Xilinx Inc. and Subsidiaries - Page 20

              (ii) * * * all stock-based compensation that is granted                 
              during the term of the qualified cost sharing                           
              arrangement and is related at date of grant to the                      
              development of intangibles * * * is included as an                      
              intangible development cost * * *.                                      
              (iii) Measurement and timing of stock-based                             
              compensation expense.--(A) In general.-Except as                        
              otherwise provided in this paragraph (d)(2)(iii), the                   
              operating expense attributable to stock-based                           
              compensation is equal to the amount allowable to the                    
              controlled participant as a deduction for federal                       
              income tax purposes with respect to that stock-based                    
              compensation (for example, under section 83(h)) and is                  
              taken into account as an operating expense under this                   
              section for the taxable year for which the deduction is                 
              (1) Transfers to which section 421 applies.--Solely for                 
              purposes of this paragraph (d)(2)(iii)(A), section 421                  
              does not apply to the transfer of stock pursuant to the                 
              exercise of an option that meets the requirements of                    
              section 422(a) or 423(a).                                               
         Id. at 49001.  On August 26, 2003, Treasury finalized its                    
         proposed regulations without modifying the above-referenced                  
         provisions.  The final regulations are applicable to stock-based             
         compensation provided to employees in taxable years beginning on             
         or after August 26, 2003.                                                    
              D.   Respondent’s Amendments to Answer                                  
              In the December 28, 2000, notice of deficiency, respondent              
         determined that the cost-sharing pool included ESOs granted to               
         petitioner’s research and development employees prior to and                 
         after April 2, 1995 (i.e., the cost-sharing agreement’s execution            
         date), and exercised during 1997 and 1998.  On August 4, 2003,               
         the Court filed respondent’s motion for leave to file an                     

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