On August 7, 2018, the US Court of Appeals for the Ninth Circuit withdrew its opinion in Altera Corporation v. Commissioner, just 15 days after the initial release of the opinion. The court in Altera had overturned a Tax Court decision by upholding the validity of Treas. Reg. § 1.482-7A(d)(2), which provides that a cost-sharing arrangement among related entities for the development of intangibles is not considered qualified unless the entities share the cost of stock-based compensation. For a detailed analysis of the withdrawn opinion, see the prior Eversheds Sutherland legal alert on the decision.
The withdrawal comes as the clerk of court selected Judge Susan P. Graber to replace the late Judge Stephen Reinhardt, who had participated in the case but died unexpectedly at age 87 on March 29, 2018, more than four months prior to the release of the Altera opinion.
Under section 3.2(h) of the Ninth Circuit’s general orders, in the event that one of the members of a three-judge panel is unavailable due to death, the clerk randomly selects a new judge from a list of available judges by drawn lot. The new panel member typically reviews the briefs and the recording of the oral argument before voting on a decision. In Altera, the court issued an order stating that it withdrew the opinion to allow the new panel to confer on the case.
The withdrawal of the panel opinion in Altera may indicate that the new panel may reverse the original panel. This was the case in Xilinx Inc. v. Commissioner, 592 F.3d 1017 (9th Cir. 2010), which also involved the validity of the cost-sharing regulations as applied to stock-based compensation. The original panel opinion in Xilinx held for the Internal Revenue Service, but the court later withdrew the panel opinion and reissued it with the opposite result—a decision for the taxpayer. The Altera and Xilinx decisions have another commonality—in Judge Reinhardt’s view, the regulation was valid in both cases.
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Eversheds Sutherland Observation: With the Altera decision withdrawn, the Tax Court’s decision invalidating Treas. Reg. § 1.482-7A(d)(2) is reinstated—at least for now. A number of taxpayers previously disclosed in filings with the Securities and Exchange Commission that they had made changes in their tax provisions due to the implications of the Ninth Circuit’s decision. The withdrawal of the Ninth Circuit decision will likely require additional disclosures, reversing the changes made in response to the original decision. |
The Ninth Circuit has substituted a number of panel members for Judge Reinhardt in other cases, but Altera seems to be the only case in which a panel member was substituted after the decision had been entered. In fact, Judge Reinhardt is credited as the deciding vote and author of the majority opinion in the en banc decision in Rizo v. Yovino, 887 F.3d 453 (9th Cir. 2018), which was issued April 9, 2018, roughly two weeks after Judge Reinhardt’s death.
The Altera majority opinion stated that Judge Reinhardt had “fully participated” and had “formally concurred” in the majority opinion prior to his death. This characterization of a deceased judge’s participation appears in only two other Ninth Circuit cases, both of which involved Judge Reinhardt himself, and referred to another deceased judge. See United States v. Young, 720 Fed.Appx. 846 (9th Cir. 2017); Hernandez v. Chappell, 878 F.3d 843 (9th Cir. 2017). The latter decision, like Altera, involved a 2-1 split where the deceased judge was in the majority.
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