In court documents, Judge John Noonan briefly sets out the key question in front of the panel, and affirms the Tax Court's decision on it.

"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 sharing agreement, even when companies operating at arm’s length would not do so. The tax court found related companies are not required to share such costs and ruled that the Commissioner of Internal Revenue’s attempt to allocate such costs was arbitrary and capricious. We affirm," writes Foley.

The tax community will be relieved to read the new decision as in the ruling of May 2009, the court seemed to disregard the arm's length principle. This decision was dramatically withdrawn earlier this year.

"The panel made an error [in the last ruling] and has now fixed it," said a senior adviser.

This reversal will not please the IRS. Commissioner Douglas Shulman once gloated over the appeals court win at a conference.

Judge Stephen Reinhardt dissents in this new decision, so the IRS may pursue Supreme Court review. Although, one specialist is sceptical of the chances of this happening.

"The Supreme Court declines to review most tax cases in which there is a petition for certiorari, [which is] where someone (government or taxpayer) seeks Supreme Court review."