-34-
agree that unrelated parties would not explicitly share these
amounts. Indeed, Scott T. Newlon, the only witness proffered by
respondent to address this issue, testified that parties “don’t
* * * explicitly [share any amount for ESOs] because * * * it
would be hard for the parties to agree on a measurement * * * and
it may * * * [leave them] open to * * * potential disputes.”
These considerations are aptly summarized by Irving Plotkin, one
of petitioners’ experts, who testified:
In the real world, these measures [the spread and grant
date value] are so speculative and controversial, and
the link between them and the value of R&D functions
performed by the ESO holder is so tenuous, that
unrelated parties in joint research arrangement simply
do not agree to pay any amount for ESOs granted to the
employees of an entity providing R&D services.
Petitioners also established that, for product pricing purposes,
companies (i.e., those who enter into cost-sharing arrangements
relating to intangibles) do not take into account the spread or
the grant date value relating to ESOs.
While respondent concedes that unrelated parties do not
explicitly share costs attributable to ESOs, he contends that
unrelated parties “negotiate terms that implicitly compensate
12(...continued)
immaterial. See Martin Ice Cream Co. v. Commissioner, 110 T.C.
189, 210 n.16 (1998).
13 Because we determined, in our June 3, 2004, order, that
the grant date theory is a new matter, respondent bears the
burden of proof with respect to this theory. Rule 142(a); Shea
v. Commissioner, 112 T.C. 183 (1999).
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