-SHARING REGULATION AT ISSUE IN ALTERA CONTAINS THE SAME FUNDAMENTAL FLAW AS THE UNAMENDED COST-SHARING REGULATION AT ISSUE IN XILINX.

IV. THE LAW SET FORTH IN XILINX APPLIES DESPITE THE DIFFERENCE IN THE ULTIMATE ISSUE BEING RESOLVED.

V. THE 2003 COST-SHARING REGULATIONS CONFLICT WITH THE PURPOSE OF SECTION 482, AS CONSTRUED IN XILINX, AND THEREFORE MUST BE INVALIDATED.

CONCLUSION

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

TABLE OF AUTHORITIES

County of Allegheny v. Am. Civil Liberties Union, Greater Pittsburgh Chapter, 492 U.S. 573 (1989)

Judulang v. Holder, 565 U.S. 42 (2011)

Miller v. Gammie, 335 F.3d 889 (9th Cir. 2003)

Miranda B. v. Kitzhaber, 328 F.3d 1181 (9th Cir. 2003)

Motor Vehicle Mfrs. Assn. of the U.S., Inc. v. State Farm Mutual Automobile Ins. Co., 463 U.S. 29 (1983)

Seminole Tribe of Fla. v. Florida, 517 U.S. 44 (1996)

United States v. Johnson, 256 F.3d 895 (9th Cir. 2001)

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

STATUTES AND RULES

5 U.S.C. § 706(2)(A)

Fed. R. App. P. 35(a)(2)

OTHER AUTHORITIES

H.R. Rep. No. 99-841, pt. II (1986)

Treas. Reg. § 1.482-1 (2003)

Treas. Reg. § 1.482-1 (1994)

Treas. Reg. § 1.482-1(b)(1) (1994)

Treas. Reg. § 1.482-1(b)(2)(i) (2003)

Treas. Reg. § 1.482-7 (2003)

Treas. Reg. § 1.482-7(a)(3) (2003)

Treas. Reg. § 1.482-7(d)(1) (1995)

Treasury Decision 9088, 68 Fed. Reg. 51,171, 51,172 (2003)


INTEREST OF THE AMICUS CURIAE

The Amicus Curiae is Xilinx, Inc., the world's leading provider of programmable logic devices.1 Xilinx was founded in 1983 and is headquartered in San Jose, California.

The opinion of this Court's divided panel in Altera conflicts with this Court's opinion in Xilinx Inc. v. Commissioner, 598 F.3d 1191 (9th Cir. 2010). Xilinx is troubled by the uncertainty created by the conflict of this Court's decisions in Altera and Xilinx regarding the treatment of stock-based compensation (“SBC”) in cost sharing arrangements. The opinion of the Altera panel mandates the sharing of SBC costs, a result this Court rejected in Xilinx. Xilinx continues to use cost sharing for global research and development, and that research and development would be substantially adversely affected if this Court does not invalidate the 2003 amended cost sharing regulation at issue in Altera.

The Court should rehear Altera en banc to reconcile the panel majority's decision with this Court's prior decision in Xilinx.

The parties have consented to the filing of this brief.

SUMMARY OF THE ARGUMENT

In Xilinx, this Court ruled that the arm's-length standard of Treas. Reg. § 1.482-1 is violated if cost sharing is required “for costs that unrelated parties would not share” and that requiring the sharing of “costs that unrelated parties would not share” conflicts with the purpose of section 482. 598 F.3d at 1196. The panel issued this ruling after reasoned consideration of the arguments, including the Commissioner's assertion that the “commensurate with income” standard of section 482 gave the Commissioner the authority to write a regulation requiring related parties to share costs that unrelated parties do not share. The ruling of Xilinx became the binding law of the Circuit. See Miranda B. v. Kitzhaber, 328 F.3d 1181, 1186 (9th Cir. 2003) (en banc) (per curiam).

The Altera panel majority nevertheless refused to follow Xilinx. The panel majority cited three reasons for not following Xilinx: differences in the regulations at issue, the ultimate question before the Court, and the administrative authority being tested. None of these reasons is sufficient for distinguishing Xilinx and for failing to apply the binding law of the Circuit.

First, the differences in the regulations at issue are too insubstantial to justify a different result in Altera than this Court reached in Xilinx. Although the regulations at issue in Xilinx were amended in 2003, the clarifying amendments did not fix the regulations' fundamental problem; the regulations still require sharing of costs that unrelated parties do not share. Second, although the ultimate question before the Court has changed from resolving a conflict between regulations in Xilinx to evaluating the validity of a regulation in Altera, the underlying issue in both Xilinx and Altera is whether a regulation can require sharing of SBC costs even though uncontrolled parties do not do so. Finally, although Altera requires the Court to determine the administrative authority of the Commissioner to promulgate Treas. Reg. §§ 1.482-1 and 1.482-7 as amended in 2003, that authority is constrained by the statute, which this Court already construed in Xilinx.

Had the Altera panel majority followed the law of the Circuit, it would have reached a different result. En banc rehearing of Altera is necessary to maintain uniformity of this Court's decisions. See Fed. R. App. P. 35(a)(2).

