July 31, 2019
LB&I Control No: LB&I-04-0719-008
MEMORANDUM FOR ALL LARGE BUSINESS AND INTERNATIONAL DIVISION EMPLOYEES
FROM: Douglas W. O’Donnell /s/ Douglas W. O’Donnell
Commissioner, Large Business and International Division
SUBJECT: Withdrawal of Directive LB&I-04-0118-005, Instructions for Examiners
on Transfer Pricing Issue Selection – Cost-Sharing Arrangement
Stock Based Compensation, dated January 12, 2018
Purpose: The purpose of this document (“Withdrawal”) is to formally withdraw Directive LB&I-04-0118-005 (Cost Sharing Arrangement (CSA) Stock Based Compensation (SBC) Directive), dated January 12, 2018, which provided instructions for examiners on transfer pricing issue selection related to SBC in CSAs.
Background: U.S. taxpayers that are cost sharing participants are required to include SBC as intangible development costs (IDCs), under Treas. Reg. §§ 1.482-7A(d)(2) and 1.482-7(d)(3), if such costs are directly identified with, or reasonably allocable to, the intangible development activity of the CSA.
In Altera Corp. v. Commissioner, 145 T.C. 91 (2015), the Tax Court invalidated Treas. Reg. § 1.482-7A(d)(2). The IRS appealed Altera and issued Directive LB&I-04-0118-005 on January 12, 2018, directing examiners to stop opening new examinations for issues related to SBC included in CSA IDCs until the outcome of the Altera appeal is known. On June 7, 2019, the United States Court of Appeals for the Ninth Circuit reversed the U.S. Tax Court’s opinion in Altera.
Withdrawal of Directive: Based on the Ninth Circuit’s decision in Altera, I am formally withdrawing Directive LB&I-04-0118-005. With the issuance of this Withdrawal, examiners should continue applying Treas. Reg. §§ 1.482-7A(d)(2) and 1.482-7(d)(3), including opening new examinations of CSA SBC issues when appropriate. These issues may be factually intensive, and transfer pricing teams should develop the facts to support their analyses and conclusions. Where appropriate, Issue Teams should
consider consulting the Practice Network and Counsel for support in developing the most reliable analyses of this issue. We will continue to monitor any further developments related to the Ninth Circuit’s decision.
Effective Date: July 31, 2019
Contact: For further information regarding this Withdrawal, please contact the Director of Treaty and Transfer Pricing Operations.
This Withdrawal 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 provision of the Code, regulations, or guidance thereunder.
cc: Division Counsel, LB&I