-2-
1. Held: R’s allocation is contrary to the
arm’s-length standard mandated by sec. 1.482-1(b),
Income Tax Regs., because uncontrolled parties would
not allocate the spread or the grant date value
relating to employee stock options.
2. Held, further, P’s allocation satisfies the arm’s-
length standard mandated by sec. 1.482-1, Income Tax Regs.
Kenneth B. Clark, Ronald B. Schrotenboer, William F. Colgin,
Tyler A. Baker, Jaclyn J. Pampel, Anthony D. Cipriano, and Allen
Madison, for petitioners.
David P. Fuller, Jeffrey A. Hatfield, Bryce A. Kranzthor,
Lloyd T. Silberzweig, Kendall Williams, David N. Bowen, John E.
Hinding, and Paul K. Webb, for respondent.
OPINION
FOLEY, Judge: Respondent determined deficiencies in the
amounts of $24,653,660, $25,930,531, $27,857,516, and $27,243,975
and section 6662(a) accuracy-related penalties in the amounts of
$4,935,813, $5,189,389, $5,573,412, and $5,448,795 relating to
petitioners’ 1996,1 1997, 1998, and 1999 Federal income taxes,
respectively. The issues for decision are whether: (1)
Petitioner and its foreign subsidiary must share the cost, if
any, of stock options petitioner issued to research and
development employees, (2) respondent’s allocations meet the
arm’s-length requirement set forth in section 1.482-1(b), Income
Tax Regs., and (3) petitioners are liable for section 6662(a)
accuracy-related penalties.
1 Pursuant to the parties’ Apr. 4, 2002, stipulation of
settled issues, the 1996 taxable year is no longer in issue.
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