AMAZON.COM, INC. & SUBSIDIARIES, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
No. 17-72922
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
August 16, 2019
Tax Ct. No. 31197-12
FOR PUBLICATION
Appeal from a Decision of the United States Tax Court
Argued and Submitted April 12, 2019 Seattle, Washington
Filed August 16, 2019
Before: William A. Fletcher, Consuelo M. Callahan, and Morgan Christen, Circuit Judges.
Opinion by Judge Callahan
SUMMARY*
Tax
The panel affirmed the Tax Court’s decision on a petition for redetermination of federal income tax deficiencies, in an appeal involving the regulatory definition of intangible assets and the method of their valuation in a cost-sharing arrangement.
In the course of restructuring its European businesses in a way that would shift a substantial amount of income from U.S.-based entities to the European subsidiaries, appellee Amazon.com, Inc. entered into a cost sharing arrangement in which a holding company for the European subsidiaries made a “buy-in” payment for Amazon’s assets that met the regulatory definition of an “intangible.” See
At issue is the correct method for valuing the pre-existing intangibles under the then-applicable transfer pricing regulations. The Commissioner sought to include all intangible assets of value, including “residual-business assets” such as Amazon’s culture of innovcation, the value of workforce in place, going concern value, goodwill, and growth options. The panel concluded that the definition of “intangible” does not include residual-business assets, and that the definition is limited to independently transferrable assets.
COUNSEL
Judith A. Hagley (argued), Gilbert S. Rothenberg, and Arthur T. Catterall, Attorneys, Tax Division; Richard E. Zuckerman, Principal Deputy Assistant Attorney General; Travis A. Greaves, Deputy Assistant Attorney General; Tax Division, United States Department of Justice, Washington, D.C.; for Respondent-Appellant.
Carter G. Phillips (argued), Joseph R. Guerra, and Matthew D. Lerner, Sidley Austin LLP, Washington, D.C.; David R. Carpenter, Sidley Austin LLP, Los Angelеs, California; for Petitioner-Appellee.
Christopher J. Walker, The Ohio State University Moritz College of Law, Columbus, Ohio; Steven P. Lehotsky, U.S. Chamber Litigation Center, Washington, D.C.; for Amicus Curiae The Chamber of Commerce of the United States of America.
Elizabeth J. Stevens, Caplin & Drysdale, Chartered, Washington, D.C., for Amici Curiae H. David Rosenbloom and John P. Steines, Jr.
Alice E. Loughran, Charles G. Cole, Michael C. Durst, and Robert J. Kovacev, Steptoe & Johnson LLP, Washington D.C., for Amici Curiae Semiconductor Industry Association, Information Technology Industry Council, National Foreign Trade Council, Software Finance and Tax Executives Council, and TechNet.
A. Duane Webber, George M. Clarke, and Phillip J. Taylor, Baker & McKenzie LLP, Washington, D.C.; Mark A. Oates, Susan E. Ryba, and Cameron C. Reilly, Baker & McKenzie LLP, Chicago, Illinois; Scott H. Frewing, Baker & McKenzie LLP, Palo Alto, California; for Amici Curiae Silicon Valley Tax Directors Group, Agilent Technologies, Inc., Cisco Systems, Inc., Dell Technologies Inc., Dolby Laboratories, Inc., Expedia Group, Inc., FireEye, Inc., Genesys Int’l Corp. Ltd., Informatica, Inc., NetApp, Inc., Palo Alto Networks, Inc., Surveymonkey Inc., and VMwarе, Inc.
CALLAHAN, Circuit Judge:
Appellee, Amazon.com, Inc., is a U.S.-based online retailer with highly profitable
The compensation was provided through a cost sharing arrangement, whereby Amazon and a holding company for the European subsidiaries would be treated as co-owners of the intangibles. Under the arrangement, the holding company was required to make a “buy-in” payment for the pre-existing intangibles Amazon contributed to the arrangement and to make cost sharing payments going forward for its share of future research and development (R&D) efforts. The buy-in payment was taxable income to Amazon, and the holding company’s cost sharing payments would reduce Amazon’s U.S. tax deductions for R&D costs.