ARGUMENT

I. STARE DECISIS MANDATES THAT THIS COURT'S RULING IN XILINX CONTROL THE RESOLUTION OF ALTERA.

The Supreme Court teaches that the precedential value of a court's decision lies “not only [in] the result but also [in] those portions of the opinion necessary to that result.” Seminole Tribe of Fla. v. Florida, 517 U.S. 44, 67 (1996). Earlier, Justice Kennedy enunciated the “general rule [that] the principle of stare decisis directs us to adhere not only to the holdings of our prior cases, but also to their explications of the governing rules of law.” County of Allegheny v. Am. Civil Liberties Union, Greater Pittsburgh Chapter, 492 U.S. 573, 668 (1989) (Kennedy, J., concurring in part and dissenting in part). In this Court, Justice Kennedy's “general rule” is a binding command: “Where a panel confronts an issue germane to the eventual resolution of the case, and resolves it after reasoned consideration in a published opinion, that ruling becomes the law of the circuit, regardless of whether doing so is necessary in some strict logical sense.” Miranda B., 328 F.3d at 1186 (quoting United States v. Johnson, 256 F.3d 895, 914 (9th Cir. 2001) (en banc)).

The law of the Circuit, as established in Xilinx, is that the arm's-length standard is violated if cost sharing is required “for costs that unrelated parties would not share” and that requiring the sharing of “costs that unrelated parties would not share” conflicts with the purpose of section 482. See 598 F.3d at 1196.

This ruling was necessary to the resolution in Xilinx. The question at issue in Xilinx was whether SBC costs were required to be shared in a cost sharing agreement. Id. at 1193-94. This Court began its discussion by noting that “[t]he Commissioner does not dispute the tax court's factual finding that unrelated parties would not share [such costs].” Id. at 1194. Treas. Reg. § 1.482-7(d)(1), as applicable to the years at issue, required the sharing of “all costs,” and Treas. Reg. § 1.482-1(b)(1) required that “the standard to be applied in every case is that of a taxpayer dealing at arm's length with an uncontrolled taxpayer.” Therefore, this Court had to construe the regulations to determine if there was a conflict, and, if so, resolve that conflict. The ruling construed the arm's-length standard, determined that there was a conflict, and then resolved that conflict in favor of the arm's-length standard because it is fundamental to the purpose of section 482.

II. THE XILINX PANEL CONSIDERED AND REJECTED COMMENSURATE-WITH-INCOME ARGUMENTS.

As one of its grounds for choosing not to follow Xilinx, the Altera panel majority erroneously asserts that this Court “did not consider the 'commensurate with income' standard” in Xilinx. Altera, slip op. at 48. In fact, the Commissioner made “commensurate with income” arguments in Xilinx and this Court rejected those arguments after the reasoned consideration required by Miranda B and Johnson.

The Commissioner's briefs in Xilinx argued that, based on the legislative history of the “commensurate with income” provision of section 482, evidence about uncontrolled companies' treatment of SBC is neither required nor allowed in order to obtain an arm's-length result.2 See Appellant's Reply Br., at 22-25, 29, Xilinx, 98 F.3d 1191 (citing H.R. Rep. No. 99-841, pt. II, at 637-38 (1986) (Conf. Rep.)). The Xilinx panel unanimously rejected that assertion. See 598 F.3d at 1200 n.2 (Reinhardt, J., dissenting) (explaining that the Commissioner “advanced an argument that we reject”).

Furthermore, in assessing the validity of the 2003 cost-sharing regulations, the Court must focus on the arguments the Commissioner made while promulgating the regulations, not the arguments the Commissioner made later, in litigation. See Motor Vehicle Mfrs. Assn. of the U.S., Inc. v. State Farm Mutual Automobile Ins. Co., 463 U.S. 29, 50 (1983) (“[C]ourts may not accept appellate counsel's post hoc rationalizations for agency action.”). The commensurate-with-the-income arguments the Commissioner made to this Court in both Xilinx and Altera came only after the rule-making process with respect to the 2003 cost-sharing regulations, which were promulgated seven years before publication of this Court's Xilinx opinion. Those arguments therefore came too late to supply a reasoned basis for the regulations. See Altera, slip op. at 50-51 (O'Malley, J., dissenting) (explaining that the majority erred by upholding the 2003 cost-sharing regulations based on reasons the Department of the Treasury never provided when promulgating them).

III. THE AMENDED COST-SHARING REGULATION AT ISSUE IN ALTERA CONTAINS THE SAME FUNDAMENTAL FLAW AS THE UNAMENDED COST-SHARING REGULATION AT ISSUE IN XILINX.

The 2003 amended cost-sharing regulation at issue in Altera and the 1995 unamended regulation at issue in Xilinx both mandate a result this Court rejected: the requirement that related parties share SBC costs that unrelated parties do not share. The Xilinx panel held the regulation to be invalid because requiring parties to share costs conflicts with the arm's length standard, and the Altera panel should have followed that precedent.

