The Ninth Circuit reached the same conclusion it had reached in the opinion issued in July 2018, which was subsequently withdrawn presumably because one of the judges on the three-judge panel had died before the opinion was issued. The case subsequently was reheard by a reconstituted three-judge panel.
The Ninth Circuit’s majority opinion determined that the regulation was a valid exercise of authority under Section 482 because (a) the arm’s-length standard is a versatile concept that does not require strict comparability to the pricing practices of unrelated parties, (b) the commensurate-with-income standard authorized Treasury to apply alternatives to comparability approaches in the case of transactions involving intangibles, and (c) the regulatory preamble explained the Treasury’s reasoning in sufficient detail to withstand challenge under the Administrative Procedure Act (APA).
Judge O’Malley dissented, concluding, as had the Tax Court, that Reg. sec. 1.482-7A(d)(2) (i) was invalid as a procedural matter because of Treasury’s failure to comply with the APA in issuing the regulation, and (ii) was contrary to Section 482 as a substantive matter because it did not comport with the arm’s-length standard and because a CSA does not constitute a transfer of intangible property to which the commensurate with income standard applies.