                  FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

XILINX, INC., AND CONSOLIDATED         
SUBSIDIARIES,
                                            No. 06-74246
                Petitioner-Appellee,
                 v.                         Tax Ct. No.
                                               702-03
COMMISSIONER OF INTERNAL
REVENUE,
              Respondent-Appellant.
                                       

XILINX, INC., AND CONSOLIDATED         
SUBSIDIARIES,
                                            No. 06-74269
                Petitioner-Appellee,
               v.                           Tax Ct. No.
                                               4142-01
COMMISSIONER OF INTERNAL
                                              OPINION
REVENUE,
           Respondent-Appellant.
                                       
                  Appeal from a Decision
              of the United States Tax Court
       Maurice B. Foley, Tax Court Judge, Presiding

                 Argued and Submitted
        March 12, 2008—San Francisco, California

                    Filed May 27, 2009

    Before: Stephen Reinhardt, John T. Noonan, Jr. and
            Raymond C. Fisher, Circuit Judges.

                 Opinion by Judge Fisher;
                 Dissent by Judge Noonan

                            6151
                      XILINX, INC. v. CIR                 6155




                         COUNSEL

Ronald B. Schrotenboer, Kenneth B. Clark (argued) and Tyler
A. Baker, Fenwick & West LLP, Mountain View, California,
for the petitioner-appellee.

Gilbert S. Rothenberg, Richard Farber and Arthur T. Catterall
(argued), Tax Division, Department of Justice, Washington,
D.C., for the respondent-appellant.

Alice E. Loughran, Steptoe & Johnson LLP, Washington,
D.C., for amici curiae Cisco Systems, Inc., and Altera Corpo-
ration.

A. Duane Webber, Baker & McKenzie LLP, Washington,
D.C., for amici curiae Software Finance and Tax Executives
Council and AeA.


                         OPINION

FISHER, Circuit Judge:

   On this appeal from the tax court, we must decide whether,
under the tax regulations in effect during tax years 1997, 1998
and 1999, related companies engaged in a joint venture to
develop intangible property must include the value of certain
stock option compensation one participant gives to its
employees in the pool of costs to be shared under a cost shar-
ing agreement, even when companies operating at arm’s
length would not do so. The tax court found related compa-
nies are not required to share such costs and ruled that the
6156                         XILINX, INC. v. CIR
Commissioner of Internal Revenue’s attempt to allocate such
costs was arbitrary and capricious. We reverse and hold: (1)
related companies in a cost sharing agreement to develop
intangibles must share all costs related to the joint venture,
even if unrelated companies would not do so; (2) stock
options for which companies claim tax deductions are a cost
under former 26 C.F.R. § 1.482-7(d)(1); and (3) such costs are
“related to” the intangible product development, as part of the
compensation package offered to employees involved in
activities under the joint venture.1

                        I.     BACKGROUND

   Xilinx, Inc. (“Xilinx”) researches, develops, manufactures,
markets and sells integrated circuit devices and related devel-
opment software systems. Xilinx wanted to expand its posi-
tion in the European market and established Xilinx Ireland
(“XI”) in 1994 as an unlimited liability company under the
laws of Ireland. XI sold programmable logic devices and con-
ducted research and development (“R&D”). Two wholly
owned Irish subsidiaries of Xilinx owned XI during the tax
years of 1997, 1998 and 1999, the only years at issue in this
appeal.

   In 1995, Xilinx and XI entered into a Cost and Risk Shar-
ing Agreement (“the Agreement”), which provided that all
right, title and interest in new technology developed by either
Xilinx or XI would be jointly owned. Under the Agreement,
each party was required to pay a percentage of the total R&D
costs in proportion to the anticipated benefits to each from the
new technology that was expected to be created. Specifically,
the Agreement required the parties to share: (1) direct costs,
defined as costs directly related to the R&D of new technol-
  1
    For the purposes of this opinion, all citations and references to regula-
tions are to the regulations in effect during tax years 1997, 1998 and 1999.
The relevant regulations have been amended repeatedly since then, most
recently in 2009, see, e.g., T.D. 9441, 2009-7 I.R.B. 460.
                         XILINX, INC. v. CIR                     6157
ogy, including, but not limited to, salaries, bonuses and other
payroll costs and benefits; (2) indirect costs, defined as costs
incurred by departments not involved in R&D that generally
benefit R&D, including, but not limited to, administrative,
legal, accounting and insurance costs; and (3) costs incurred
to acquire products or intellectual property rights necessary to
conduct R&D. The Agreement did not specifically address
whether employee stock options (ESOs) were a cost to be
shared.

   Xilinx offered ESOs to its employees under two plans.
Under one plan, employees were granted options as part of
the employee hiring and retention program. The options were
of two varieties: incentive stock options (ISOs) and nonstatu-
tory stock options (NSOs). Employees could exercise these
options two ways: (1) by purchasing the stock at the market
price on the day the option was issued (“exercise price”)
regardless of its then-current market price or (2) by simulta-
neously exercising the option at the exercise price and selling
it at its then-current price, pocketing the difference. Under the
other plan, employees could acquire employee stock purchase
plan shares (ESPPs) by contributing to an account through
payroll deductions and purchasing stock at 85 percent of
either its exercise price or its market price on the purchase
date. Employees must always pay taxes on NSOs, see 26
U.S.C. § 83, but have to pay taxes on ISOs and ESPPs only
if they sell acquired stock shares before a specified waiting
period has expired (“a disqualifying disposition”), see 26
U.S.C. § 421(b). In determining the R&D costs to be shared
under the Agreement for tax years 1997, 1998 and 1999,
Xilinx did not include any amount related to ESOs.

   In tax years 1997, 1998 and 1999, Xilinx deducted as busi-
ness expenses under 26 U.S.C. §§ 83 and 162 approximately
$41,000,000, $40,000,000 and $96,000,000, respectively,
based on its employees’ exercises of NSOs or disqualifying
dispositions of ISOs and ESPPs.2 It also claimed an R&D
  2
   Under 26 U.S.C. § 162(a)(1), employers may deduct from their taxable
income “all the ordinary and necessary expenses paid or incurred during
6158                      XILINX, INC. v. CIR
credit under 26 U.S.C. § 41 for wages related to R&D activ-
ity, of which approximately $34,000,000, $23,000,000 and
$27,000,000 in the respective tax years were attributable to
exercised NSOs or disqualifying dispositions of ISOs and
ESPPs.3 Furthermore, in 1996 Xilinx and XI entered into two
agreements that allowed XI employees to acquire options for
Xilinx stock. Both agreements provided XI would pay Xilinx
for the “cost” of the XI employees’ exercise of the stock
options, which was to equal the stock’s market price on the
exercise date minus the exercise price. In the 1997, 1998 and
1999 tax years, XI paid Xilinx $402,978, $243,094 and
$808,059, respectively, under these agreements.

   The Commissioner of Internal Revenue (“Commissioner”)
issued notices of deficiency against Xilinx for tax years 1997,
1998 and 1999, contending ESOs issued to its employees
involved in or supporting R&D activities were costs that
should have been shared between Xilinx and XI under the
Agreement. Specifically, the Commissioner concluded the
amount Xilinx deducted under 26 U.S.C. § 83(h) for its
employees’ exercises of NSOs or disqualifying dispositions of
ISOs and ESPPs should have been shared. By sharing those
costs with XI, Xilinx’s deduction would be reduced, thereby
increasing its taxable income. The Commissioner’s determi-
nation resulted in substantial tax deficiencies and accuracy-
related penalties under 26 U.S.C. § 6662(a).

