Tier II Issue: Cost Sharing Stock Based Compensation Directive #2
LMSB Control No: LMSB-4-1109-040
Impacted IRM 4.51.5
December 4, 2009
|
MEMORANDUM FOR |
INDUSTRY DIRECTORS |
|
FROM: |
Patricia C. Chaback |
|
SUBJECT: |
Tier II Issue: Cost Sharing Stock Based Compensation Directive #2 |
The purpose of this Directive is to inform examiners and their team managers that they may not use Delegation Order 236 (expected to be revised and reissued as Delegation Order 4-24) to resolve the issue of whether stock based compensation must be included as a cost to be shared under a qualified cost sharing arrangement in any open cycle. The settlement terms that have been used by Appeals in the past to resolve this type of dispute do not accurately reflect the current hazards of litigation.
For tax years beginning after December 31, 1995, and prior to August 26, 2003, Treas. Reg. § 1.482-7 (T.D. 8632; 60 Fed. Reg. 65,553 (Dec. 20, 1995)) required taxpayers who entered into a qualified cost sharing arrangement to share all development-related costs in proportion to their reasonably anticipated benefits attributable to the development activity. That regulation did not specify that stock based compensation was among the costs to be shared. On May 27, 2009, in the Xilinx case, the 9th Circuit Court of Appeals ruled that under that regulation, stock based compensation was among the costs that parties to a qualified cost sharing arrangement must share. Xilinx, Inc. v. Commissioner, 567 F.3d. 482, 496 (9th Cir. 2009). On August 26, 2003, Treas. Reg. § 1.482-7 (T.D. 9088; 68 Fed. Reg. 51,171 (Aug. 26, 2003)) was promulgated in final form. That regulation specified that the costs to be shared under a qualified cost sharing arrangement included stock based compensation.
Both the result reached in the 9th Circuit’s Xilinx opinion (regarding the pre-2003 regulation) and the 2003 regulation affecting stock based compensation granted in taxable years beginning after August 25, 2003, clearly support the government’s long standing position that stock based compensation is among the costs parties to a qualified cost sharing arrangement must share.
Appeals’ settlements of the issue in prior examination cycles of taxpayers who were parties to qualified cost sharing arrangements do not accurately reflect current hazards of litigation on the issue.
Previous settlements by the Appeals Office in prior cycles of taxpayers will not be followed in those taxpayers’ open cycles after May 27, 2009, under Delegation 236.
The January 12, 2004 Industry Director Directive on Stock Options and Cost Sharing Agreements remains in full effect. Industry Director Directive on Stock Options and Cost Sharing Agreements dated 1-12-2004.
This Directive is not an official pronouncement of law, and cannot be used, cited, or relied upon as such.
cc: Commissioner, LMSB
Deputy Commissioner, Operations, LMSB
Deputy Commissioner, International, LMSB
Division Counsel, LMSB
Chief, Appeals
Directors, Field Operations
Director, Planning, Quality, Analysis & Support
