On March 22 the Ninth Circuit released its new opinion in Xilinx v. Commissioner, Doc 2010-6163, 2010 WTD 55-42. 1 As has been expected since the panel withdrew its original opinion, it reversed itself and in a 2-1 opinion held for the taxpayer. The opinion makes it pretty clear why the reversal occurred. It was the result of concentrated pressure by the international tax community and the fact that the government was unwilling to defend the theory on which the panel originally decided the case: that the arm’s-length standard of the section 482 regulations does not apply to cost sharing. Like Judge Reinhardt, I continue to believe that the original decision was correct. As explained in my previous article, the cost-sharing regulations are an implementation of the super-royalty rule added by Congress to section 482 in 1986, and Congress made it clear when it adopted the super-royalty rule that the rule was to be applied regardless of whether it was consistent with the arm’s-length standard. Therefore, the correct standard for deciding cost-sharing cases is not the arm’s-length standard, which is not in the code but only in the regulations, but rather the clear reflection of income standard, which is embodied in the first sentence of section 482 and applied to intangibles in the second sentence. Contrary to the majority opinion, congressional purpose clearly supports the position the panel took in the original opinion, not the position the majority took now.
Avi-Yonah, Reuven S. "Xilinx Revisited." Tax Notes Int'l 59, no. 2 (2010): 1141-2.