  Xilinx timely filed suit in the tax court. The tax court
denied cross motions for summary judgment. After a bench

the taxable year in carrying on any trade or business, including a reason-
able allowance for salaries or other compensation for personal services
actually rendered.” Under 26 U.S.C. § 83(h), employers may deduct under
§ 162 the value of any property transferred to an employee in connection
with the performance of employment.
   3
     Under 26 U.S.C. § 41(b)(2)(A), companies can claim a tax credit for
“wages paid or incurred to an employee for qualified [research] services
performed by such employee.”
                      XILINX, INC. v. CIR                  6159
trial, the tax court found that two unrelated parties in a cost
sharing agreement would not share any costs related to ESOs.
After assuming ESOs were costs for purposes of 26 C.F.R.
§ 1.482-7(d)(1), the tax court then found 26 C.F.R. § 1.482-
1(b)(1) — which requires cost sharing agreements between
related parties to reflect how two unrelated parties operating
at arm’s length would behave — dispositive and concluded
the Commissioner’s allocation was arbitrary and capricious
because it included the ESOs in the pool of costs to be shared
under the Agreement, even though two unrelated companies
dealing with each other at arm’s length would not share those
costs.

   The Commissioner timely appealed. On appeal, the parties
focused primarily on whether the requirement in 26 C.F.R.
§ 1.482-7(d)(1) that “all costs” be shared between related par-
ties in a cost sharing agreement or the requirement in 26
C.F.R. § 1.482-1(b)(1) that all transactions between related
parties reflect what two parties operating at arm’s length
would do controlled. After oral argument, we requested sup-
plemental briefing on whether ESOs were “costs” and
whether they were “related to” the intangible product devel-
opment for purposes of 26 C.F.R. § 1.482-7(d)(1), and
whether a literal application of 26 C.F.R. § 1.482-7(d)(1)
would conflict with a tax treaty between the United States and
Ireland that was in effect during the 1998 and 1999 tax years.

              II.   STANDARD OF REVIEW

   “Decisions of the tax court are reviewed on the same basis
as decisions from civil bench trials in the district court.” DHL
Corp. v. Comm’r, 285 F.3d 1210, 1216 (9th Cir. 2002).
“Thus, we review the tax court’s conclusions of law de novo
and its factual findings for clear error.” Id.

                    III.    DISCUSSION

   The Commissioner does not dispute the tax court’s factual
finding that unrelated parties would not share ESOs as a cost.
6160                   XILINX, INC. v. CIR
Instead, the Commissioner maintains ESOs are a cost that
must be shared under § 1.482-7(d)(1), even if unrelated par-
ties would not share them.

A.     26 C.F.R. §§ 1.482-1(b)(1) and 1.482-7(d)(1) Are
       Irreconcilable, so § 1.482-7(d)(1), the More Specific of
       the Two, Controls.

   Congress has authorized the Secretary of the Treasury to
allocate income and deductions among related business enti-
ties to prevent tax avoidance.

     In any case of two or more organizations, trades, or
     businesses (whether or not incorporated, whether or
     not organized in the United States, and whether or
     not affiliated) owned or controlled directly or indi-
     rectly by the same interests, the Secretary may dis-
     tribute, apportion, or allocate gross income,
     deductions, credits, or allowances between or among
     such organizations, trades, or businesses, if he deter-
     mines that such distribution, apportionment, or allo-
     cation is necessary in order to prevent evasion of
     taxes or clearly to reflect the income of any of such
     organizations, trades, or businesses. In the case of
     any transfer (or license) of intangible property
     (within the meaning of section 936(h)(3)(B)), the
     income with respect to such transfer or license shall
     be commensurate with the income attributable to the
     intangible.

26 U.S.C. § 482. The Secretary in turn promulgated regula-
tions authorizing the Commissioner to allocate income and
deductions among related entities. The introduction to these
regulations explains:

     The purpose of section 482 is to ensure that taxpay-
     ers clearly reflect income attributable to controlled
     transactions and to prevent the avoidance of taxes
                          XILINX, INC. v. CIR                        6161
      with respect to such transactions. Section 482 places
      a controlled taxpayer on a tax parity with an uncon-
      trolled taxpayer by determining the true taxable
      income of the controlled taxpayer. This section sets
      forth general principles and guidelines to be fol-
      lowed under section 482.

26 C.F.R. § 1.482-1(a)(1).4 The next subsection states that the
standard to be employed “in every case” to ensure taxpayers
accurately reflect income from controlled transactions and do
not avoid taxes through such transactions is an arm’s length
standard:

      In determining the true taxable income of a con-
      trolled taxpayer, the standard to be applied in every
      case is that of a taxpayer dealing at arm’s length with
      an uncontrolled taxpayer. A controlled transaction
      meets the arm’s length standard if the results of the
      transaction are consistent with the results that would
      have been realized if uncontrolled taxpayers had
      engaged in the same transaction under the same cir-
      cumstances (arm’s length result). However, because
      identical transactions can rarely be located, whether
      a transaction produces an arm’s length result gener-
      ally will be determined by reference to the results of
      comparable transactions under comparable circum-
      stances.

26 C.F.R. § 1.482-1(b)(1).

   Another section, however, specifically governing cost shar-
ing agreements between controlled parties to develop intangi-
ble property authorizes the Internal Revenue Service “to make
  4
   Controlled taxpayer is defined as “any one of two or more taxpayers
owned or controlled directly or indirectly by the same interests, and
includes the taxpayer that owns or controls the other taxpayers.” 26 C.F.R.
§ 1.482-1(i)(5).
6162                  XILINX, INC. v. CIR
each controlled participant’s share of the costs (as determined
under [§ 1.482-7(d)]) of intangible development under the
qualified cost sharing arrangement equal to its share of rea-
sonably anticipated benefits attributable to such development
. . . .” 26 C.F.R. § 1.482-7(a)(2). Controlled participants must
include “all” costs in the pool of costs to be shared propor-
tionally (the “all costs requirement”):

    For purposes of this section, a controlled partici-
    pant’s costs of developing intangibles for a taxable
    year mean all of the costs incurred by that participant
    related to the intangible development area, plus all of
    the cost sharing payments it makes to other con-
    trolled and uncontrolled participants, minus all of the
    cost sharing payments it receives from other con-
    trolled and uncontrolled participants. Costs incurred
    related to the intangible development area consist of:
    operating expenses, as defined in § 1.482-5(d)(3),
    other than depreciation or amortization expense, plus
    (to the extent not included in such operating
    expenses, as defined in § 1.482-5(d)(3)) the charge
    for the use of any tangible property made available
    to the qualified cost sharing arrangement.

26 C.F.R. § 1.482-7(d)(1). “Operating expenses” are defined
as “includ[ing] all expenses not included in cost of goods sold
except for interest expense, foreign income taxes [and]
domestic income taxes, and any other expenses not related to
the operation of the relevant business activity.” 26 C.F.R.
§ 1.482-5(d)(3). How these various provisions interact is the
crux of the parties’ dispute.

