Instructions for Examiners on Transfer Pricing Selection- Cost-Sharing Arrangement Stock Based Compensation


January 12, 2018

LB&I Control No: LB&I-04-0118-005


From: Douglas W. O’Donnell  
Commissioner, Large Business and International Division
Subject: Instructions for Examiners on Transfer Pricing Issue Selection- Cost-Sharing Arrangement Stock Based Compensation

This Directive provides instructions to Large Business & International (LB&I) examiners in the selection of certain transfer pricing issues for examination.


Transfer pricing issues make up a substantial portion of the LB&I inventory.  As a result, significant LB&I resources are devoted to transfer pricing issues.  LB&I recognizes that it needs to manage transfer pricing issues under examination and related resources in the most efficient and effective manner possible.  This Directive provides instructions with respect to managing certain transfer pricing issues in inventory.

This Directive only applies to examinations of LB&I taxpayers (i.e., assets equal to or greater than $10,000,000) who are required to file (including extensions) forms 5471 or 5472 with their original annual US tax return.


Stop opening issues related to stock-based compensation (SBC) included in cost-sharing arrangement (CSA) intangible development costs (IDCs) until the Ninth Circuit issues an opinion in the Altera case on appeal.

In Altera Corp. v. Commr, 145 T.C. 91 (2015), the Tax Court invalidated Treasury’s final cost sharing regulations (T.D. 9088), which require taxpayers to include SBC when determining operating expenses under a qualified CSA. The Tax Court applied the Administrative Procedure Act (APA) and Motor Vehicles Mrfs. Ass’n v. State Farm, 463 U.S. 29 (1983) to hold that the regulations were procedurally issued in an arbitrary and capricious fashion and were therefore invalid. Both the Tax Court and the Ninth Circuit had previously invalidated a 1995 version of similar regulations in Xilinx Inc. v. Commr, 125 T.C. 37 (2005), affd, 598 F.3d 1191 (9th Cir. 2010). The government has appealed Altera and oral argument was heard in October 2017.

While Altera is on appeal, no new examinations of CSA SBC issues will be started. Once the outcome of the Altera appeal is known, LB&I will reconsider this Directive and will issue further instructions at that time.  For CSA examinations where the SBC issue is already being developed by the examination team, if the taxpayer agrees to extend the statute of limitations for a period long enough to allow for the results of Altera to be known and for any additional development work, then issue development will be stopped.  If the taxpayer does not agree to extend the statute of limitations, then development of the issue will continue.

While this Directive limits the focus of CSA examinations regarding SBC, examination and adjustments related to other CSA issues, including other IDC issues, are not limited by this Directive.

Although inclusion of SBC in charges for intercompany services is not directly impacted by the Altera litigation, taxpayers are likely to contest inclusion of SBC in services costs on the same grounds as presented in Altera (i.e., not included by third parties in services contracts).  Examination teams should consult with LB&I Division Counsel on those issues to determine whether inclusion of SBC in services should be pursued as a strategic transfer pricing examination issue if it is factually distinguishable from the issue in Altera.


For further information regarding this Directive and any of the specific issues addressed herein, please contact the Director of Treaties and Transfer Pricing Operations.

This Directive is not an official pronouncement of law and cannot be used, cited or relied upon as such. In addition, nothing in this Directive should be construed as affecting the operation of any other provision of the Code, regulations or guidance thereunder.

cc:  Division Counsel, LB&I