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LB&I Withdraws Guidance on Cost-Sharing Arrangement Stock-Based Compensation

A July 31, 2019 memo from Douglas W. O’Donnell withdrew LB&I’s directive to examiners related to stock-based compensation in cost sharing arrangements.

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A July 31, 2019 memo from Douglas W. O’Donnell withdrew LB&I’s directive to examiners related to stock-based compensation in cost sharing arrangements.

A July 31, 2019 memo from Douglas W. O’Donnell, the IRS Commissioner of the Large Business and International Division (LB&I), withdrew LB&I’s directive to examiners related to stock-based compensation in cost sharing arrangements (CSAs). As a result, the IRS will now examine allocations between group members of employee stock-based compensation in CSAs for transfer pricing purposes.

The prior directive (Directive LB&I-04-0118-005, dated January 12, 2018) directed examiners to stop opening new cases related to stock-based compensation included in cost-sharing agreement intangible development costs while the IRS’ appeal of the Tax Court’s decision in Altera was pending. The Tax Court in Altera had nullified Treasury’s cost-sharing regulations on the treatment of stock-based compensation expenses. The United States Court of Appeals for the Ninth Circuit subsequently reversed the U.S. Tax Court’s opinion in Altera on June 7, 2019. Altera has filed a petition for rehearing of the majority decision of the Ninth Circuit.

With the new directive issued in early August 2019, U.S. taxpayers that are cost-sharing participants must include stock-based compensation as intangible development costs if these costs are directly identified with, or reasonably allocable to, the intangible development activity of the CSA. LB&I has instructed examiners to open new examinations of CSA stock-based compensation issues when applicable. Since the issues may be factually rigorous, LB&I states that transfer pricing teams should develop the facts to support their analyses and conclusions. Finally, LB&I instructs issue teams to consider consulting the Practice Network and Counsel for support in developing the most dependable analyses of this issue.

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