   [1] Section 1.482-1(b)(1) specifies that the true taxable
income of controlled parties is calculated based on how par-
ties operating at arm’s length would behave. The language is
unequivocal: this arm’s length standard is to be applied “in
every case.” In the context of cost sharing agreements, this
would require controlled parties to share only those costs
                       XILINX, INC. v. CIR                  6163
uncontrolled parties would share. By implication, costs that
uncontrolled parties would not share need not be shared. In
contrast, § 1.482-7(d)(1) specifies that controlled parties in a
cost sharing agreement must share all “costs . . . related to the
intangible development area,” and that phrase is explicitly
defined to include virtually all expenses not included in the
cost of goods. The plain language does not permit any excep-
tions, even for costs that unrelated parties would not share.
Each provision’s plain language mandates a different result.
Accordingly, we conclude the two provisions establish dis-
tinct and irreconcilable standards for determining which costs
must be shared between controlled parties in cost sharing
agreements specifically related to intangible product develop-
ment.

   The structure of the regulatory regime confirms this conclu-
sion. Section 1.482-1(b)(2) explains that “[s]ections 1.482-2
through 1.482-6 provide specific methods to be used to evalu-
ate whether transactions between or among members of the
controlled group satisfy the arm’s length standard, and if they
do not, to determine the arm’s length result.” Section 1.482-
1(c)(1)’s “best method rule” explains how the Commissioner
and taxpayers should determine which of these methods pro-
vides the most reliable measure of the arm’s length result:
“the two primary factors to take into account are the degree
of comparability between the controlled transaction (or tax-
payer) and any uncontrolled comparables, and the quality of
data and assumptions used in the analysis.” Notably, § 1.482-
7 is not included among the methods specified in § 1.482-
1(b)(2) for determining the arm’s length result, and the com-
prehensive definition of “costs . . . related to the intangible
development area” does not implicate the factors identified in
§ 1.482-1(c)(1). Thus, §§ 1.482-1 through 1.482-6 establish a
sophisticated methodology for comparing controlled transac-
tions to uncontrolled transactions that is generally applicable
when determining what items must be allocated among
related parties. The regulatory regime then addresses a partic-
ular type of controlled transaction — cost sharing agreements
6164                   XILINX, INC. v. CIR
related to intangible product development — and establishes
a comprehensive definition of what costs must be shared that
does not turn on similar uncontrolled transactions. Section
1.482-7 thus appears to be a self-contained provision creating
an exception to the general methodology established in the
earlier provisions. As long as taxpayers comply with the
requirement of sharing all intangible development costs pro-
portionally to the expected benefit, see 26 C.F.R. § 1.482-
7(b)(2) (requiring “each participant’s share of intangible
development costs . . . reflect that participant’s share of antici-
pated benefits”), they are assured the district director will not
“make allocations” and revise the claimed tax liability attrib-
utable to the cost sharing agreement, 26 C.F.R. § 1.482-
7(a)(2). A bright line rule governs what costs must be shared,
rather than comparing the cost sharing agreement to similar
agreements between unrelated parties.

   In fact, the regulatory history suggests the Secretary viewed
cost sharing agreements related to intangible product develop-
ment as a unique type of controlled transaction meriting a dis-
tinct method of analysis. The 1986 amendments to 26 U.S.C.
§ 482 reflected Congress’ particular concern over transfers
and licenses of intangible property, but the conference com-
mittee report explaining those amendments recognized that
“many important and difficult issues under section 482 [we]re
left unresolved by this legislation” and suggested “a compre-
hensive study of intercompany pricing rules . . . should be
conducted” and “careful consideration should be given to
whether the existing regulations could be modified in any
respect.” H.R. Conf. Rep. No. 99-841, reprinted in 1986
U.S.C.C.A.N. 4075, 4726. In response, the Internal Revenue
Service and Treasury Department conducted a detailed study
of controlled party transactions, publishing its results in 1988.
See I.R.S. Notice 88-123, 1988-2 C.B. 458. The study “pri-
marily considered transfers of intangibles, but it also
addressed the application of section 482 to other transac-
tions,” including cost sharing agreements. Intercompany
Transfer Pricing and Cost Sharing Regulations Under Section
                           XILINX, INC. v. CIR                         6165
482, 57 Fed. Reg. 3571, 3572 (proposed Jan. 30, 1992). The
Secretary then promulgated the precursors of §§ 1.482-1
through 1.482-6 and § 1.482-7 in 1992 as a single proposed
regulation, id., but did not finalize the comprehensive all costs
requirement in § 1.482-7(d)(1) until December 1995, see T.D.
8632, 1996-4 I.R.B. 6, six months after the rest of the Section
482 regulations were finalized, see T.D. 8552, 1994-31 I.R.B.
4. The Secretary’s separate regulatory action addressing cost
sharing agreements related to intangible product development
lends further support to our conclusion that the all costs
requirement is different from the arm’s length standard gener-
ally applicable to other controlled transactions.5

   [2] Because the all costs requirement is irreconcilable with
the arm’s length standard, we hold § 1.482-7(d)(1) controls,
in light of the “elementary tenet of statutory construction that
where there is no clear indication otherwise, a specific statute
will not be controlled or nullified by a general one,” Santiago
Salgado v. Garcia, 384 F.3d 769, 774 (9th Cir. 2004) (cita-
tions and internal quotation marks omitted); see also Long
  5
    The parties and amici spend considerable time parsing the legislative
history of 26 U.S.C. § 482. The statute, however, simply delegates author-
ity to the Secretary to adjust taxable income of controlled parties to pre-
vent tax evasion. It prescribes no particular methodology for doing so,
except in the case of transfers and licenses of intangible property (types
of transactions not at issue in this case), and does not mention cost sharing
agreements. The 1986 conference committee report acknowledged the
1986 amendments did not resolve every problem inherent in controlled
transactions and suggested the Secretary study the issue further and refine
the regulations as needed, which the Secretary did. Congress plainly did
not resolve how cost sharing agreements related to intangible development
should be evaluated, and we decline the parties’ invitation to interpret the
regulations by attempting to divine a hypothetical intent from a statute that
is silent on the issue we face. See Pac. Nw. Generating Coop v. Dep’t of
Labor, 550 F.3d 846, 860-61 (9th Cir. 2008) (“When relevant statutes are
silent on the salient question, we assume that Congress has implicitly left
a void for the agency to fill, and, therefore, we defer to the agency’s con-
struction of its governing statutes, unless that construction is unreason-
able.” (internal quotation marks and alteration omitted)).
6166                       XILINX, INC. v. CIR
Island Care at Home, Ltd. v. Coke, 127 S.Ct. 2339, 2348
(2007) (applying this canon of construction to regulations).
Section 1.482-7 applies to cost sharing agreements related to
intangible development, which is the particular controlled
transaction at issue here, and specifies that “all costs . . .
related to the intangible development area” must be included
in the pool of costs to be shared. The general requirement in
§ 1.482-1(b)(1) that the arm’s length standard should apply in
every case involving a controlled transaction does not over-
ride such a specific provision.6

