Xilinx Inc. and Subsidiaries - Page 15

         the option is used instead of the ESO’s actual or maximum life.              
              During the years in issue, petitioners, on their Securities             
         and Exchange Commission Forms 10-K, elected to use the IVM, as               
         prescribed in APB 25, to measure expenses attributable to ESOs.              
         As required by SFAS 123, petitioners disclosed net income and                
         earnings per share as if the FVM had been applied.  In                       
         determining the fair value of ESOs, petitioners used an adjusted             
         BS model.                                                                    
         VI. Procedural History                                                       
              A.   Petitioners’ Federal Income Tax Returns                            
              Petitioners are accrual basis taxpayers and timely filed                
         consolidated Federal income tax returns for their taxable years              
         ended March 29, 1996, March 29, 1997, March 28, 1998, and April              
         3, 1999.  During the years in issue, GAAP, pursuant to APB 25,               
         provided that the issuing company did not incur an expense                   
         related to options granted at-the-money.  In accordance with APB             
         25, petitioner did not, for purposes of its cost-sharing                     
         agreement with XI, include any costs related to ESOs issued to               
              On December 28, 2000, and October 17, 2002, respondent                  
         issued notices of deficiency relating to 1996 through 1998 and               
         1999, respectively.  In his notices of deficiency, respondent                
         determined that petitioners were required, pursuant to its cost-             

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