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(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
allowable.
(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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