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allocation to include petitioner’s cost, if any, of employee
stock options in the cost-sharing pool for purposes of a cost-
sharing agreement between petitioner and its foreign
subsidiaries.
In support of its motion, petitioner argues that, as a
matter of law, respondent is prohibited from making an allocation
with respect to the cost-sharing arrangement for the following
reasons: (1) Respondent is not aware of specific arm’s-length
dealings where stock option costs were shared; (2) respondent
relies on opinion as opposed to factual support for inclusion of
the “at-the-money” stock options3 in the pool of costs; (3)
section 1.482-2(b)(5)(ii), Income Tax Regs., excludes “expenses
associated with the issuance of stock”; and (4) petitioner
allocated and apportioned the costs of nonintegral support
services consistently using a reasonable method in keeping with
sound accounting practices within the meaning of section 1.482-
2(b)(6)(i), Income Tax Regs.
3 An “at-the-money” stock option is issued at an exercise
price pegged to the market value on the issue date. Accordingly,
if the market value of the stock remains at the option issue
price or lower, the option will not be exercised. Conversely, if
the market price exceeds the option issue price, the option would
more likely be exercised.
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Last modified: May 25, 2011