Daily Tax Update - January 13, 2010


NINTH CIRCUIT WITHDRAWS ADVERSE OPINION IN XILINX TRANSFER PRICING CASE; FINAL RESULT STILL TO BE SEEN: The 9th Circuit, in response to the taxpayer's petition for rehearing, has withdrawn its earlier opinion adverse to the taxpayer in Xilinx Inc. v. Commissioner. The court therefore has signaled the possibility that it might change the interpretation of the "arm's length standard" incorporated in the now-withdrawn opinion. Although the case involves directly the question whether amounts related to employee stock options constitute “costs” that must be reimbursed in some circumstances by foreign subsidiaries, the 9th Circuit opinion that has been withdrawn had potentially broad implications concerning the scope of the IRS’s authority in transfer pricing matters. In particular, taxpayers have been concerned that the 9th Circuit's interpretation could leave the IRS with unwarrantedly wide discretion in changing taxpayers' income under Section 482 of the Code.

  • Steptoe & Johnson LLP has been active in this matter as an adviser to companies that stand to be affected by the outcome of the case, and as an author of an amicus brief filed at an earlier stage of the proceedings. It should be emphasized that while the court's withdrawal of its opinion signals the possibility of a positive outcome in the case, it does not guarantee such a result, so all affected will need to continue to monitor the proceedings in the 9th Circuit closely.
  • For additional information, contact Michael C. Durstmdurst@steptoe.com or Philip R. Westpwest@steptoe.com.

CANADIAN GOVERNMENT TO APPEAL GE CANADA TRANSFER PRICING DECISION: In another important development related to transfer pricing, it has been reported that the Canadian government will appeal the recent decision of the Tax Court of Canada that allowed GE Canada Corp. to deduct, for Canadian purposes, the amount of a guarantee fee paid to its US parent. The Tax Court of Canada opinion is favorable to the taxpayer, but its reasoning could be either favorable or unfavorable to taxpayers involved in cases presenting different fact patterns. The Tax Court of Canada opinion appears to be the first judicial opinion that seeks to analyze in depth the complicated question of the arm’s length value of intragroup guarantees; some have expressed the view that the Tax Court’s reasoning should be further explicated in order to provide useful guidance to taxpayers. Further developments in this matter are likely to have wide-ranging implications.

OBAMA TO ANNOUNCE NEW BIG BANK FEES TOMORROW: President Obama will announce new fees on "high risk" transactions carried out by big banks tomorrow in an effort to recoup bailout funds. A senior administration official said today, “As the banking industry recovered, the President and the economic team felt it was important to discuss ways to recoup every dime for the American people more quickly than the law required.” The administration official added, “Think of this as a tax on risk-taking by big banks. In the bailout the taxpayers back-stopped banks and those banks paid nothing for that guarantee. They lived off that guarantee."

  • Yesterday, House Ways and Means Committee Chairman Charles Rangel said that he supports President Obama's plan. Rangel said, “Our large bankers found it so convenient to come to the taxpayers and ask for help, and now we may have to come to them for help.” Rangel added that “never has a group of people proven that there's broader support for a tax.”

REG-137036-08 contains proposed regulations relating to employment tax liability of agents authorized by the Secretary under section 3504 of the Internal Revenue Code (Code) to perform acts required of employers with respect to taxes under the Federal Unemployment Tax Act on wages paid for home care services, as defined in these regulations. These proposed regulations affect employers who are home care service recipients, as defined in these regulations, and their designated agents. These regulations also propose amendments to modify the existing regulations under section 3504 to be consistent with the organizational structure of the Internal Revenue Service (IRS), and to update the citation to the Internal Revenue Code of 1986.

Notice 2010-14 provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code. It also provides guidance on the corporate bond monthly yield curve (and the corresponding spot segment rates), the 24-month average segment rates, and the funding transitional segment rates under § 430(h)(2). In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008, and the minimum present value segment rates under § 417(e)(3)(D) as in effect for plan years beginning after 2007. 

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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