Tax
Ct. Nos. 6253-12 9963-12
Arthur
T. Catterall (argued), Richard Farber, Gilbert S. Rothenberg,
and Francesca Ugolini, Attorneys; Travis A. Greaves, Deputy
Assistant Attorney General; Richard E. Zuckerman, Principal
Deputy Assistant Attorney General; Tax Division, United
States Department of Justice, Washington, D.C.; for
Respondent-Appellant.
Donald
M. Falk (argued), Mayer Brown LLP, Palo Alto, California;
Thomas Kittle-Kamp and William G. McGarrity, Mayer Brown LLP,
Chicago, Illinois; Brian D. Netter, Travis Crum, and Nicole
A. Saharsky, Mayer Brown LLP, Washington, D.C.; A. Duane
Webber, Phillip J. Taylor, and Joseph B. Judkins, Baker &
McKenzie LLP, Washington, D.C.; Ginger D. Anders, Munger
Tolles & Olson LLP, Washington, D.C.; Mark R. Yohalem,
Munger Tolles & Olson LLP, Los Angeles, California; for
Petitioner-Appellee.
Susan
C. Morse, University of Texas Law School, Austin, Texas;
Stephen E. Shay and Allison Bray, Certified Law Students,
Harvard Law School, Cambridge, Massachusetts; Clinton G.
Wallace, Columbia, South Carolina; and Leandra Lederman,
Bloomington, Indiana; for Amici Curiae Law Academics and
Professors.
Jonathan E. Taylor, Gupta Wessler PLLC, Washington, D.C.;
Clint Wallace, Vanderbilt Hall, New York, New York; for Amici
Curiae Anne Alstott, Reuven Avi-Yonah, Lily Batchelder,
Joshua Blank, Noel Cunningham, Victor Fleischer, Ari
Glogower, David Kamin, Mitchell Kane, Sally Katzen, Edward
Kleinbard, Michael Knoll, Rebecca Kysar, Zachary Liscow,
Daniel Shaviro, John Steines, David Super, Clint Wallace, and
George Yin.
Larissa B. Neumann, Ronald B. Schrotenboer, Kenneth B. Clark,
Adam R. Gahtan, and Michael D. Knobler, Fenwick & West
LLP, Mountain View, California, for Amicus Curiae Xilinx Inc.
Christopher J. Walker, The Ohio State University Moritz
College of Law, Columbus, Ohio; Kate Comerford Todd, Steven
P. Lehotsky, and Warren Postman, U.S. Chamber Litigation
Center, Washington, D.C.; for Amicus Curiae Chamber of
Commerce of the United States of America.
John
I. Forry, San Diego, California, for Amicus Curiae TechNet.
Charles G. Cole, Alice E. Loughran, Michael C. Durst, Gregory
N. Kidder, and Mark C. Savignac, Steptoe & Johnson LLP,
Washington, D.C.; Bennett Evan Cooper, Steptoe & Johnson
LLP, Phoenix, Arizona; Alexander Volokh, Emory University
School of Law, Atlanta, Georgia; for Amici Curiae Software
and Information Industry Association, Financial Executives
International, Information Technology Industry Council,
Silicon Valley Tax Directors Group, Software Finance and Tax
Executives Counsel, National Association of Manufacturers,
American Chemistry Council, BSA | the Software Alliance,
National Foreign Trade Council, Biotechnology Innovation
Organization, Computing Technology Industry Association, The
Tax Council, United States Council for International
Business, and Semiconductor Industry Association.
Kenneth P. Herzinger and Eric C. Wall, Orrick Herrington
& Sutcliffe LLP, San Francisco, California; Peter J.
Connors, Orrick Herrington & Sutcliffe LLP, New York, New
York; for Amici Curiae Charles W. Calomiris, Kevin H.
Hassett, and Sanjay Unni.