   We are not persuaded by either party’s attempts to harmo-
nize the two provisions. Xilinx argues that § 1.482-1(b)(1)’s
“in every case” language requires us to construe § 1.482-
7(d)(1)’s all costs requirement to mean that parties must share
only those costs that parties operating at arm’s length would
share, suggesting § 1.482-7(d)(1) did not explicitly incorpo-
  6
    The dissent of our learned colleague, for whom we have the greatest
respect, contends we should instead apply the canon of construction that
doubts about the meaning of tax provisions should be resolved against the
government. Dissent at 6181 (citing United Dominion Indus., Inc. v.
United States, 532 U.S. 822, 839 (Thomas, J., concurring)). This canon,
however, applies where language in a revenue provision is ambiguous.
See, e.g., Bowers v. New York & Albany Lighterage Co., 273 U.S. 346,
348-49 (1927) (interpreting meaning of “proceeding” in tax provision
establishing statute of limitations for collection of back taxes); United
States v. Merriam, 263 U.S. 179, 184 (1923) (interpreting meaning of “be-
quest” to determine if gift was taxable income). We have not found any
case resorting to this canon to resolve a conflict between two unambigu-
ous tax provisions.
   In any event, it is not the only canon of construction relevant to revenue
provisions. There is a countervailing tradition under which tax provisions
that merely create “an exception from a general revenue duty for the bene-
fit of some taxpayers” are construed in favor of the government. United
Dominion, 532 U.S. at 839 n.1 (Stevens, J., dissenting) (citing cases). In
this case, we are determining how related parties in a cost sharing agree-
ment must apportion business costs, which offset taxable income as a
deduction under 26 U.S.C. § 162(a). Thus, even if these competing canons
apply when two unambiguous provisions conflict, it would be more appro-
priate to resolve the conflict in favor of the government.
                           XILINX, INC. v. CIR                         6167
rate an arm’s length standard because that requirement is
implicit, and controlling, in light of § 1.482-1(b)(1). Although
this explanation at first seems plausible, we are not ultimately
persuaded. To read such a qualification into the precise and
comprehensive language of §§ 1.482-5(d)(3) and 1.482-
7(d)(1) would ignore the plain meaning and context of the
cost sharing provisions, specifically “all” costs “related to”
intangible development. “All” means “the entire number,
amount or quantity” or “every,” American Heritage College
Dictionary 35 (3d ed. 2000), and “related” means “[b]eing
connected [or] associated,” id. at 1152. These terms, taken
together with the regulation’s sub-definitions, describe a fixed
set of costs that must be shared in their totality and that will
not vary based on the type of intangible property being devel-
oped. Transporting an arm’s length standard into § 1.482-
7(d)(1) would transform this apparently all encompassing and
self-contained description of the costs to be shared into a
methodology under which the costs to be shared would not be
fixed by these defined terms but would rather ultimately be
defined by the conduct of unrelated parties. Significantly,
achieving an arm’s length result is not itself the regulatory
regime’s goal; rather, its purpose is to prevent tax evasion by
ensuring taxpayers accurately reflect taxable income attribut-
able to controlled transactions.7 See 26 C.F.R. § 1.482-1(a)(1).
During the regulatory process, the Secretary concluded cost
sharing agreements related to intangible development merited
separate attention. The plain language in the finalized
§ 1.482-7 articulates a bright line rule, which appears to
reflect a judgment that intangible product development
through cost sharing agreements presents a special case
  7
    Although the second sentence of § 1.482-1(a)(1) does note that Section
482 places controlled taxpayers on a tax parity with uncontrolled taxpay-
ers, the first sentence of § 1.482-1(a)(1) states that “[t]he purpose of Sec-
tion 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.” Thus, we disagree with our dissenting colleague that
the regulatory regime’s singular purpose is to ensure tax parity. Dissent at
6180.
6168                      XILINX, INC. v. CIR
requiring a distinct approach to ensure related parties do not
evade taxes. Under the circumstances, we are reluctant to
import a general standard into a comprehensive definition
contained in a highly specific regulation.8

   On the other hand, the Commissioner argues that the word
“generally” in § 1.482-1(b)(1) means there are exceptions to
using “the results of comparable transactions under compara-
ble circumstances” to determine the arm’s length result and
that § 1.482-7(d)(1)’s all costs requirement is such an excep-
tion. In context, however, the sentence containing the lan-
guage quoted above conveys that identical transactions
between unrelated parties — which are the ideal for determin-
ing “the results that would have been realized if controlled
taxpayers had engaged in the same transaction under the same
circumstances (arm’s length result),” § 1.482-1(b)(1) — are
rare, so comparable transactions are “generally” the only fea-
sible way to determine the arm’s length result. Moreover,
§ 1.482-1(b)(2) does not list § 1.482-7 among the sections
providing specific methods for calculating the arm’s length
result, so the Commissioner’s suggestion that § 1.482-
7(d)(1)’s all costs requirement is simply another method of
determining the arm’s length result is implausible. See Bou-
dette v. Barnette, 923 F.2d 754, 756-57 (9th Cir. 1991) (hold-
ing “when a statute designates certain . . . manners of
operation, all omissions should be understood as exclusions”).
Finally, the Commissioner has presented no evidence that any
companies operating at arm’s length share ESO costs and
does not challenge the tax court’s finding that unrelated par-
  8
    We do not address the parties’ dispute over whether we should defer
to the Commissioner’s interpretation of the regulations, which was not
announced until these tax proceedings began. See Bowen v. Georgetown
Univ. Hosp., 488 U.S. 204, 212-13 (declining to defer to proffered agency
interpretation that “appear[ed] to be nothing more than an agency’s conve-
nient litigating position”). We conclude the all costs requirement is not
affected by unrelated parties’ conduct based on the regulatory regime’s
plain language, structure and development, not on the Commissioner’s
proffered construction.
                           XILINX, INC. v. CIR                         6169
ties would not do so. If unrelated parties operating at arm’s
length would not share the ESO cost, requiring controlled par-
ties to share it is simply not an arm’s length result. See 26
C.F.R. § 1.482-1(b)(1) (defining “arm’s length result” as con-
sistent “with the results that would have been realized if
uncontrolled taxpayers had engaged in the same transaction
under the same circumstances”).9

