-5-
Acquired intellectual property rights costs were defined as costs
incurred in connection with the acquisition of products or
intellectual property rights. In determining the allocation of
costs pursuant to the cost-sharing agreement, petitioner did not
include in research and development costs any amount related to
the issuance of employee stock options (ESOs).
Cost-sharing percentages for petitioner and XI relating to
1997, 1998, and 1999 were as follows:
Year Petitioner XI
1997 73.61% 26.39%
1998 73.35 26.65
1999 65.09 34.91
In 1997, 1998, and 1999, the following number of petitioner’s and
XI’s employees engaged in research and development:
Year Petitioner XI
1997 338 6
1998 343 10
1999 394 16
III. Petitioner’s Stock Option Plans
ESOs are offers to sell stock at a stated price (i.e., the
exercise price) for a stated period of time. They are used by
many companies to attract, retain, and motivate employees and
align employee and employer goals. There are basically three
types of ESOs: statutory or incentive stock options (ISOs),
nonstatutory stock options (NSOs), and purchase rights issued
pursuant to an employee stock purchase plan (ESPP purchase
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