Roderick K. Donnelly and Neal A. Gordon, Morgan Lewis &
Bockius LLP, Palo Alto, California; Thomas M. Peterson,
Morgan Lewis & Bockius LLP, San Francisco, California;
Michelle L. Andrighetto, Morgan Lewis & Bockius LLP,
Boston, Massachusetts; Justin McGough, 3M Company, Saint
Paul, Minnesota; Karen Robinson, Vice President, Legal, Adobe
Inc., San Jose, California; Theodore J. Boutrous Jr. and
Christopher Chorba, Gibson Dunn & Crutcher LLP (for Apple
Inc.), Los Angeles, California; Armin D. Eberhard, Director,
International Tax Planning and M&A, Applied Materials,
Santa Clara, California; Desiree Ralls-Morrison, SVP, General
Counsel & Corporate Secretary, Boston Scientific
Corporation, Marlborough, Massachusetts; Thomas J. Vallone,
Senior Vice President, Global Tax, Dell Technologies Inc.,
Round Rock, Texas; Andy Sherman, Dolby Laboratories Inc., San
Francisco, California; Aaron Johnson, VP Legal, eBay, San
Jose, California; Jacob Schatz, EVP, General Counsel and
Corporate Secretary, Electronic Arts Inc., Redwood City,
California; Katie Lodato, Vice President - Global Tax, Eli
Lilly and Company, Indianapolis, Indiana; Dana L. Lasley,
Emerson Electric Co., St. Louis, Missouri; Paul S. Grewal, VP
& Deputy General Counsel, Facebook Inc., Menlo Park,
California; John Whittle, Executive Vice President, General
Counsel, Fortinet, Sunnyvale, California; Christine
Henninger, General Mills Inc., Golden Valley, Minnesota; Nora
Puckett, Google LLC, Mountain View, California; Kyle Bonacum,
GoPro Inc., San Mateo, California; Joshua Mishoe, Vice
President, Hewlett Packard Enterprise Company, Plano, Texas;
Barbara Beckerman, International Paper Company, Memphis,
Tennessee; Michael R. Peterson, President and Corporate
Secretary, Johnson Controls Inc.; Mark Casper, Vice President
and Deputy General Counsel, Maxim Integrated, San Jose,
California; Matthew Fawcett, General Counsel, NetApp Inc.,
Sunnyvale, California; Margaret C. Wilson, Wilson Law Group
LLC (for Oracle Corporation), Princeton, New Jersey; Maryanne
Bifulco, Vice President, Transfer Pricing Counsel, PepsiCo
Inc., Purchase, New York; Markus Green, Assistant GC,
Government Relations/Litigation, Pfizer Inc., New York, New
York; Lowell Yoder, McDermott Will & Emery (for Procter
and Gamble Company), Chicago, Illinois; Beth Wapner, VP Tax,
Qualcomm Incorporated, San Diego, California; Tanya Guazzo,
S&P Global Inc., New York, New York; Russell Elmer,
ServiceNow Inc., Santa Clara, California; Lora Blum, General
Counsel, SurveyMonkey, San Mateo, California; Scott C.
Taylor, EVP, General Counsel & Secretary, Symantec
Corporation, Mountain View, California; Donald P. Lancaster,
United Parcel Service Inc., Atlanta, Georgia; Lisa McFall, VP
& Deputy General Counsel, Workday Inc., Pleasanton,
California; for Amicus Curiae Cisco Systems Inc. and
Thirty-Two Other Affected Companies.
Christopher Bowers, David Foster, Raj Madan, and Royce
Tidwell, Skadden Arps Slate Meagher & Flom LLP,
Washington, D.C.; Nathaniel Carden, Skadden Arps Slate
Meagher & Flom LLP, Chicago, Illinois; for Amicus Curiae
Amazon.com Inc.
Miriam
L. Fisher, Melissa Arbus Sherry, and Eric J. Konopka, Latham
& Watkins LLP, Washington, D.C., for Amici Curiae
PricewaterhouseCoopers LLP, Deloitte Tax LLP, and KPMG LLP.
Before: Sidney R. Thomas, Chief Judge, and Susan P. Graber
and Kathleen M. O'Malley, [*] Circuit Judges.
SUMMARY
[**]
Tax
The
panel denied a petition for rehearing en banc on behalf of
the court in a case in which the panel reversed the decision
of the Tax Court.
