Originally published on Forbes.com.
There was a big win for the IRS last month in Altera Corporation & Subsidiaries v IRS as the Ninth Circuit in a two to one vote overturned a Tax Court decision. I covered the decision here. Although the dollar stakes were not that high to Intel, which had acquired Altera as the litigation was ongoing, technology companies had been watching the case closely. Amazon had filed an amicus brief supporting the taxpayer.
Not So Fast
But, but, but, the case is not a win for the IRS as of today. It is back in limbo. Because unlike the stories you hear about Chicago, it seems that in the Ninth Circuit they don’t want the dead to vote. One of the two votes in favor of the IRS was cast by Judge Stephen Reinhardt who died on March 29, 2018, almost four months before the decision issued. You will see it noted:
Judge Reinhardt fully participated in this case and formally concurred in the majority opinion prior to his death.
Filed today in the Ninth Circuit we find:
The Opinions filed July 24, 2018, are hereby withdrawn to allow time for the reconstituted panel to confer on this appeal.
I found that there was another order after the decision issued last week:
Pursuant to Ninth Circuit General Order 3.2h, the Honorable Susan Graber has been drawn as a replacement judge for Judge Reinhardt.
About The Judges
The late Judge Reinhardt was appointed by Jimmy Carter and was considered one of the most liberal judges on the courts of appeals. According to the wikipedia entry, which is as far as I intend to go today, he was reversed a lot.
Judge Graber was appointed by Bill Clinton. I found this in Above the Law.
Judge Graber didn’t care about being “sexy,” and she didn’t focus on the “sexy” cases. Based on what we observed, “SPG” didn’t seem to care about serving any particular ideology, conservative or liberal. Nor did she seem to care about what people thought of her, or what the media wrote about her. She just “did her thing,” calling each case as she saw it, typically with moderate results.
I don’t think that is much use in predicting the new result, but it is what I could find.
The Issue
I explained the issue and its significance here. Very big picture, the IRS win would make it harder for companies like Amazon to shift the profits from their intellectual property to off-shore tax havens by requiring stock-based compensation to be a shared cost between the parent and the subsidiary. Stock-based compensation, by its nature, will tend to be an expense of the parent.
Some Comments
I reached out to some attorneys for comment. One who stays off the record and practices in another area of tax law just responded “Wow”.
Matt Erskine has a boutique practice in Worcester Mass focusing on unique assets. He wrote me:
There is a concept known as a “royalty trust” where you buy the royalty rights to IP and then “farm” the cash flow. If you could offer a deduction as well on other income, you have a pretty attractive deal.
I do not know much about international corporate tax law. I however agree that these sorts of cases are an employment program for tax lawyers. I remember when the anti-trust suit against ATT finally settled, there where attorneys at large firms on NY and Washington who had done nothing else but work on that matter full time for ten years and were at a complete loss as to what to do.
Lew Taishoff who brought the decision to my attention in the first place and also wrote about it wrote me:
Predictions would be foolhardy. But I suspect the original decision will stand.
Lu Gauthier whose Boston Tax Institute is the best continuing professional education value in New England wrote me:
Perhaps there should be an inquiry as to the cause of death?
Best information I could get on that is from the New York Times – Stephen Reinhardt, Liberal Lion of Federal Court, Dies at 87
The cause was a heart attack that Judge Reinhardt had during an appointment with his dermatologist, a spokesman for the United States Court of Appeals for the Ninth Circuit in San Francisco said.
True or not, that is what “they” want you to think. I wonder how often that sort of thing happens. I thought people might go into dermatology to avoid having to deal with that sort of drama. That and the more regular hours.
Other Coverage
Jack Townsend posted Ninth Circuit Withdraws Altera Opinion on Federal Tax Procedure.
The earlier opinions were issued with the deceased judge, Judge Reinhardt, having indicated his agreement with Judge Thomas prior to death, so Judge Thomas’ opinion was the majority opinion. I presume the reconstitution was caused by the issuance of the opinions after the death of Judge Reinhardt and the commotion that resulted from issuance of the deciding vote after death.
Law 360 has something by Molly Moses, but I don’t feel like registering.
As I expected Keith Fogg at Procedurally Taxing has something.
These events provide even more excitement for a case that did not need more procedural turns to draw attention to its importance.