   We also disagree with the dissent that the United States-
Ireland Tax Treaty and the Treasury Department’s Technical
Explanation of that treaty are useful “guides” in determining
which of the two irreconcilable standards governs.10 Dissent
at 6181-84. To be sure, the Technical Explanation, which was
issued while the tax regulations at issue in this case were in
effect, states that the treaty incorporates the arm’s length prin-
ciple from United States tax law, “refers to the arm’s length
standard as decisive” and “makes no specific mention of the
   9
     The arm’s length standard is a regulatory gloss on the Secretary’s stat-
utory authority to allocate income to avoid tax evasion, and the Secretary
has since modified the regulations to state explicitly that ESOs are costs
that must be shared and that the all costs requirement is an arm’s length
result, see 26 C.F.R. § 1.482-7T(a) & (d)(1)(iii) (2009), despite the
absence of any evidence that unrelated parties share ESOs. Congress and
regulators may adopt a technical definition of a term that is distinct from
its plain meaning, see, e.g., Ernzen v. United States, 922 F.2d 1433, 1436
(9th Cir. 1991) (discussing technical statutory definition of “contribution”
in 26 U.S.C. § 72(r)), but we are concerned here only with the regulations
in effect in 1997, 1998 and 1999, which did not explicitly define an “arm’s
length” result to require sharing of ESOs.
   10
      Although the dissent does not argue the treaty and Technical Explana-
tion trump § 1.482-7, it maintains those documents can “obviate a poten-
tial conflict” between the regulations. Dissent at 6186. This is possible,
however, only if they override § 1.482-7’s plain language, and the dissent
cites no authority in support of the novel proposition that an agency’s
interpretation of a treaty should supplant a duly enacted regulation. Treaty
interpretations are undoubtedly entitled to great weight when construing
an ambiguous treaty, see Sumitomo Shoji Am., Inc. v. Avagliano, 457 U.S.
176, 184-85 (1982), but § 1.482-7 was promulgated through notice-and-
comment rulemaking and therefore has the force and effect of law, see
United States v. Mead Corp., 533 U.S. 218, 226-27 (2001).
6170                       XILINX, INC. v. CIR
[all costs requirement].” Dissent at 6183-84.11 The dissent
maintains the general arm’s length standard should trump the
specific all costs requirement because it is hard to believe the
Treasury Department “conceal[ed] from its treaty parties that
[the arm’s length standard] had an exception when stock
options were in question.” Dissent at 6185. But this argument
rests on the false premise that Treasury officials involved in
the treaty negotiations believed the all costs requirement was
inconsistent with the arm’s length standard articulated in
§§ 1.482-1 through 1.482-6. The dissent overlooks several
details: (1) the Commissioner has always argued, before the
tax court and on appeal, that the all costs requirement is con-
sistent with the arm’s length standard in § 1.482-1(b)(1); (2)
the Treasury Department has never publicly differentiated
between the two standards; and (3) the current regulations
explicitly state the all costs requirement is consistent with the
arm’s length standard, see 26 C.F.R. § 1.482-7T(a) &
(d)(1)(iii) (2009). By all appearances, the Treasury Depart-
ment’s consistent view over the years has been that requiring
related parties in a cost sharing arrangement to share ESO
costs is not incompatible with (1) international norms or (2)
the regulatory arm’s length standard under domestic tax law.
Obviously, we have concluded the second view is not sup-
ported by the plain language of the regulations in effect dur-
ing 1997, 1998 and 1999 (and we express no opinion on the
first). But the dissent goes a step further by projecting our
conclusion 12 years into the past and assuming the Treasury
officials involved in negotiating and interpreting the tax treaty
agreed with it, without offering any basis for doing so. As we
have explained, we do not believe the Secretary accidentally
  11
     These observations are not materially different from § 1.482-1(b)(1)’s
statement that the arm’s length standard applies “in every case.” The
dilemma in this case is that the arm’s length standard, as articulated by the
tax regulations in effect at the time the Technical Explanation was issued,
is irreconcilable with the all costs requirement. A document that essen-
tially mirrors language in the general regulation stating the general stan-
dard should always govern does not, in our view, offer much insight into
which of two conflicting regulations should control.
                       XILINX, INC. v. CIR                    6171
promulgated a highly specific regulation that plainly requires
related parties in cost sharing agreements to share all costs.
The treaty documents do not alter our view.

   [3] In sum, we conclude the arm’s length regulation,
§ 1.482-1(b)(1), and the all costs regulation, § 1.482-7(d)(1),
cannot be harmonized. Accordingly, we hold § 1.482-7(d)(1),
being the more specific of the two, controls.

B.   Section 1.482-7(d)(1) Does Not Violate the United
     States-Ireland Tax Treaty.

   [4] As noted, we requested supplemental briefing on
whether § 1.482-7(d)(1) might be preempted for the tax years
the United States-Ireland Tax Treaty was in effect. The tax
treaty establishes that the appropriate standard for determin-
ing whether to reallocate profits from controlled transactions
involving controlled parties is whether “conditions are made
or imposed between the two enterprises in their commercial
or financial relations that differ from those that would be
made between independent enterprises.” See 1997 United
States-Ireland Tax Treaty, Art. 9, RIA Int. Tax Treaty 3057.
The Department of the Treasury’s treaty explanation confirms
that this standard is identical to the arm’s length standard in
§ 1.482-1(b)(1). See Department of the Treasury Technical
Explanation of the 1997 United States-Ireland Tax Treaty,
RIA Int. Tax Treaty 3095. Nonetheless, § 1.482-7(d)(1) does
not conflict with the tax treaty in these circumstances, because
the treaty expressly allows a contracting state to apply its
domestic laws to its own citizens, even if those laws conflict
with the treaty. See 1997 United States-Ireland Tax Treaty,
Art. 1(4), RIA Int. Tax Treaty 3057 (“Notwithstanding any
provision of [this treaty], a Contracting State may tax its resi-
dents . . . and its citizens, as if the [treaty] had not come into
effect.”). Xilinx is not a foreign entity, so applying § 1.482-
7(d)(1) to it does not violate the treaty, even if the regulation’s
all costs requirement is at odds with the treaty’s arm’s length
standard.
6172                      XILINX, INC. v. CIR
C.     ESOs for Which Companies Claim Tax Deductions
       Are Costs and Are Related to the Research and
       Development Activity, to the Extent They Are Given
       to Employees Involved In or Supporting that Activity.

   Because § 1.482-7(d)(1) controls, the Commissioner prop-
erly allocated the ESO amounts only if they are “costs
incurred by [Xilinx] related to the intangible development
area.”

  1.     Certain ESO amounts are a cost.

   Xilinx relies on the considerable evidence and testimony
presented to the tax court that unrelated parties in a cost shar-
ing agreement do not treat ESOs as costs to be shared. This
evidence is beside the point — whether or not unrelated par-
ties share an item is immaterial to whether it is a cost to either
party. Xilinx also maintains ESOs are not costs because two
provisions of § 1.482-7 allow taxpayers to use any accounting
method as long as it is used consistently.12 Xilinx reads these
provisions to allow a taxpayer to establish conclusively what
is or is not a cost by using a particular accounting method and
sticking with it. Xilinx then argues that under one particular
business accounting method, which was widely accepted
when Congress passed 26 U.S.C. § 482 in the 1980s and was
still an acceptable method during the tax years at issue, ESOs
are not treated as costs.

  [5] Xilinx’s argument that § 1.482-7’s accounting require-
ments allow taxpayers to self-define what is and is not a cost
  12
     Those two subsections establish accounting requirements that taxpay-
ers in a qualified cost sharing agreement must meet. First, they must “use
a consistent accounting method to measure costs and benefits.” 26 C.F.R.
§ 1.482-7(i). Second, they must maintain documentation to establish “[t]he
accounting method used to determine the costs and benefits of the intangi-
ble development . . . and, to the extent that the method materially differs
from U.S. generally accepted accounting principles, an explanation of
such material differences.” 26 C.F.R. § 1.482-7(j)(2)(i)(D).
                      XILINX, INC. v. CIR                  6173
by consistently using a particular accounting method is cre-
ative but unsound. The accounting requirements are minimum
eligibility requirements for a qualified cost sharing agreement.
It does not logically follow that whatever accounting method
a taxpayer uses, even a nonstandard one, conclusively estab-
lishes what is a cost, even if that method differs from how the
regulation defines costs. Rather, the regulation’s accounting
requirements are clearly intended to ensure the government
has a basis upon which to verify whether taxpayers who
obtain the benefit of a qualified cost sharing agreement are
accurately reporting and sharing costs, i.e., not treating items
that are costs under the regulation as something other than
costs.

