On March 22, the Ninth Circuit issued its opinion affirming the opinion of the United States Tax Court in Xilinx, Inc. v. Commissioner. The March 22 ruling, a 2-1 panel decision written by Judge Noonan, relied heavily upon the Treasury Regulations under Section 482 and drew support from the U.S.-Ireland Tax Treaty and the Department of Treasury Technical Explanation thereto. Judge Fisher wrote a concurring opinion, while Judge Reinhardt dissented.

The taxpayer, Xilinx, and its Irish subsidiary had entered into a cost sharing agreement which provided that each party was required to pay a percentage of the research and development costs for jointly-owned technology. The agreement was silent as to whether the cost of employee stock options would be shared. Xilinx issued stock options to its employees and claimed certain deductions with respect to the options. The IRS claimed that the amount deducted with respect to the options should have been shared with the Irish subsidiary, thereby reducing Xilinx’s deduction and increasing its taxable income. The taxpayer provided evidence that unrelated parties would share the cost of such stock-based compensation with unrelated parties. The Tax Court held for the taxpayer based on Treas. Reg. § 1.482-1(b)(1), which requires that agreements between related parties reflect how two unrelated parties operating at arm’s length would behave.