To guard against manipulation by jointly controlled entities, the regulations require that the buy-in payment reflect the fair market value of the pre-existing intangibles made available under a cost sharing arrangement. Amazon initially reported a buy-in payment of about $255 million. Appellant, the Commissioner of Internal Revenue, concluded that the buy-in payment had not been determined at arm’s length in accordance with the transfer pricing regulations, so the IRS performed its own calculation, valuing the buy-in at about $3.6 billion. Amazon filed a petition in the United States Tax Court challenging the IRS’s valuation.
In the tax court proceedings, Amazon and the Commissioner offered competing methods for valuing Amazon’s pre-existing intangibles. There was a key difference between the parties’ respective approaches. Amazon’s methodology isolated and valued only the specific intangible assets that it transferred to the European holding company under the cost sharing arrangement, including website technology, trademarks, and customer lists. The Commissioner’s methodology essentially valued the entire European business, minus pre-existing tangible assets. That method necessarily swept into the calculation all contributions of value, including those that are more nebulous and inseparable from the business itself, like the value of employees’ experience, education, and training (known as “workforce in place“), going concern value, goodwill, and other unique business attributes and expectancies (which the parties refer to as “growth options“). The tax court sided primarily with Amazon, and the Commissioner appealed.
This case requires us to interpret the meaning of an “intangible” in the applicable (but now outdated) transfer pricing regulations.1 The case turns on whether, as the Commissioner argues, the regulatory
I.
Before summarizing Amazon’s corporate restructuring and the procedural history of this case, we first provide an overview of the statutory and regulatory framework for transfer pricing.
A.
When a taxpayer sells or licenses its property, including intangible assets, to another entity, the purchase price or license royalty is taxable income. Often, such transactions occur between entities “owned or controlled directly or indirectly by the same interests.”
The implementing regulations state that “[t]he purpose of section 482 is to ensure that taxpayers clearly reflect income attributable to controlled transactions, and to prevent the avoidance of taxes with respect to such transactions.”
The key regulations were promulgated in 1994 and 1995. The regulations divide property into two categories: tangible property (
(b) Definition of intangible. For purposes of section 482, an intangible is an asset that comprises any of the following items and has substantial value independent of the services of any individual—
- Patents, inventions, formulae, processes, designs, patterns, or know-how;
Copyrights and literary, musical, or artistic compositions; - Trademarks, trade names, or brand names;
- Franchises, licenses, or contracts;
- Methods, programs, systems, prоcedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; and
- Other similar items. For purposes of section 482, an item is considered similar to those listed in paragraph (b)(1) through (5) of this section if it derives its value not from its physical attributes but from its intellectual content or other intangible properties.
A controlled taxpayer may make its intangibles available to a foreign affiliate by entering a licensing agreement, under which the foreign affiliate’s royalty fee is taxable income to the controlled taxpayer. See generally
As an alternative to licensing, the regulations authorize jointly controlled entities to enter a cost sharing arrangement, under which they become co-owners of intangibles devеloped as a result of the entities’ joint R&D efforts. See generally
Under the regulations, a subsidiary that enters a cost sharing arrangement with its parent must make two distinct payments. First, the subsidiary must make an arm’s length “buy-in” payment reflecting the value of the pre-existing intangibles the parent contributes to the arrangement:
If a controlled participant makes pre-existing intangible property in which it owns an interest available to other controlled participants for purposes of research in the intangible development area under a qualified cost sharing arrangement, then each such other controlled participant must make a buy-in payment to the owner.
Second, the subsidiary must pay a share of the intangible development costs (or R&D) “equal to its share of reasonably anticipated benefits attributable to such development.”
sharing payments to reflect its share of the anticipated benefits. The subsidiary’s cost sharing payments serve to reduce the deductions the controlled taxpayer can take for R&D costs (thereby increasing tax liability).
B.
Amazon is an online retailer that began operating in the United States in 1995. In the late 1990s and early 2000s, Amazon expanded operations into France, Germany, and the United Kingdom. Amazon’s business in Europe had a siloed structure, with separate European subsidiaries independently operating and managing the business, each subsidiary having its own
To address operational inefficiencies in Europe, in the early 2000s Amazon investigated options for creating a centralized European headquarters. Amazon ultimately located its new headquarters in Luxembourg, which offered a central location, the lowest value-added tax rate in Europe, and a relatively low corporate tax rate. Beginning in 2004, Amazon undertook a series of transactions to implement its plan for centralizing business operations in Europe.
