On July 31, 2019, the Internal Revenue Service (IRS) Large Business and International (LB&I) division formally withdrew its Directive (LB&I-04-0118-005) instructing examiners on transfer pricing selection related to stock based compensation (SBC) in Cost Sharing Arrangements (CSAS). See here for IRS Notice of Withdrawal.

The Directive was issued January 12, 2018, after the Tax Court’s opinion in Altera which invalidated Treasury Regulation § 1.482-7A(d)(2). The IRS appealed Altera and issued Directive LB&I-04-0118-005, which we previously discussed here. The Directive instructed examiners to “[s]top opening issues related to stock-based compensation (SBC) included in cost-sharing arrangements (CSAS) intangible development costs (IDCs) until the Ninth Circuit issues an opinion in the Altera case on appeal.” At the time, the IRS indicated that it would issue further guidance once Altera was finally decided. On June 7, 2019, the Ninth Circuit reversed the Tax Court’s decision.

As such, the IRS withdrew the Directive and instructed examiners to resume opening new examinations of stock-based compensation in cost sharing arrangements. The IRS noted that the issues may be factually intensive and transfer pricing teams should develop the facts to support their analyses and conclusions. 

Practice Point: On July 24, 2019, Altera filed a petition to seek rehearing en banc. Several amicus briefs have been filed in support of the rehearing petition. And given the importance of the issue, we expect that the court will order the government to file a response to the petition. We will report on further developments.