Tax Court Voids Portion of Code Section 482 Cost Sharing Regulations

There are tax advantages for U.S. taxpayers to jointly develop intangible personal property with related non-U.S. entities. For an overview, see my prior post here.

Treasury Regulations provide detailed guidance on what costs must be shared between the co-developers if they want the IRS to respect the cost sharing arrangement. Under those regulations, stock-based compensation of one of the parties, such as restricted stock, nonstatutory stock options, statutory stock options (ISOs and ESPPs), stock appreciation rights, and phantom stock, must be shared.

The Tax Court has stricken as invalid Reg. § 1.482-7(d)(2) which requires such sharing of stock-based compensation costs. The Court found the rules to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, because such cost-sharing does not generally occur in the real world between unrelated parties. The IRS was required to show some real world use of sharing of these costs because of the general arms-length standards of the Section 482 regulations (citing Xilinx v. Commissioner, which case also held that Congress never intended for the commensurate-with-income standard relating to intangible property to supplant the arm's-length standard). The Tax Court found that the regulations had not abandoned the arm’s length standard, and left for another day the question whether the IRS could do so in future regulations.

Altera Corporation and Subsidiaries, (2015) 145 TC No. 3

No Need to File §83(b) Election with Tax Return

Not a big item, but a helpful one – under proposed regulations a taxpayer need no longer file a copy of their Code §83(b) election with their income tax return for the year of the election.

Normally under Code §83, a taxpayer who receives property in connection with performing services does not include that property in income until the property is transferable or not subject to a substantial risk of forfeiture. Since it may be advantageous to bring that property into income when received (when it may have a lower value than later), taxpayers can nonetheless elect to include it when received under §83(b). To make the election, the taxpayer must file the election within 30 days of the property transfer and file a copy of the election with their income tax return for that year. Since the filing of a copy with the return may inhibit taxpayers from filing their returns electronically, this second requirement is now removed. However, the filing of the election within 30 days is still required.

The proposed regulations are proposed to apply on January 1, 2016. Nonetheless, taxpayers may rely on them for transfers occurring on or after January 1, 2015.

Preamble to Prop Reg 07/16/2015, Prop Reg § 1.83-2

Applicable Federal Rates - August 2015