Qualities of a Leader
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By Ron Cohen, CPA, MST
Greenstein, Rogoff, Olsen & Co., LLP
Taxpayer loses the Xilinx Case (click this link to see the complete Ninth Circuit Court of Appeals Decision of 5/27/09) in the Court of Appeal on May 27, 2009.
Subject to further appeal to the Supreme Court (which almost never happens with tax related cases), the tax benefits of a Qualified Cost-Sharing Arrangement have been reduced due to this decision requiring the sharing of stock option deductions with the off-shore Cost Sharing Participant – thereby reducing U.S tax deductions, and increasing the U.S. tax liability. A Qualified Cost Sharing Arrangement is complex stuff. But for the many high-tech companies that use this type of arrangement, this is big and unfortunate news that may lead to the need to file amended tax returns for prior years (open to the statute of limitations), or concede issues in their on-going tax audits for years related to this issue.
More later as the tax community digests this decision.
Xilinx Rehearing Petition for en banc review:
It has come to my attention, through fellow Silicon Valley tax professionals, that Xilinx is considering an appeal to the 9th Circuit Court of Appeals decision via an “En Banc” process, where the decision is reviewed by additional Appeals Court judges. I’m not a lawyer, so here’s a definition of this procedure at: http://www.techlawjournal.com/glossary/legal/enbanc.htm
After the En Banc review, either the taxpayer or the I.R.S. can further appeal the case to the U.S. Supreme Court. However, the Supreme Court may choose not to hear the case, and then the lower court decision is final.
I’m told the Supreme Court denied a hearing on three tax cases in the last year. However, many tax cases are small, simple disputes where the taxpayer just won’t give up until all their appeals are exhausted.
Some attorneys argue that the Appeals Court decision in Xilinx reverses 50 years of decisions consistently applying the “arm-length” standard to international transfer pricing issues. That would seem worth the Supreme Court’s time. We’ll just have to see if the case gets that far.
For tax accounting purposes, under FAS 109, the consensus I’ve heard is that any reserve that is deemed necessary as a result of this taxpayer loss in court (for taxpayers with similar facts and issues) is recorded and a debit to Additional Paid In Capital (“APIC”) for the unpaid tax and penalties accrued. The interest expense accrual is an income statement debit.
This treatment is consistent with FAS 109, which incorporated old APB 25, wherein any benefit booked for taxes related to stock option expense in prior years should have also been recorded to APIC (not the income statement) as the tax benefit is related to “equity” transactions. So, booking a reserve now, for the anticipated loss of that tax benefit (via an audit settlement or amended tax returns if the statue of limitations is not otherwise closed) to APIC is to reverse the previously recorded benefit makes sense. Please check with your GAAP auditor on this point.
I can always be reached for questions or comments at (510) 797-8661 x237.