   Also, the official accounting method upon which Xilinx
relies, Accounting Principles Board Opinion No. 25 (1972)
(“APB 25”), was superseded by Statement of Financial
Accounting Standards No. 123 (1995) (“SFAS 123”).
Although SFAS 123 allowed taxpayers to employ APB 25’s
methodology (under which these ESOs have zero cost) during
the relevant tax years, SFAS 123 explained that the APB 25
method was no longer the preferred method for valuing ESOs,
going so far as to require companies employing APB 25 also
to report the cost of ESOs under SFAS 123’s preferred fair
value based method. Xilinx used APB 25 and treated the
ESOs as a zero cost on its books, but it also complied with
SFAS 123 and reported the ESO cost under the SFAS 123 fair
value method in footnotes to its public income statements.
Thus, although Xilinx did not violate business accounting
practices in ascribing zero cost on its books to ESOs, the pre-
ferred business accounting practice during the relevant tax
years treated ESOs as costs.

   [6] In the end, Xilinx’s argument is undermined by the reg-
ulatory language and its own tax returns. “Costs incurred
related to the intangible development area [are] . . . operating
expenses as defined in § 1-482.5(d)(3),” 26 C.F.R. § 1.482-
7(d)(1), which provides that “operating expenses” include “all
6174                      XILINX, INC. v. CIR
expenses not included in cost of goods sold except for . . . any
. . . expenses not related to the operation of the relevant busi-
ness activity,” 26 C.F.R. § 1-482.5(d)(3).13 Xilinx stipulated
that it did not include the value of the ESOs in the cost of
goods sold, and it claimed tax deductions under 26 U.S.C.
§§ 83 and 162 for the exercised NSOs and the disqualifying
dispositions of the ISOs and ESPPs as business “expenses.”14
See 26 U.S.C. § 162(a)(1) (allowing employers to deduct “all
the ordinary and necessary expenses paid or incurred”
(emphasis added)). Xilinx could not have claimed deductions
on these ESOs unless they were an “expense,” which is the
key term in the definition of “cost” under § 1.482-7(d)(1).
Moreover, Xilinx required XI to pay it for the value of the
ESOs XI employees exercised. Requiring reimbursement for
ESOs granted to another company’s employees further sup-
ports the conclusion that the ESOs are costs. In short, the pre-
ferred business accounting method in effect during the
relevant tax years treated ESOs as costs, and Xilinx itself
treated certain amounts of ESOs as “expenses” in claiming
them as a tax deduction. Accordingly, we hold the ESO value
that Xilinx deducted as a business expense is a “cost” for the
purposes of § 1.482-7(d)(1).15
  13
      For the sake of clarity, we analyze whether the ESOs are a “cost” and
whether they are “related to” the joint venture separately. We recognize
that this distinction is not altogether appropriate, because the meaning of
“cost” turns on whether an item is an “operating expense,” the definition
of which focuses on whether the expense is “related to” the “relevant busi-
ness activity.” The proper construction of “cost” therefore turns on
whether it is “related to” the activity. Because we conclude ESOs are “re-
lated to” the intangible product development area, however, our separate
analysis of the two questions poses no problem.
   14
      The Commissioner stipulated that the exercise (as opposed to disquali-
fying dispositions) of ISOs and ESPPs are not “operating expenses” within
the meaning of § 1.482-5(d)(3). Accordingly, we have no occasion to
decide whether those items are “costs” that must be shared.
   15
      Xilinx also suggests the ESOs should not be treated as costs because
they require no cash outlay. Presumably, however, Xilinx could obtain full
market value for the stock shares it allows its employees to obtain at a
lower price, so, at a minimum, the difference between the exercise price
and the then-current market price is an opportunity cost to Xilinx. In any
event, ESOs were treated as costs during the relevant tax years under tax
accounting principles and the preferred business accounting methodology.
                      XILINX, INC. v. CIR                  6175
  2.   ESOs are related to the intangible development area.

   [7] The tax court found the ESOs are part of Xilinx’s
employee recruitment and retention program, and Xilinx does
not suggest salaries or benefits, like healthcare and retirement
contributions, for employees involved in R&D activities are
not “related to” their work on the R&D activities. It is diffi-
cult to view ESOs as anything but part of Xilinx’s employee
compensation package, because it is a benefit conferred in
exchange for services rendered. ESOs are just as “related to”
(“connected [or] associated” with) an employee’s work as any
other employment benefit or compensation. See American
Heritage College Dictionary 1152 (3d ed. 2000). In fact,
Xilinx claimed the ESOs as part of a tax credit available for
“wages paid or incurred to an employee for qualified
[research] services performed by such employee.” 26 U.S.C.
§ 41(b)(2)(A). Xilinx’s inclusion of ESOs as part of employee
wages for the R&D tax credit undermines its attempt to avoid
tax liability by arguing those ESOs are not “related to” the
same research activity. Although “related to” in 26 C.F.R. §
1.482-7(d)(1) and “for” in 26 U.S.C. § 41(b)(2)(A) are not
identical terms, they convey essentially the same thing in the
context of each provision: the expense must be part of the
compensation given to an employee involved in the relevant
activity.

   Accordingly, Xilinx’s arguments that its ESOs have noth-
ing to do with R&D, are issued company wide and are not
viewed by the employees who receive them as related to their
R&D are misplaced. The same can be said of any component
of an employee’s compensation package. For example, health
benefits given to a company’s employees are not tied to any
particular task an employee performs, yet the cost of those
benefits borne by the employer is still related to the work its
employees do. (The cost of health benefits was specifically
included among the items to be shared between Xilinx and XI
as part of the total R&D costs.) For employees who work on
6176                   XILINX, INC. v. CIR
R&D, the cost of health benefits for that employee is plainly
related to the company’s R&D activities.

   Xilinx also focuses on the considerable evidence it pre-
sented to the tax court proving companies operating at arm’s
length do not share the cost of ESOs. It maintains those com-
panies would share ESO costs if they were in fact related to
a joint venture, just as they share all other costs related to the
project, and points out that not even the United States allows
contractors hired to conduct R&D to bill the government for
the cost of ESOs. Xilinx believes the reason companies oper-
ating at arm’s length do not share ESOs must be that the cost
is not related to the joint venture. The evidence presented to
the tax court, however, suggests three reasons why companies
operating at arm’s length do not share ESO costs, none of
which have anything to do with whether the cost is related to
the joint venture. First, as Xilinx has pointed out, unlike most
costs, companies bear no out-of-pocket expense for ESOs (in
fact, the exercise of ESOs results in cash inflow). Even
though companies can estimate the accounting cost of ESOs,
the tax court found those costs cannot be measured precisely,
so companies operating at arm’s length may elect not to share
ESOs, because agreeing how to value something with no pres-
ent out-of-pocket cost might be a sticking point in negotiating
an agreement. Second, the tax court noted the cost of ESOs
is tied to the value of one company’s stock, so sharing this
cost might create a perverse incentive for the other company
to minimize the economic value of the joint venture in order
to keep its partner’s stock value low and thereby limit its own
share of the cost for its partner’s ESOs. Finally, a company
operating at arm’s length has an incentive not to share ESO
costs, to the extent those costs can be deducted as a business
expense. What company would not like to bear the full cost
of something that imposes no out-of-pocket expense and con-
fers the benefit of a tax deduction? Although the record con-
clusively establishes that companies in a joint venture
operating at arm’s length do not share ESO costs, none of the
                      XILINX, INC. v. CIR                  6177
possible explanations for this fact demonstrate ESO costs are
unrelated to the joint venture.

