Split 9th Circuit panel sides with IRS in tax appeal once complicated by Reinhardt’s death

The 9th U.S. Circuit Court of Appeals has reiterated a legal conclusion in a tax case previously complicated by the death of a sitting judge, saying in a split opinion Friday that the U.S. Department of the Treasury acted within its authority when promulgating regulations aimed and stopping large businesses from avoiding taxes by creating subsidiaries.

Chief Judge Sidney R. Thomas, joined by Judge Susan P. Graber, wrote in the ruling a federal statute outlining how the department may determine corporate tax income empowered the commissioner of the Internal Revenue Service to issue a rule requiring related corporate entities to share the costs of employee stock compensation in order for such arrangements to be eligible for deductions.

Reversing a 2015 tax court decision striking down the regulations, Thomas wrote federal courts needed to give deference to the department's interpretation of the law and said no violations of Administrative Procedure Act occurred. Altera Corp. v. Commissioner of Internal Revenue, 2019 DJDAR 4948 (9th Cir., June 7, 2019).

Judge Kathleen M. O'Malley, sitting by designation from the U.S. Court of Appeals for the Federal Circuit, dissented.

Friday's slip opinion comes nearly a year after the panel issued a similar decision, but with one significant difference. In July, the court also sided with the Internal Revenue Service, but the late Judge Stephen Reinhardt, not Graber, gave Thomas the upper hand to write for the majority.

When the court issued that ruling, Reinhardt had been dead for nearly four months, a fact that gave many legal scholars and lawyers pause. The court withdrew the opinion after several lawyers published commentary questioning the prudence of its release. Graber subsequently was randomly selected as a replacement.

Reinhardt's death caused confusion among legal practitioners as to how the 9th Circuit replaces judges when a case under submission leave the court.

The court's internal rule simply states that a replacement will be drawn "as needed," but does not clarify the circumstances when a new judge is required. In an interview with the Daily Journal last year, the court's clerk, Molly C. Dwyer, said interpretation of the rule has historically allowed the remaining two judges on a panel to decide when a replacement is needed.

A footnote attached to last year's Altera decision said: "Judge Reinhardt fully participated in this case and formally concurred in the majority opinion prior to his death." And O'Malley articulated no concern with the fashion in which the decision was rendered when she dissented last year.

But the U.S. Supreme Court recently considered when and how a court may count the opinions of a dead judge, summarily reversing Reinhardt's final opinion -- which was published more than a week after he died -- and expressing special concern about including a dead jurist's vote to establish a one judge majority.

The 9th Circuit general order outlining replacement procedures has not yet been updated, but a source familiar with internal court proceedings not authorized to speak on the record told the Daily Journal Friday "a rule change process is underway to avoid repetition of what happened in Altera." The source could not comment on when those changes would be announced.

The U.S. Department of Justice did not respond to a request for comment by press time. Neither did Donald M. Falk, a partner at Mayer Brown LLP who represents Altera.