Judge
M. Smith, joined by Judges Callahan and Bade, dissented from
the denial of rehearing en banc. Title 26 of United States
Code § 482 authorizes the Department of Treasury to
re-allocate reported income and costs between related
entities where necessary to prevent them from improperly
avoiding taxes. Judge M. Smith agreed with the Tax
Court's unanimous conclusion that the Treasury's
implementing regulation § 1.482-7(d)(2) constituted
arbitrary and capricious rulemaking in violation of the
Administrative Procedure Act. Judge M. Smith observed that,
in addition to being wrongly decided, the majority's
decision engenders deleterious practical consequences,
threatens the uniform enforcement of the Tax Code, invites an
effective circuit split, ignores the reasonable reliance of
businesses on the well-settled arm's length standard and
subjects those businesses to double taxation, lowers the bar
for compliance with the Administrative Procedure Act, and
sends a signal that executive agencies can bypass proper
notice-and-comment procedures through post-hoc
rationalization.
ORDER
The
full court has been advised of the petition for rehearing en
banc. A judge requested a vote on whether to rehear the
matter en banc. The matter failed to receive a majority of
the votes of the nonrecused active judges in favor of en banc
consideration. Fed. R. App. P. 35. Judges McKeown, Wardlaw,
Bybee, Bea, Watford, Owens, Friedland, Miller, Collins, and
Lee were recused and did not participate in the vote.
The
petition for rehearing en banc is denied. Attached is the
dissent from and statements respecting the denial of
rehearing en banc.
M.
SMITH, Circuit Judge, with whom CALLAHAN and BADE, Circuit
Judges, join, dissenting from the denial of rehearing en
banc:
Neither
the laudable goal of preventing tax evasion nor the prospect
of adding billions of dollars to the public coffers excuses
the Department of the Treasury from complying with the
Administrative Procedure Act. In 2003, Treasury promulgated a
tax rule with no reasoned basis for its decision, pursuant to
an explanation that ran contrary to the evidence before it.
In 2019, a divided panel of our court upheld that rule based
on a novel interpretation of the relevant statute, which
Treasury developed only as an appellate litigating position,
and which was never subject to notice and comment. As
recognized by the unanimous en banc Tax Court, Treasury's
actions in this case are the epitome of arbitrary and
capricious rulemaking. The panel majority's decision
tramples on the reliance interests of American businesses,
threatens the uniform enforcement of the Tax Code, and
drastically lowers the bar for compliance with the
Administrative Procedure Act.
I
respectfully dissent from our court's denial of rehearing
en banc.[1]
I.
For
almost a century, Congress has authorized Treasury to
recalculate the taxes of related entities based on what their
taxes would look like if they were unrelated entities. For
the past fifty years, Treasury has made this determination by
analyzing whether the results of a transaction between
related entities are consistent with the results of a
comparable transaction between entities operating at
arm's length. When a transaction does not meet this
arm's length standard, Treasury adjusts it for tax
purposes by reallocating the related entities' costs and
income.
In the
late-1990s, Treasury decided that stock-based
compensation-then a new phenomenon-was a type of cost it
wanted to re-allocate under these calculations. The problem
was, and remains, that unrelated entities do not share
stock-based compensation costs. Treasury's first attempt
at such a re-allocation was therefore thrown out by the Tax
Court and by this court because it was contrary to
Treasury's own regulations calling for application of the
arm's length standard. Perhaps preemptively recognizing
this defect on the very face of its rules, Treasury attempted
a mid-litigation cure of simply adding a cross reference to
its arm's length standard provision. That attempted cure
is the 2003 rulemaking challenged here.
A.
In
1928, Congress enacted 26 U.S.C. ("I.R.C.") §
482 to authorize Treasury to re-allocate reported income and
costs between related entities where necessary to prevent
them from improperly avoiding taxes by, for instance,
shifting income to lower tax foreign jurisdictions.
See H.R. Rep. No. 70-2, at 16-17 (1927);
Comm'r v. First Sec. Bank of Utah, N.A., 405
U.S. 394, 400 (1972). Treasury soon promulgated regulations
specifying that "[t]he standard to be applied in every
case is that of an ...