Tax Court Rules On Inclusion Of Stock-Based Compensation Costs In Cost-Sharing Agreements

In Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015), the Tax Court struck down 2003 Treasury Regulations (T.D. 9088) (the "2003 Regulations") requiring that taxpayers include stock-based compensation costs in the expenses of qualified cost-sharing arrangements.

Background

The 2003 Regulations

In 2002, Treasury issued a notice of proposed rulemaking and a notice of public hearing relating to proposed amendments to the 1995 Regulations. In response, a number of organizations submitted comments informing Treasury that in arm's-length transactions between unrelated parties the parties do not pay or reimburse each other for amounts attributable to stock-based compensation. Commentators stated that they knew of no transactions between unrelated parties that required one party to pay or reimburse another for amounts related to stock-based compensation. In addition, certain commentators conducted searches of the EDGAR system and found no cost-sharing agreements between unrelated parties in which the parties agreed to share either the exercise spread or grant date of stock-based compensation. Commentators also identified multiple arm's-length agreements in which the parties did not share stock-based compensation. Finally, commentators explained that from an economic perspective unrelated parties would not agree to share costs of stock-based compensation because the value of stock-based compensation is speculative, potentially large, and is outside the control of the parties. However, despite the commentary provided to Treasury, the 2003 Regulations explicitly required parties to qualified cost-sharing agreements to share stock-based compensation costs.

Xilinx

Previously, in Xilinx, Inc. v. Commissioner, 598 F.3d 1191 (9th Cir. 2010), the Ninth Circuit, affirming the Tax Court's decision, ruled against the Service's interpretation of the 1995 cost-sharing Treasury Regulations (the "1995 Regulations"). The Service argued that under the 1995 cost-sharing Treasury Regulations, which did not specifically address stock-based compensation, taxpayers must include stock-based compensation costs in the pool of costs shared in a qualified cost-sharing agreement. However, the Ninth Circuit rejected the Service's argument and held that stock-based compensation does not need to be included in the pool of costs. The Ninth Circuit reasoned that unrelated parties operating at arm's length do not share such costs, and therefore the Service's attempt to allocate...