Amazon formed Amazon Europe Holding Technologies SCS (“AEHT“) and transferred to AEHT the pre-existing European subsidiaries, their operating assets, and their pre-existing intangible rights (i.e., those developed in Europe). Amazon and AEHT also entered a cost sharing arrangement—the transaction most pertinent to this appeal.4 For the arrangement to be a “qualified cost sharing arrangement” under the transfer pricing regulations outlined above, AEHT needed to pay Amazon for the pre-existing intangibles Amazon contributed to the arrangement. To determine the amount of this “buy-in,” Amazon hired a tax firm, which concluded the pre-existing intangibles were worth $217 million.5
Under the cost sharing arrangement, AEHT also makes cost sharing payments to Amazon for its share of ongoing intangible development costs. Amazon reported cost sharing payments from AEHT of about $116 million for 2005 and about $77 million for 2006.
The IRS rejected Amazon’s calculation of AEHT’s buy-in, concluding that Amazon grossly undervalued the intangibles Amazon made available to AEHT. Applying a discounted-cash-flow valuation methodology, the IRS determined a buy-in payment of $3.6 billion.6 Amazon filed a petition in the tax court challenging the IRS’s valuation. Amazon argued that the cost sharing arrangement covered
three distinct groups of transferred assets—website technology, marketing intangibles, and European-customer information—that must be valued separately using a methodology referred to in the transfer pricing regulations as the comparable uncontrolled transaction method.
After a six-week trial that included testimony and written reports of thirty expert witnessеs, the tax court concluded that the Commissioner abused his discretion in determining that the discounted cash flow methodology supplied the best method for determining an arm’s length buy-in payment and in determining that the required payment is $3.468 billion. Amazon.Com, Inc. v. Comm‘r, 148 T.C. 108, 150 (2017). Relying on the rationale of its prior decision in Veritas Software Corp. v. Commissioner, 133 T.C. 297 (2009), nonacq., 2010-49 I.R.B (2010), action on dec., 2010-05 (Nov. 12, 2010), the tax court reasoned
in the statutory and regulatory definitions” in that they “cannot be bought and sold independently.” Id.7
The tax court adopted the comparable uncontrolled transaction method as the best way to value the buy-in payment because that method allows for the intangibles at issue to be isolated and separately valued. Id. at 164. Although the tax court agreed with Amazon’s general valuation approach, it disagreed with certain aspects of Amazon’s implementation of that method. Id. After making adjustments, the tax court calculated the value of the buy-in payment to be about $779 million. The Commissioner timely appealed, challenging the tax court’s rejection of his expert’s discounted cash flow methodology.8
II.
The tax court had jurisdiction over this action under
“[W]e review the tax court’s conclusions of law de novo and its factual findings for clear error.” MK Hillside
Partners v. Comm‘r, 826 F.3d 1200, 1203 (9th Cir. 2016) (quoting DHL Corp. & Subsidiaries v. Comm‘r, 285 F.3d 1210, 1216 (9th Cir. 2002)).
III.
The dispositive issue in this case is whether, under the 1994/1995 regulations, the “buy-in” required for “pre-existing intangible property” must include compensation for residual-business assets.9 To answеr this legal question, we consider the regulatory definition of an “intangible,” the overall transfer pricing regulatory framework, the rulemaking history of the regulations, and whether the Commissioner’s position is entitled to deference under Auer v. Robbins, 519 U.S. 452 (1997). We agree with the tax court that the definition of an
A.
The Commissioner argues that Amazon’s valuable residual-business assets meet “§ 1.482-4(b)’s definition of intangibles.” “Regulations are interpreted according to the same rules as statutes, applying traditional rules of construction.” Minnick v. Comm‘r, 796 F.3d 1156, 1159 (9th Cir. 2015); see Kisor v. Wilkie, 139 S. Ct. 2400, 2415 (2019) (recognizing that “all the ‘traditional tools’ of construction” are the same for both statutes and regulations
(quoting Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 843 n.9 (1984))). Our “legal toolkit” includes careful examination of “the text, structure, history, and purpose of a regulation.” Kisor, 139 S. Ct. at 2415.
