Stock Options and Cost-Sharing Agreements • Contributions of Motor Vehicles, Boats and Planes • Disaster Relief • Mileage Rates

Lesli S. Laffie, J.D., LL.M.

Court Decisions

Stock Options and Cost-Sharing Agreements

According to the Tax Court in Xilinx Inc., 125 TC No. 4 (2005), the IRS abused its discretion in reallocating costs incurred by a domestic parent and its controlled Irish subsidiaries related to the issuance to, or exercise of stock options by, its employees. The Service had determined that the taxpayer was required, under its cost-sharing agreement, to take into account the spread (i.e., the stocks market price on the exercise date over the exercise price) on stock options exercised by the taxpayers employees.

Overview: Although Sec. 482 authorizes the IRS to allocate income, deductions, credits or allowances among controlled entities to prevent tax evasion or to clearly reflect income, it operates to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining the formers true taxable income. True taxable income is determined using the standard of a taxpayer dealing at arms length with an unrelated party. This is accomplished by analyzing the results of comparable transactions under comparable circumstances.

Holding: The Tax Court overruled the Services argument that Sec. 482s legislative and regulatory history demonstrated Congresss intent to supplant the use of comparable transactions with internal measures of cost and profit. Rather, the court held that it was unnecessary and inappropriate to resort to such history, because Regs. Sec. 1.482-1(b)(1) is unambiguous. In addition, it held that such history supports a finding that the arms-length standard applies in determining the appropriate allocation of costs under Regs. Sec. 1.482-7.

The court concluded that unrelated parties would not share the spread, because it is difficult to estimate, unpredictable and potentially large. Accordingly, the IRSs allocations were arbitrary and capricious, as they failed to meet the arms-length standard. The court noted that although the Service claimed that unrelated parties implicitly share the spread of the options, both parties agreed that unrelated parties would not explicitly share these amounts. Expert testimony indicated that, because of their speculative and controversial nature, as well as the tenuous link between the options and the value of the research and development functions performed by the holder, unrelated parties would not agree to pay for options granted to the employees of an entity providing such functions. The taxpayers uncontradicted evidence established that certainty and control are of paramount importance to unrelated parties involved in cost-sharing arrangements. (For more details, see Tax Trends, Allocation of Employee Stock Options to Cost-Sharing Agreement, this issue.)

From the IRS

Contributions of Motor Vehicles, Boats and Planes

The Service has issued a new form, 1098-C, Contributions of Motor Vehicles, Boats and Planes, for donations of these items exceeding $500.

Background: Under new Sec. 170(f)(12), added by American Jobs Creation Act of 2004 Section 884(a), contributions of motor vehicles, boats and airplanes exceeding $500 in claimed value are disallowed, unless the taxpayer attaches the donees contemporaneous written acknowledgment of the gift to the return claiming the contribution (for details, see Nissenbaum, Significant Individual Provisions of the AJCA, TTA, February 2005). The IRS has now issued Form 1098-C for such substantiation, for affected contributions made after 2004. A separate form must be used for each such gift in the same tax year exceeding $500 in claimed value.

New form: Generally, a charity is required to furnish Form 1098-C to donors within 30 days after (1) it sold the contribution or (2) the contribution date. The deduction is limited to the amount shown in box 4c, Gross proceeds from sale, unless box 5a or 5b is checked (see the exhibit). The taxpayer must attach copy B to the return claiming the deduction. (Form 8283, Noncash Charitable Contributions, must also be attached, if the total of all cash gifts exceeds $500.)

Disaster Relief

The IRS has extended its internal deadlines for a broad range of tax collection and assessment activities in areas devastated by Hurricanes Katrina and Rita, until Feb. 28, 2006.

The Katrina Emergency Tax Relief Act of 2005 (P.L. 109-73), as explained in IR-2005-112, and IR-2005-110, addressing Hurricane Rita, provide that internal deadlines will now be extended until that date for assessing and collecting taxes, issuing deficiency notices, allowing credits and refunds, filing suit against taxpayers, etc.

Taxpayers in affected areas also have until Feb. 28, 2006 to file returns, pay taxes or make deposits. They must identify themselves as hurricane victims when sending in forms or payments, to receive relief.

Mileage Rates

Responding to skyrocketing gasoline prices, the IRS, in Ann. 2005-71, has raised the mileage allowance for Sept. 1, 2005Dec. 31, 2005. The standard mileage rate for business is now 48.5 per mile, up from 40.5; medical and moving miles are now 22, up from 15. The mileage rate for charitable deduction purposes remains at 14, fixed by Sec. 170(i).