   [8] Accordingly, we hold ESOs are related to the work per-
formed by the employees who receive them. The ESO costs
for employees who were involved in activities that would
contribute to the joint venture between Xilinx and XI there-
fore should have been shared. Based on the record before us,
however, we cannot conclusively determine whether the
Commissioner’s allocation is limited only to employees
involved in the joint venture and takes into account whether
employees spent all or only part of their time on tasks relevant
to the joint venture. Accordingly, we remand to the tax court
on the narrow issue of determining whether the Commission-
er’s allocation accurately reflects ESO costs for employees
involved in tasks related to the joint venture.

                    IV.   CONCLUSION

    We hold that 26 C.F.R. § 1.482-7(d)(1)’s all costs require-
ment is irreconcilable with 26 C.F.R. § 1.482-1(b)(1)’s
requirement that an arm’s length standard should apply in
every case and that § 1.482-7(d)(1), as the more specific of
the two provisions, controls. We further hold ESOs are “costs
. . . related to the intangible development area” and therefore
must be shared between controlled parties in a cost sharing
agreement. We therefore reverse the tax court, because the
Commissioner’s allocation was appropriate to the extent it
involved ESO costs Xilinx claimed as a business expense
deduction and was limited to ESOs for employees involved in
the joint venture. We remand so that the tax court may ensure
the Commissioner’s allocation is consistent with our holding.

   [9] Xilinx may have been caught off guard by the defi-
ciency notices, which is understandable given the absence of
any public guidance that the Commissioner would interpret
the cost sharing regulation to require sharing of ESO costs.
This result is nonetheless mandated by the plain meaning of
6178                      XILINX, INC. v. CIR
§ 1.482-7(d)(1), which we have concluded controls over
§ 1.482-1(b)(1). We are troubled, however, by the imposition
of accuracy related penalties here. Although we have con-
strued the regulations in a manner favorable to the Commis-
sioner, we rejected the Commissioner’s attempted
harmonization of §§ 1.482-1 and 1.482-7 along the way.
Moreover, the Secretary has since promulgated new regula-
tions “clarify[ing]” this issue by explicitly including ESOs as
costs to be shared.16 68 Fed. Reg. 51171-02, 2003-2 C.B. 841.
When even the government has found it necessary to clarify
the regulations, we have our doubts that imposing a penalty
on taxpayers for their failure to follow the letter of the law is
appropriate. On remand, the tax court may also consider any
defenses Xilinx raised against the Commissioner’s imposition
of accuracy related penalties.

   REVERSED and REMANDED.



NOONAN, Circuit Judge, dissenting:

   The Commissioner of Internal Revenue has issued regula-
tions that are irreconcilable. These are the regulations relevant
to this case. We have three alternatives:

   1. Hold that when the Commissioner talks out of both
sides of his mouth, his speech is unintelligible and his regula-
tions are unenforceable.
  16
     The current temporary regulations provide that controlled taxpayers’
operating costs, which must be shared in a qualified cost sharing arrange-
ment, “include . . . stock-based compensation.” 26 C.F.R. § 1.482-
7T(d)(1)(iii) (2009). Such expenses must “equal . . . the amount allowable
to the controlled participant as a deduction for federal income tax purposes
with respect to that stock-based compensation.” 26 C.F.R. § 1.482-
7T(d)(3)(iii) (2009).
                          XILINX, INC. v. CIR                       6179
   2.     Apply a rule of thumb: the specific controls the gen-
eral.

   3. Resolve the conflict based on the dominant purpose of
the regulations, aided by the basic rule that ambiguous docu-
ments are to be interpreted against the drafter and further
enlightened by the way the Treasury has proceeded in drafting
tax treaties relevant to American parents and their foreign
subsidiaries.

   The majority has chosen the second alternative. It is a sim-
ple solution. It is plausible. But it is wrong. It converts a
canon of construction into something like a statute. It ignores
the international context and the Treasury’s own practice. In
what follows, I will spell out this mistake and why I chose the
third alternative.

  The problem. The majority put it well:

        Section 1.482-1(b)(1) specifies that the true taxable
        income of controlled parties is calculated based on
        how parties operating at arm’s length would behave.
        The language is unequivocal: this arm’s length stan-
        dard is to be applied “in every case.” In the context
        of cost sharing agreements, this would require con-
        trolled parties to share only those costs uncontrolled
        parties would share. By implication, costs that
        uncontrolled parties would not share need not be
        shared. In contrast, § 1.482-7(d)(1) specifies that
        controlled parties in a cost sharing agreement must
        share all “costs . . . related to the intangible develop-
        ment area,” and that phrase is explicitly defined to
        include virtually all expenses not included in the cost
        of goods. The plain language does not permit any
        exceptions, even for costs that unrelated parties
        would not share. Each provision’s plain language
        mandates a different result. Accordingly, we con-
        clude the two provisions establish distinct and irrec-
6180                   XILINX, INC. v. CIR
    oncilable standards for determining which costs must
    be shared between controlled parties in cost sharing
    agreements specifically related to intangible product
    development. Maj. Op. 6162-63.

   The handy canon of construction. Often the specific con-
trols the general. This rule has been used by the Supreme
Court. E.g., Long Island Care At Home, Ltd. v. Coke, 127
S. Ct. 2339, 2348 (2007). Apply this simple rule here, and
section 1.482-7(d)(1) controls. The conflict dissolves. The
Commissioner is vindicated.

   This simple solution is all too pat. It gives controlling
importance to a single canon of construction. But, as every
judge knows, the canons of construction are many and their
interaction complex. The canons “are not mandatory rules.”
Chickasaw Nation v. United States, 534 U.S. 84, 94 (2001).
They are guides “designed to help judges determine the Leg-
islature’s intent.” Id. They can be “overcome” by “other cir-
cumstances” manifesting that intent. Id. The canons are “tools
designed to help courts better determine what Congress
intended, not to lead courts to interpret the law contrary to
that intent.” Scheidler v. National Org. of Women, Inc., 547
U.S. 9, 23 (2006). In the light of these principles, three con-
siderations show the Commissioner’s position to be untena-
ble.

   Purpose. First, the purpose of the regulation is paramount.
That purpose is parity between taxpayers in uncontrolled
transactions and taxpayers in controlled transactions. The reg-
ulations are not to be construed to stultify that purpose. If the
standard of arm’s length is trumped by 7(d)(1) the purpose of
the statute is frustrated. If Xilinx cannot deduct all its stock
option costs, Xilinx does not have parity with an independent
taxpayer. Under the majority’s holding, the law is interpreted
contrary to the intent of its maker.

  A basic rule. Second, a very old canon of construction
applies in this case, “in which the complex statutory and regu-
                        XILINX, INC. v. CIR                 6181
latory scheme leads itself to any number of interpretations.”
We resolve the inconsistencies against the government.
United Dominos Industries, Inc. v. United States, 532 U.S.
822, 839 (2001) (Thomas, J., concurring and citing, among
other cases, United States v. Merriam, 263 U.S. 179, 188
(1923) (“If the words are doubtful, the doubt must be resolved
against the Government and in favor of the taxpayer”)). This
canon of construction is framed in the cases just cited as par-
ticularly relevant to tax statutes. It is, however, not a conces-
sion to taxpayers. It is the way legal documents are read. The
draft is construed against the drafter.

