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Using IColor::Transparency to set the degree of transparency does not seem to work.
It appears that either the color is transparent with transparency = 0, or it is fully opaque when using a value greater than 0.
This property has not been fully implemented to take advantage of setting a range of transparency.
Solution or Workaround
Use 0 for transparent and any value greater than 0 for opaque.
View the ILayerEffects::Transparency topic in ArcObjects Developer Help for another option.