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Respondent counters that: (1) Section 1.482-2(d)(4)4 and
(b)(4), Income Tax Regs., requires that “all costs” be included
in cost-sharing arrangements, and “all costs” include employee
stock options; and (2) there are disputed material facts
concerning whether arm’s-length parties would share the cost of
stock options granted to employees who performed the research and
development for the transferred intangible.
Background
Petitioner is the successor in interest to Conner
Peripherals, Inc. (Conner Domestic), which developed and
manufactured hard disk drives for sale to personal computer
manufacturers and others. Effective January 1, 1988, Conner
Domestic and its wholly owned foreign manufacturing subsidiary,
Conner Peripherals Singapore, Ltd. (Conner Foreign 1), entered
into a cost-sharing agreement. Effective July 1, 1990, Conner
Domestic, Conner Foreign 1, and Conner Domestic’s wholly owned
Singapore corporation, Conner Peripherals Pte., Ltd., entered
into a new cost-sharing agreement for sharing research and
development (R&D) costs, and the 1988 cost-sharing agreement was
4 Sec. 1.482-2(d), Income Tax Regs., was amended in 1993,
and respondent refers to the amended version (sec. 1.482-2A(d),
Income Tax Regs.) in his materials. Petitioner, on the other
hand, refers to the unamended version. While the years we
consider predate the amendment, the amended version, to the
extent pertinent here, has not been changed. Accordingly, the
references used by the parties are interchangeable.
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