We begin with the language of
The regulation defines an “intangible” as an asset that both “has substantial value independent of the services of any individual” and is one of the items listed in subsection (b)(1)–(6).
Reading the catchall provision together with the introductory language of the definition, residual-business assets are intangibles if they (1) have substantial value independent of the services of any individual and (2) derive their value from intellectual content or other intangible properties. The Commissioner argues both elements are satisfied. First, he argues that Amazon’s growth options “derive their value from intangible, rather than physical, attributes.” He then cites testimony from Amazon’s expert (Dr. Bradford Cornell) that Amazon’s growth options are primarily attributable to its culture of innovation. Second, he argues that the value of Amazon’s growth options is independent of the services of any individual because they
are “part of the culture of Amazon to be able to have creative ideas bubble up in their organization and actually usе them.”
Amazon argues that the Commissioner’s interpretation of the catchall provision is too sweeping for several reasons. Amazon’s central argument is that to qualify as an “intangible” under the regulation, an item must be capable of being bought and sold independently of the business—and residual-business assets are inseparable from the business. The tax court agreed. See Amazon.Com, 148 T.C. at 157 (concluding that, unlike the specific intangibles listed in the regulation, “workforce in place, going concern value, goodwill, and what trial witnesses described as ‘growth options’ and corporate ‘resources’ or ‘opportunities’ . . . cannot be bought and sold independently“).
Amazon offers several arguments in support of its position that assets that are inseparable from the business do not meet the regulatory definition of an “intangible.” Quoting Arcadia v. Ohio Power Co., 498 U.S. 73, 78 (1990), Amazon argues that the Commissioner’s interpretation renders the “enumeration of specific subjects entirely superfluous—in effect adding to that detailed list ‘or anything else.’” Amazon invokes the canon ejusdem generis—of the same
Amazon’s focus on the commonality of the 28 specified items has some force. After all, if all 28 listed items share a common attribute, why would anyone understand a catchall for “similar items” to include a non-listed item that doesn’t share that attribute? Amazon’s commonality argument falters, however, because the catchall provision did not
simply say “[o]ther similar items.” Instead, the catchall elaborated by explaining how an item is determined to be “similar” to the other items: “if it derives its value not from its physical attributes but from its intellectual content or other intangible properties.”
Amazon also argues that the regulation’s requirement that an intangible have “substantial value independent of the services of any individual,”
Analysis of the regulatory text alone does not definitively resolve the question here. The definition of an
“intangible” is susceptible to, but does not compel, an interpretation that embraces residual-business assets. The problem is that residual-business assets, such as “growth options” and a “culture of innovation,” are amorphous, and it’s not self-evident whether such assets have “substantial value independent of the services of any individual.” See
But we are required to look at the regulatory scheme “as a whole,” viewing the regulatory “definition in the context of the entire [transfer pricing] regulations.” Alaska Trojan P‘ship v. Gutierrez, 425 F.3d 620, 628 (9th Cir. 2005). The Commissioner argues that other regulations governing transfer pricing support his view that the regulatory definition of an “intangible” embraces residual-business
assets. He cites two sections in the regulations,
Section 1.482-7A specifies the requirements of a qualified cost sharing arrangement and the methods for determining the taxable income resulting from such an arrangement. The Commissioner cites the subsection that imposes the “buy-in” requirement where “[a] controlled participant . . . makes intangible property available to a qualified cost sharing arrangement.”
The Commissioner’s argument based on
The Commissioner also finds support for his position in the regulations’ preamble stating that “[t]he purpose of section 482 is to ensure that taxpayers clearly reflect income attributable to controlled transactions and to prevent the avoidance of taxes with respect to such transactions.”
