SAN FRANCISCOProgrammable logic vendor Xilinx Inc. could stand to lose more than $40 million after a federal appeals court overturned a 2005 ruling that favored the company in a tax dispute with the U.S. Internal Revenue Service (IRS).
The U.S. Court of Appeals for the Ninth Circuit Wednesday (May 27) overruled a
September 2005 opinion issued by the U.S. Tax Court, which found that Xilinx was not liable for taxes or penalties claimed by the IRS relating to transactions between the company and its Irish subsidiary.
In a two-to-one majority decision, a three-judge panel remanded the case back to the Tax Court to decide taxes and penalties due the IRS from Xilinx. According to Xilinx's most recent annual report, the decision could cost the company more than $40 million in payments to the IRS and forfeited interest income.
Xilinx said late Thursday in a regulatory filing with the U.S. Securities and Exchange Commission that it was forced to delay its 10-K annual report filing for the period ended March 28 in order to consider the impact of the Ninth Circuit ruling. The report was due to be filed Wednesday.
Dan Goff, vice president of tax at Xilinx, described the ruling as a "fundamental shift" in how the relevant tax rules are applied.
"This is really the first case where the court rejected the IRS' arguments, but the IRS still won," Goff said of the ruling in a telephone interview. Goff said the court's decision "takes the moorings away from the longstanding principles that guided [section 482 of the U.S. tax code] for many years."
The original tax dispute centered on cost sharing between Xilinx and Xilinx Ireland during the company's fiscal years 1996 through 1999. The court concluded that the Xilinx' cost sharing agreement, which did not include any sharing of cost for stock option expenses, met the "arm's-length" standard of IRS tax regulations and that unrelated parties would not share the spread or grant date value of stock options. The arms length standard requires that companies that are related to one another conduct transactions as though they are unrelated to avoid any semblance of conflict of interest.