Xilinx Inc. and Subsidiaries - Page 16

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         sharing agreement, to share with XI the costs of certain ESOs.               
         Respondent determined that the cost required to be taken into                
         account equaled the spread (i.e., the stock’s market price on the            
         exercise date over the exercise price) relating to ESOs exercised            
         by petitioner’s employees (spread theory).  Respondent defined               
         the spread as the amount of petitioners’ section 83 deduction                
         relating to the exercise of NSOs and disqualifying dispositions              
         of ISOs and ESPP purchase rights.10  Respondent’s determination              
         resulted in the following deficiencies and penalties:11                      

                                                 Penalty                              
                        Year      Deficiency     Sec. 6662(a)                         
                        1996      $24,653,660    $4,935,813                           
                        1997      25,930,531     5,189,389                            
                        1998      27,857,516     5,573,412                            
                        1999      27,243,975     5,448,795                            
              On March 26, 2001, and January 14, 2003, respectively,                  
         petitioners timely filed their petitions with the Court seeking a            
         redetermination of the deficiencies set forth in the December 28,            
         2000, and October 17, 2002, notices.  Petitioner’s principal                 
         place of business was San Jose, California, at the time the                  


               10  ISOs and ESPP purchase rights meeting the requirements             
          of secs. 422 and 423, however, were not included in respondent’s            
          definition because they are not subject to tax under sec. 83 (see           
          supra note 5).                                                              
               11  Respondent’s reallocation of petitioner’s expenses, in             
          turn, reduced petitioner’s deductible business expenses and                 
          increased petitioner’s taxable income.                                      





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