  Treasury practice. The purpose of the regulations and the
normative rules of interpretation deny recognition to the Com-
missioner’s position on 7(d)(1). Additionally, his own agency
has undercut him in the tax treaty between the United States
and Ireland, signed into law by President Clinton on July 28,
1997. The announced purpose of the tax treaty is “the avoid-
ance of double taxation and the prevention of fiscal evasion
with respect to income and capital gains.”

  The treaty reads:

    Article 9 Associated Enterprises

            1. Where:

            (a) an enterprise of a Contracting State
         participates directly or indirectly in the
         management, control or capital of an enter-
         prise of the other Contracting State; or

            (b) the same persons participate
         directly or indirectly in the management,
         control, or capital of an enterprise of a Con-
         tracting State and an enterprise of the other
         Contracting State, and in either case condi-
         tions are made or imposed between the two
6182                  XILINX, INC. v. CIR
         enterprises in their commercial or financial
         relations that differ from those that would
         be made between independent enterprises,
         then, any profits that, but for those condi-
         tions, would have accrued to one of the
         enterprises, but by reason of those condi-
         tions have not so accrued, may be included
         in the profits of that enterprise and taxed
         accordingly.

            2. Where a Contracting State includes in
         profits of an enterprise of that State, and
         taxes accordingly, profits on which an
         enterprise of the other Contracting State has
         been charged to tax in that other State, and
         the other Contracting State agrees that the
         profits so included are profits that would
         have accrued to the enterprise of the first-
         mentioned State if the conditions made
         between the two enterprises had been those
         that would have been made between inde-
         pendent enterprises, then that other State
         shall make an appropriate adjustment to the
         amount of the tax charged therein on those
         profits. In determining such adjustment,
         due regard shall be had to the other provi-
         sions of this Convention and the competent
         authorities of the Contracting States shall if
         necessary consult each other.

1997 United States-Ireland Tax Treaty, RIA Int. Tax Treaty
3057.

  The treaty adopts as its standard the transactions “that
would be made between independent enterprises.” That stan-
dard is the arm’s length standard. No exceptions are provided.
Arm’s length is the international standard specifically govern-
ing Xilinx and XI.
                       XILINX, INC. v. CIR                   6183
   A tax treaty is negotiated by the United States with the
active participation of the Treasury. The Treasury’s reading of
the treaty is “entitled to great weight.” United States v. Stuart,
489 U.S. 353, 369 (1989) (quoting Sumitomo Shoji America,
Inc. v. Aragliano, 457 U.S. 176, 184-185 (1982)). Simulta-
neous with the signing of the treaty into law, the Treasury
issued its “Technical Explanation.” As to Article 9, the Expla-
nation reads:

       This article incorporates in the Convention the
    arm’s length principle reflected in the U.S. domestic
    transfer pricing provision, particularly Code section
    482. It provides that when related enterprises engage
    in a transaction on terms that are not arm’s length,
    the Contracting States may make appropriate adjust-
    ments to the taxable income and tax liability of such
    related enterprises to reflect what the income and tax
    of these enterprises with respect to the transaction
    would have been had there been an arm’s length
    relationship between them.

    ...

       The fact that a transaction is entered into between
    such related enterprises does not, in and of itself
    mean that a Contracting State may adjust the income
    (or loss) of one or both of the enterprises under the
    provisions of this Article. If the conditions of the
    transaction are consistent with those that would be
    made between independent persons, the income aris-
    ing from that transaction should not be subject to
    adjustment under this Article.

       Similarly, the fact that associated enterprises may
    have concluded arrangements, such as cost sharing
    arrangements or general services agreement, is not in
    itself an indication that the two enterprises have
    entered into a non-arm’s length transaction that
6184                  XILINX, INC. v. CIR
    should give rise to an adjustment under paragraph 1.
    Both related and unrelated parties enter into such
    arrangements (e.g., joint venturers may share some
    development costs). As with any other kind of trans-
    action, when related parties enter into an arrange-
    ment, the specific arrangement must be examined to
    see whether or not it met the arm’s length standard.
    In the event that it does not, an appropriate adjust-
    ment may be made, which may include modifying
    the terms of the agreement or recharacterizing the
    transaction to reflect its substance.

       It is understood that the “commensurate with
    income” standard for determining appropriate trans-
    fer prices for intangibles, added to Code section 482
    by the Tax Reform Act of 1986, was designed to
    operate consistently with the arm’s-length standard.
    The implementation of this standard in the section
    482 regulations is in accordance with the general
    principles of paragraph 1 of Article 9 of the Conven-
    tion, as interpreted by the OECD Transfer Pricing
    Guidelines.

Department of the Treasury Technical Explanation of the
1997 United States-Ireland Tax Treaty, RIA Int. Tax Treaty
3095.

   No fewer than five times, the Explanation refers to the
arm’s length standard as decisive. The Explanation adds that
as to “transaction[s] . . . that are consistent with those that
would be made between independent persons, the income
from the transfer should not be subject to adjustment under
this Article.” The Explanation makes no specific mention of
the “all-of-the-costs” standard. The Explanation glosses the
statute’s “commensurate with income standard” as “designed
to operate consistently with the arm’s length standard”: the
arm’s length standard is treated as the measure, with which
CWI is “designed to operate consistently.” This standard is
                       XILINX, INC. v. CIR                  6185
further affirmed to be in accord with principles operative
under the Transfer Pricing Guidelines of the Organisation for
Economic Co-operation and Development.

   It cannot easily or safely be supposed that the Treasury in
negotiating the treaty was unaware of the “all-of-the-costs”
regulation and its relation to stock options issued in connec-
tion with R&D. In oral argument before this court, counsel for
the Commissioner expressed the relation between the differ-
ent divisions of the Treasury by tightly clasping his two hands
together, a gesture effectively communicating their unity of
thought and action. The Commissioner as litigator cannot dis-
avow the position that the Treasury repeatedly took in the Ire-
land and other tax treaties of which we take judicial notice.
See, e.g., United States-France, Article 9 (RIA Int. Tax Treaty
2225); United States-Germany, Article 9 (RIA Int. Tax Treaty
1542); and United States-United Kingdom, Article 9 (RIA Int.
Tax Treaty 2546). In each of them, Article 9 takes transac-
tions between independent companies as the measure.

   Using the standard of what independent companies would
do in their own cost-sharing arrangements, the Treasury could
not have meant to conceal from its treaty parties that this stan-
dard had an exception when stock options were in question.
There is good reason for the standard the Treasury chose: it
is an internationally comprehensible standard. It does not
require the treaty partner to recognize costs that may have no
recognition in its law. If double taxation of the income of par-
ent and subsidiary is to be avoided, a clear, simple, compre-
hensive standard is needed.

   I do not reach the issue of whether the treaty obligations
“constitute binding federal law enforceable in United States
courts.” Medellin v. Texas, 128 S.Ct. 1346, 1356 (2008). Even
if the treaty and the Technical Explanation should be held not
to operate as law trumping the hapless regulation, 7(d)(3),
treaty and explanation act as guides. They tell us what the
Treasury has had in mind in the regulations at issue. They
6186                  XILINX, INC. v. CIR
obviate a potential conflict. They illuminate what “tax parity”
entails.

   No remand is necessary. I vote to affirm the decision of the
tax court.
