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IRS addresses stock-based compensation

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Tax Hot Topics newsletter The IRS recently released a Chief Counsel Memorandum (AM 2021-004) addressing the transfer pricing implications of taxpayer cost-sharing agreements that did not contract to share stock-based compensation (SBC) costs and included “reverse claw-back” provisions in their contracts.

Specifically, the IRS analyzed the treatment of “reverse claw-back” provisions under the current cost sharing arrangement regulations, which provide that each participant’s share of intangible development costs (IDCs), including SBC, should be proportionate to its reasonably anticipated benefits. These regulations are similar to those upheld in Altera Corp. & Subs. v. Commissioner in the Ninth Circuit (926 F.3d 1061).

Before the Altera case was finally decided, certain taxpayers who originally excluded SBC from cost pools amended their cost sharing agreements to include a reverse claw-back provision to include the applicable SBC upon a triggering event.

Ultimately the IRS concluded:

  • The IRS may make allocations to adjust the results of a cost-sharing transaction (CST) so that the results are consistent with the arm’s length standard. Adjustments would be reflected in the year in which the IDCs were incurred.
  • If the IRS adjusts the results of a CST for a taxable year to account for SBC costs, that adjustment should be treated as reducing the amount of any reverse claw-back true-up obligation by a corresponding amount, thereby avoiding an overpayment of the SBC costs.
  • If allocations to adjust the results of a CST in the year the IDCs were incurred are not possible for certain years, the IRS may make other adjustments, if necessary, to reflect the contract or to ensure that the Non-SBC CS Agreement produces results that are consistent with an arm’s length result within the meaning of Treas. Reg. Sec. 1.482-1(b)(1).

Contact:
Steven Wrappe
Managing Director
Washington National Tax Office
T +1 202 521 152

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