SAN FRANCISCO—An appellate court's decision to withdraw an opinion entered last year in favor of the U.S. Internal Revenue Service (IRS) against programmable logic vendor Xilinx Inc. leaves the matter unresolved pending further guidance from the court, according to specialists in transfer pricing tax.
The U.S. Court of Appeals for the Ninth Circuit Wednesday (Jan. 13) withdrew a an opinion it issued in 2009 overturning a 2005 U.S. Tax Court finding that Xilinx was not liable for taxes or penalties claimed by the IRS relating to transactions between the company and its Irish subsidiary.
According to Ward Connolly, a former tax attorney who is now a principal and tax advisor at PriceWaterhouseCoopers (PWC), the Ninth Circuit could still find in favor of the IRS and issue a different opinion supporting its decision. The court may also choose to hear additional arguments in the matter or reaffirm the Tax Court's 2005 decision, Connolly said.
"It's almost like the Ninth Circuit just decided to hit the reset button," Connolly said.
If it ultimately loses the case, Xilinx (San Jose, Calif.) could be compelled to pay more than $40 million in payments to the IRS and forfeited interest income. Xilinx declined to comment on the withdraw of the Ninth Circuit's opinion.
"My understanding is that it's pretty unusual that the court would withdraw it' opinion without releasing at the same time some new guidance about what they want to do," Connolly said.
Irving Plotkin, a senior managing director at PwC, called the circumstance highly unusual. Plotkin, who was an outspoken critic of the Ninth Circuit's decision to overturn the 2005 Tax Court ruling, said the court has put itself in an awkward position.
The original tax dispute centered on cost sharing between Xilinx and its Irish subsidiary during the fiscal years 1996 through 1999. The Tax Court concluded in 2005, that the Xilinx' cost sharing agreement, which did not include any sharing of cost for stock option expenses, met the "arm's-length" standard of IRS tax regulations and that unrelated parties would not share the spread or grant date value of stock options. The arms length standard requires that companies that are related to one another conduct transactions as though they are unrelated to avoid any semblance of conflict of interest.
