US: Xilinx Faces IRS Opposition To Rehearing

by Glen Shapiro, LawAndTax-News.com, New York

13 October 2009

The IRS has submitted its reasons for opposing the rehearing of the Xilinx case to the Ninth Circuit Court, claiming in particular that the Xilinx argument that it was of "exceptional importance" was unwarranted.

In addition to five amici curiae ("friend of the court") supporting briefs filed on behalf of dozens of corporations, a letter signed by 10 former senior tax officials from seven US trading partners was also sent in support of a rehearing.

An IRS claim of more than USD40m for back taxes on Xilinx hinges on the application of the "arm's length" principle in applying transfer prices between associated companies as though they were unrelated. The Ninth Circuit Court ruled in May that the cost of employee stock options should have been subject to a cost-sharing agreement between Xilinx and its Irish subsidiary. Xilinx's application for a rehearing in August recognized the huge controversy initiated by the case, and the precedent it set.

Companies such as Cisco Systems felt the need to record a one-time tax charge of between USD130m and USD150m during its current fourth quarter as a result of the Xilinx cost-sharing appeal court decision, because of "changes to the tax treatment of share-based compensation expenses for the purpose of determining intangible development costs under a company’s research and development cost sharing arrangement."

The Justice Department also argued on behalf of the IRS that the Xilinx case did not take into account later regulation changes and that it was inappropriate for the case to address the question of whether the US and its treaty partners have a common understanding of the arm's length principle as expressed in tax treaties.

Dan Goff, vice president of tax at Xilinx, said that the Justice Department response left a lot of the big issues untouched and ignored the fact that the IRS designated the case as one of national importance and reported on its importance to Congress.

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