In Xilinx, we considered whether the parties to a cost sharing arrangement “must include the value of certain stock option compensation one participant gives to its employees in the pool of costs to be shared.” Id. at 1192. We found two provisions of the regulations in conflict. We first cited § 1.482-1(b)(1)‘s statement that “the standard to be applied in every case is that of a taxpayer dealing at arm‘s length with an uncontrolled taxpayer.” Id. at 1195 (quoting
at 1196-97. The primary opinion reasoned that “[p]urpose is paramount.” Id. at 1196.12
Relying on the logic of the primary opinion in Xilinx, the Commissioner asserts that “it is undisputed that a company entering into the same transaction under the same circumstances with an unrelated party would have required compensation.” To evaluate this claim, it‘s important to be clear about what exactly is meant by the phrase “the same transaction under the same circumstances.” The Commissioner relies on deposition testimony from one of Amazon‘s experts that parties dealing at arm‘s length would pay for growth options. But the expert explained at trial the difference between an investor or purchaser of the entire business (who would pay for the full value of the business) and a partner (who would not). The question becomes whether a cost sharing arrangement is akin to the sale of a business or like a partnership in certain assets or aspects of the business. The Commissioner assumes, but does not explain why, the transfer of intangible assets under Amazon‘s cost sharing arrangement with AEHT should be treated the same as the sale of the business.
The Commissioner‘s reliance on Xilinx thus suffers the same defect as his “made available” argument based on
If the cost shаring regulations as a whole tip the scale either direction, they tend to favor Amazon on the issue presented here. The regulations describe a cost sharing arrangement as an agreement “to share the costs of development of one or more intangibles.”
The overall regulatory scheme doesn‘t definitively resolve the issue, but it favors Amazon more than the Commissioner.
C.
We next turn to the drafting history of the regulatory definition. Both parties claim support for their respective positions in the historical development of the regulations.
Treasury first defined intangible property for purposes of section 482 in regulations adopted in 1968:
[I]ntangible property shall consist of the items described in subdivision (ii) of this subparagraph, provided that such items have substantial value independent of the services of individual persons.
(ii) The items referred to in subdivision (i) of this subparagraph are as follows:
- Patents, inventions, formulas, processes, designs, patterns, and other similar items;
- Copyrights, literary, musical, or artistic compositions, and other similar items;
- Trademarks, trade names, brand names, and other similar items;
- Franchises, licenses, contracts, and other similar items;
- Methods, programs, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, technical data, and othеr similar items.
33 Fed. Reg. 5848, 5854 (Apr. 16, 1968).
Fourteen years later, Congress enacted the Tax Equity and Fiscal Responsibility Act of 1982, adopting a definition of intangible property in section 936 of the Internal Revenue Code that was nearly identical to the one in the regulations implementing section 482.13 The Commissioner plucks a phrase from a Senate Report for the 1982 Act suggesting that the statute “defines intangible assets broadly.” With more context, the quoted sentence from the Senate Report states that “[t]he bill defines intangible assets broadly to include” the 28 specifically-listed items “and other items similar to any of those listed, so long as the item has substantial value independent of the services of individual persons.” S. Rep. 97-494, at 161 (1982), as reprinted in 1982 U.S.C.C.A.N. 781, 924 (emphasis added).14
this language, the Committee didn‘t contemplate intangibles that are not independently transferrable.
The Tax Reform Act of 1986 amended section 482 to incorporate the “intangible property” definition from section 936: “In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)), the income with respeсt to such transfer or license shall be commensurate with the income attributable to the intangible.” Pub. L. 99-514, § 1231, 100 Stat. 2085 (Oct. 22, 1986).
When it amended section 482, Congress requested that the IRS conduct “a comprehensive
The White Paper discussed, among other things, cost sharing arrangements. According to the White Paper, the purpose of the buy-in requirement is for “a party to a cost sharing arrangement that has contributed funds or incurred risks for development of intangibles at an earlier stage” to be “compensated by the other participants.” Id. at 497. “[I]f there are intangibles that are not fully developed that relate to the research to be conducted under the cost sharing arrangement, it is necessary to value them in ordеr to determine an appropriate buy-in payment.” Id.
The White Paper proposed “three basic types of intangibles” that would be subject to the buy-in requirement:
- “preexisting intangibles at various stages of development that will become subject to the arrangement“;
- “basic research not associated with any product“; and
- “a going concern value associated with a participant‘s research facilities and capabilities that will be utilized.”
Id. Although the White Paper proposed including going concern value of a research facility in the buy-in, after receiving opposition in public comments, Treasury proposed new regulations that essentially retained the definition of “intangible” from before without referencing going concern value or any other residual-business asset. See 57 Fed. Reg. 3571, 3579 (Jan. 30, 1992).
