-18-
uncontrolled parties would not share the spread, we may conclude
that respondent’s determination is arbitrary, capricious, or
unreasonable. * * * neither party has presented sufficient
evidence or established facts adequately addressing whether the
arm’s-length standard has been met.
C. Promulgation of Regulations Addressing Cost Sharing of
Stock-Based Compensation
On July 29, 2002, the U.S. Department of the Treasury
(Treasury) issued proposed regulations regarding the treatment of
ESOs for cost-sharing purposes. In the preamble accompanying
these proposed regulations, Treasury stated:
The proposed regulations provide that in determining a
controlled participant's operating expenses within the
meaning of � 1.482-7(d)(1), all compensation, including
stock-based compensation, * * * must be taken into
account.
67 Fed. Reg. 48999 (July 29, 2002). As a result of this change
(i.e., the inclusion of stock-based compensation) to section
1.482-7(d)(1), Income Tax Regs., Treasury stated that it was
adding:
express provisions coordinating the cost sharing rules
of � 1.482-7 with the arm's length standard as set
forth in � 1.482-1. New � 1.482-7(a)(3) clarifies that
in order for a qualified cost sharing arrangement to
produce results consistent with an arm's length result
within the meaning of � 1.482-1(b)(1), all requirements
of � 1.482-7 must be met, including the requirement
that each controlled participant's share of intangible
development costs equal its share of reasonably
anticipated benefits attributable to the development of
intangibles. The proposed regulations also make
amendments to � 1.482-1 to clarify that � 1.482-7
provides the specific method to be used to evaluate
whether a qualified cost sharing arrangement produces
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