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On May 7 the Ninth Circuit decided Xilinx v. Commissioner. By a 2-1 majority, the panel reversed the Tax Court and held that costs of employee stock options must be included in the pool of costs subject to a tax-sharing agreement. The Xilinx decision is important for three reasons. First, cost sharing is probably the key element in current transfer pricing law because it is the principal way in which profits from intangibles get shifted from the United States to low-tax jurisdictions. Moreover, informed observers agree that the allocation of income from intangibles is the most important problem in transfer pricing, and because most intangible-intensive corporations rely heavily on employee stock options, the narrow issue decided in Xilinx has large revenue implications, especially for high-tech companies. This is evidenced by the filing of two amicus briefs on behalf of coalitions of high-tech companies siding with the taxpayer and by practitioners’ reactions to the IRS victory.


Reprinted with the permission of Tax Analysts.