Xilinx Inc. and Subsidiaries - Page 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                      
         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                 
              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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