Academic journal article Journal of Accountancy

Related Parties Must Share Employee Stock Options Costs

Academic journal article Journal of Accountancy

Related Parties Must Share Employee Stock Options Costs

Article excerpt

A panel of the U.S. Court of Appeals for the Ninth Circuit held that employee stock option (ESO) costs incurred by one company participating with related companies in a cost-sharing agreement (CSA) in the late 1990s must be allocated among the research and development (R&D) costs of all the participants under former Treas. Reg. [section] 1.482-7 (which applied because the transactions occurred before 2003, when the regulations were amended). This decision reversed a Tax Court holding that because unrelated parties in a cost-sharing agreement did not have to share ESO costs, related parties also did not have to share these costs.

Semiconductor company Xilinx Inc., and Xilinx Ireland, a subsidiary; entered into a joint venture CSA that required them to share R&D costs of developing new technology. The parties agreed to share all direct and indirect costs and those of acquiring intellectual property rights. The agreement did not specifically address ESOs, and they were not shared for tax years 1997, 1998 and 1999.

The IRS contended that ESO costs for employees working on the R&D project should have been shared between the related parties and assessed substantial deficiencies and accuracy-related penalties.

The court extensively analyzed which regulation section governed the sharing of ESO costs. Former Treas. Reg. [section] 1.482-1 required controlled transactions to be analyzed by an arms-length standard "in every case," that is, whether the results were consistent with those of uncontrolled taxpayers engaging in the same transaction. The court rejected the IRS' attempt to harmonize that standard with the more specific former Treas. …

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