Although the language of the regulation was amended in 2003, its treatment of SBC costs remained the same. In promulgating the 2003 amendment to Treas. Reg. § 1.482-7, the IRS asserted it was merely “clarifying” the treatment of SBC rather than substantively changing that treatment. Treasury Decision 9088, 68 Fed. Reg. 51,171, 51,172 (2003) (issued seven years before this Court's decision in Xilinx). The other “clarifications” made by the 2003 amendments were the “coordinating amendments” to Treas. Reg. §§ 1.482-1 and 1.482-7. The coordinating amendments added a sentence to Treas. Reg. § 1.482-1 stating that “Treas. Reg. § 1.482-7 provides the specific methods used to evaluate whether a cost sharing arrangement as defined in § 1.482-7 produces results consistent with an arm's length result.” Treas. Reg. § 1.482-1(b)(2)(i). A new paragraph added to Treas. Reg. § 1.482-7(a)(3) provided that there is an arm's length result “if, and only if,” the controlled participants share costs in proportion to their shares of reasonably anticipated benefits. These coordinating amendments, however, do not change the applicability of this Court's holding in Xilinx because they do not change the governing rules of law in section 482.

The Altera panel majority repeatedly discusses whether the Commissioner was required to consider comparability analysis. That, however, is not the issue. The issue is whether the Commissioner can require a result that differs from what uncontrolled parties actually do at arm's length. The law of this Court, as established in Xilinx, is that such a requirement is inconsistent with the purpose of section 482.

The coordinating amendments merely state that the requirement to include SBC costs in cost sharing agreements produces (by administrative fiat) an arm's length result. In other words, the regulations make exactly the same assertion that the Commissioner made throughout the Xilinx litigation. The assertion is no truer now than it was when the Xilinx panel rejected it.

IV. THE LAW SET FORTH IN XILINX APPLIES DESPITE THE DIFFERENCE IN THE ULTIMATE ISSUE BEING RESOLVED.

Although not all of the issues in Xilinx and Altera are identical, the underlying issue in both Xilinx and Altera is whether a regulation can require sharing of SBC costs even though uncontrolled parties do not do so. Xilinx resolved that issue, and the reasoning behind that resolution should apply in Altera. See Miranda B., 328 F.3d at 1186.

Furthermore, issues decided in a prior case “need not be identical in order [for the ruling] to be controlling.” Miller v. Gammie, 335 F.3d 889, 900 (9th Cir. 2003) (en banc). In Miller, this Court held that if the reasoning of a Supreme Court opinion is irreconcilable with a precedent of this Court, this Court must follow the Supreme Court's reasoning, even when the Supreme Court's opinion decides an issue that is technically distinguishable from the issue confronting this Court. Similarly, although Xilinx resolved a conflict between two regulations and Altera involves the validity of a regulation promulgated by the Commissioner, the Altera panel should have treated the reasoning of the Xilinx panel as precedent and should not have issued a judgment that is irreconcilable with this Court's reasoning in Xilinx.

V. THE 2003 COST-SHARING REGULATIONS CONFLICT WITH THE PURPOSE OF SECTION 482, AS CONSTRUED IN XILINX, AND THEREFORE MUST BE INVALIDATED.

A regulation must be invalidated if its promulgation is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). An agency's interpretation of a statute is arbitrary and capricious if it is “unmoored from the purposes and concerns” of the underlying statutory regime. Judulang v. Holder, 565 U.S. 42, 64 (2011). The Commissioner's authority to promulgate cost-sharing regulations is thus constrained by the purposes and concerns of section 482, which this Court construed in Xilinx. Section 482 did not change between 1995 and 2003, so its purpose as construed in Xilinx must continue to be its purpose as construed in Altera. The Xilinx panel held that under the arm's-length standard, “costs that uncontrolled parties would not share need not be shared,” and “[i]f the standard of arm's length is trumped . . . the purpose of the statute is frustrated.” 598 F.3d at 1196.

The uncontroverted facts in Altera, as in Xilinx, show that uncontrolled parties do not share SBC costs; therefore, a regulation requiring the sharing of such costs conflicts with the arm's-length standard, and because such a regulation conflicts with the arm's-length standard it frustrates the purpose of section 482. In mandating the sharing of SBC costs just as the 1995 regulations did, the 2003 amendments conflict with the arm's-length standard, are contrary to the purpose of section 482, are arbitrary and capricious, and must be invalidated.

CONCLUSION

For these reasons, the Court should grant the petition for rehearing en banc and apply the law of the Circuit as established in Xilinx.

FOOTNOTES

1Counsel for the parties have not authored this brief in whole or in part. No one other than Xilinx has contributed money that was intended to fund preparing or submitting this brief.

2In 1986, section 482 was amended to add: “In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.”

END FOOTNOTES

DOCUMENT ATTRIBUTES
  • Case Name
    Altera Corp. et al. v. Commissioner
  • Court
    United States Court of Appeals for the Ninth Circuit
  • Docket
    No. 16-70496
    No. 16-70497
  • Institutional Authors
    Fenwick & West LLP
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2019-29535
  • Tax Analysts Electronic Citation
    2019 TNTI 149-20
    2019 TNTF 149-12
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