In 1993, Treasury issued revised temporary and proposed regulations that defined an “intangible” as “any commercially transferable interest” in the intangibles listed in § 936(h)(3)(B) that had “substantial value independent of the services of any individual.” 58 Fed. Reg. 5263, 5287 (Jan. 21, 1993). Treasury also requested comment on “whether the definition of intangible property . . . should be expanded to include items not normally considered to be items of intellectual property, such as work force in place, goodwill or going concern value.” 58 Fed. Reg. 5310, 5312 (Jan. 21, 1993). Amazon cites opposition comments submitted in response to Treasury‘s request for comment.
In 1994, Treasury issued final regulations (the ones applicable here), which reflected a minor reworking of the definition. 59 Fed. Reg. 34971, 35016 (Jul. 8, 1994). Treasury explained that the revised definition omitted the “commercially transferrable” language that appeared in the temporary regulations “because it was superfluous: if the property was not commercially transferrable, then it could not have been transferred in a controlled transaction.” Id. at 34983. Treasury also explained that the revision “clarified” that the phrase “other similar items” in the definition “refer[s] to items that derive their value from intellectual content or other intangible properties rather than physical attributes.” Id. In 1995, Treasury issued final regulations governing cost sharing arrangements, including
The drafting history of the transfer pricing regulations does not support the Commissioner‘s argument that the definition of an “intangible” covered residual-business assets. The only references in the drafting history to any residual-business assets suggest that such items were excluded from the definition of intangible assets.
Two key statements by Treasury in the drafting history render the Commissioner‘s current position untenable. First, in 1993, Treasury confirmed that the then-existing definition of “intangible” did not include residual-business assets when it asked for comments on whether the definition of intangibles “should be expanded to include items not normally considered to be items of intellectual property, such as work force in place, goodwill or going concern value.” 58 Fed. Reg. at 5312 (emрhasis added). Second, a year later after opting against such an expansion, and instead retaining the same essential definition from before (including the same list of 28 items), Treasury explained that the final (1994) rule merely “clarified” when an item would be deemed similar to the 28 items listed in the definition. 59 Fed. Reg. at 34983.
The Commissioner is thus forced to argue that what Treasury explicitly confirmed would not be considered an “intangible” without a substantive “expan[sion]” of the definition was implicitly added to the definition through a non-specific “clarifi[cation].” The Commissioner‘s argument stretches “clarification” beyond its commonly understood meaning of merely clearing up what was previously ambiguous or otherwise restating a standard consistent with what was previously intended. Cf. Motorola, Inc. v. Fed. Exp. Corp., 308 F.3d 995, 1007 (9th Cir. 2002) (distinguishing between a “clarifying amendment” and “one that work[s] a substantive change” (emphasis omitted)).15
Another statement from the drafting history of
The Commissioner now contends that the 1994 definition was intended to embrace residual-business assets even though such assets “cannot be transferred independently.” Yet the Commissioner fails to identify any contemporaneous statement by the agency that would “display awareness” that it was changing its position on whether residual-business assets are included within the definition of intangibles. See FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009) (“[T]he requirement that an agency provide reasoned explanation
The Commissioner argues his position is supported by a different regulatory scheme governing penalties for taxpayers who substantially misstate the value of property on their tax returns. See
The Commissioner‘s attempt to bootstrap § 1.6662-5‘s reference to “goodwill” ignores that the proposed regulation concerning substantial valuation misstatements was issued on the same day Treasury separately confirmed that the definition of “intangible” for purposes of the regulations implementing section 482 did not include goodwill or other residual-business assets. 58 Fed. Reg. at 5312. Considering the context, Treasury‘s use of “goodwill” in § 1.6662-5 but not in
Amazon points to other Treasury regulations that define certain covered property by incorporating the definition of intangible property under section 936(h)(3)(B) and then adding goodwill and going concern value.
The drafting history of § 1.482-4(b) strongly supports Amazon‘s position that Treasury limited the definition of “intangible” to independently transferrable assets.16
D.
The Commissioner next argues that the tax court should have deferred to
The Supreme Court “has cabined Auer‘s scope in varied and critical ways.” Kisor, 139 S. Ct. at 2418. “First and foremost, a court should not afford Auer deference unless the regulation is genuinely ambiguous.” Id. at 2415. Genuine ambiguity is not determined by examination of the regulatory text alone. Instead, “before concluding that a rule is genuinely ambiguous, a court must exhaust all the ‘traditional tools’ of construction,” “‘carefully consider[ing]’ the text, structure, history, and purpose of a regulation, in all the ways it would if it had no agency to fall back on.” Id. (first quoting Chevron, 467 U.S. at 843 n.9; then quoting Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 707 (1991) (Scalia, J., dissenting))).
