As reported in today’s issue of Transfer Pricing Report, two recent U.S. Tax Court petitions filed by Altera Corp. almost certainly represent the IRS’s chosen litigating vehicle for the issue of stock option cost sharing.

In the Altera cases, the IRS allocated $96 million to the company for 2004-07, most of it based on the argument that Altera should have included costs from employee stock options in its cost sharing agreement with a Cayman Islands affiliate.

The IRS has made this argument before—first against Seagate Technology in a dispute over the company’s 1991-92 years, and more recently against Xilinx for 1997-99. The IRS ended up conceding the issue in Seagate, and lost the Xilinx case in the Tax Court and (eventually) on appeal to the Ninth Circuit.

Two factors could cause a different outcome this time around, however:

(1 ) regulations issued in 2003 specifically stating that employee stock options must be included in cost sharing agreements; and

(2) the Supreme Court’s decision in the Mayo Foundation case, which makes it harder for taxpayers to challenge the validity of IRS regulations.

Samuel Maruca, the IRS’s director of transfer pricing operations, has said for more than a year that the agency needs to “produce some winners” to improve its credibility in the transfer pricing area.

We’ll stay tuned!

 Molly Moses
Managing Editor, Transfer Pricing Report