TAX NEWS - January 2010

Ninth Circuit withdraws opinion in Xilinx

The U.S. Court of Appeals for the Ninth Circuit on January 13 withdrew its May 2009 opinion in Xilinx Inc. v. Commissioner, in which it held that stock-based compensation must be included in the research and development cost base of companies that have entered into a cost sharing arrangement (CSA) under former Treasury reg. section 1.482-7 and, therefore, must be allocated among the CSA participants based on anticipated benefits. The IRS amended the regulations in August 2003 to specifically require this result, and the withdrawn opinion would have had potentially important ramifications for all CSAs entered into before the effective date of the 2003 amended regulations.

The Ninth Circuit decision had overturned the Tax Court decision issued in 2005, in which the Tax Court held that because unrelated parties would not have shared stock-based compensation as part of a CSA, related companies were not required to share such costs, and that the Service's attempt to allocate such costs was arbitrary and capricious.

In August 2009, Xilinx filed a motion for rehearing either by the three-judge appellate panel or by the entire Ninth Circuit (rehearing en banc). A number of third-party "friends of the court" have since urged the court to agree to an en banc rehearing because of the significance of the issue involved. Although the court has not yet acted on the taxpayer's motion, the withdrawal of the opinion sets the stage for the court to reconsider the case or grant a rehearing, either of which would result in a new opinion at some future time.