The 9th Circuit yesterday reversed itself and affirmed the Tax Court in the Xilinx transfer pricing case. Xilinx v. Commissioner, No. 06-74246 (9th Cir. Mar. 22, 2010).  From Susan Morse (Santa Clara):

The Xilinx litigation deals with the treatment of stock option costs in cost sharing arrangements before those regs were amended to explicitly require the inclusion of such costs. The Tax Court in 2005 rejected the government's assertion that Xilinx had to include employee stock option deductions in the cost base of its cost sharing arrangement despite the fact that unrelated parties acting at arm's length would not bear such costs. In May 2009 a 3-judge panel of the 9th Circuit reversed the Tax Court, 2-1: Judges Fisher and Reinhardt in the majority, Judge Noonan in dissent. In January 2010 the 9th Circuit's ruling was withdrawn, apparently following a request for rehearing by the taxpayer.

The opinion yesterday reveals that Judge Fisher has changed his mind. In today's decision, Judge Noonan wrote (as he did previously in dissent) that the conflict between the requirement that taxpayers share "all costs" and the requirement that they price transactions "at arm's length" rendered the reg ambiguous and resulted in construction against the government, based in part on the "dominant purpose" of the regs, to reflect arm's length pricing, as also reflected by treaties. Judge Reinhardt stuck to the argument in dissent that the "all costs" regulation, as the more specific of the two provisions, trumped the arm's length requirement. Judge Fisher explained his change of heart in part in footnote 3: "The Commissioner's response to Xilinx's petition for rehearing declined to fully endorse [the original decision's] reasoning." This appears to have helped to convince him that the regs were "hopelessly ambiguous."