The text of the regulatory definition of “intangible,” the definition‘s place within the transfer pricing regulations generally, and the rulemaking history leave little room for the Commissioner‘s proffered meaning. But even if there were genuine ambiguity, there is a separate reason Auer deference is not warranted here.
“[N]ot every reasonable agency reading of a genuinely ambiguous rule should receive Auer deference.” Kisor, 139 S. Ct. at 2416. Instead, “a court must make an independent inquiry into whether the character and context of the agency interpretation entitles it to controlling weight.” Id. (citing Christopher v. SmithKline Beecham Corp., 567 U.S. 142, 155 (2012)). For example, courts will not defer to an agency‘s interpretation when doing so “would seriously undermine the principle that agencies should provide regulated parties fair warning of the conduct [a regulation] prohibits or requires.” Barboza v. Cal. Ass‘n of Prof‘l Firefighters, 799 F.3d 1257, 1267 (9th Cir. 2015) (alteration in original) (quoting Christopher, 567 U.S. at 156). This exception accounts for the “risk that agencies will promulgate vague and open-ended regulations that they can later interpret as they see fit, thereby ‘frustrat[ing] the notice and predictability purposes of rulemaking.‘” Christopher, 567 U.S. at 158 (quoting Talk Am., Inc. v. Michigan Bell Tel. Co., 564 U.S. 50, 68 (2011) (alteration in original) (Scalia, J., concurring)).
Christopher and Barboza thus teach that the timing of an agency‘s first announcement of its interpretation may be dispositive on whether the agency‘s view will be given Auer deference. Here, the Commissioner does not identify a specific document (e.g., policy manual or court brief) definitivеly expressing the agency‘s view of its regulations. It thus appears that the Commissioner‘s court briefs in this case present Treasury‘s “first announce[ment of] its view,” see Christopher, 567 U.S. at 153, that the definition of intangible in § 1.482-4(b) embraces residual-business assets. The exception to Auer deference from Christopher and Barboza therefore applies. “Where an agency announces its interpretation for the first time in an enforcement proceeding, and has not previously taken any action to enforce that interpretation, ‘the potential for unfair surprise is acute.‘” Barboza, 799 F.3d at 1267 (quoting Christopher, 567 U.S. at 158). Even if first arising before the current litigation, a new interpretation is owed no deference if it would “create[] ‘unfair surprise’ to regulated parties.” Kisor, 139 S. Ct. at 2417-18 (quoting Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 170 (2007)). No statement from Treasury in the drafting history of the 1994/1995 regulations expresses the position the Commissioner advances now. Indeed, as discussed above, Treasury‘s contemporaneous explanations of the regulations are to the contrary. Amazon and other taxpayers were thus not given fair warning of the Commissioner‘s current interpretation of the rеgulatory definition of an “intangible.” That interpretation is not entitled to deference.
IV.
The Commissioner‘s calculation of AEHT‘s buy-in under the cost sharing arrangement included residual-business assets as part of Amazon‘s pre-existing intangibles. The language of the (now-superseded) regulatory definition of an “intangible” is ambiguous and could be construed as including residual-business assets. But the drafting history of the regulations and other indicators of Treasury‘s contemporaneous intent strongly favor Amazon‘s proffered meaning—that intangibles were limited to independently transferrable assets. Treasury appears to have changed its position on the meaning of the regulation after Amazon and AEHT entered into their cost sharing arrangement. We share the sentiment reflected in the concurring opinion in Xilinx:
Indeed, I am troubled by the complex, theoretical nature of many of the Commissioner‘s arguments trying to reconcile the two regulations. Not only does this make it difficult for the court to navigate the regulatory framework, it shows that taxрayers have not been given clear, fair notice of how the regulations will affect them.
Xilinx, 598 F.3d at 1198 (Fisher, J., concurring). We therefore agree with the tax court that the former regulatory definition of an “intangible” does not include residual-business assets.
AFFIRMED.