On 5 August 2019, the U.S. IRS published a memorandum dated 31 July 2019 on the formal withdraw of Directive LB&I-04-0118-005. Directive LB&I-04-0118-005 was issued on 12 January 2018 and provided instructions for examiners on transfer pricing issue selection related to SBC in CSAs.

Background:  U.S. taxpayers that are cost sharing participants are required to include SBC as intangible development costs (IDCs), under Treas. Reg. §§ 1.482-7A(d)(2) and 1.482-7(d)(3), if such costs are directly identified with, or reasonably allocable to, the intangible development activity of the CSA.

In Altera Corp. v. Commissioner, 145 T.C. 91 (2015), the Tax Court invalidated Treas. Reg. § 1.482-7A(d)(2).  The IRS appealed Altera and issued Directive LB&I-04-0118-005 on January 12, 2018, directing examiners to stop opening new examinations for issues related to SBC included in CSA IDCs until the outcome of the Altera appeal is known.  On June 7, 2019, the United States Court of Appeals for the Ninth Circuit reversed the U.S. Tax Court’s opinion in Altera.

Withdrawal of Directive:  Based on the Ninth Circuit’s decision in Altera, I am formally withdrawing Directive LB&I-04-0118-005. With the issuance of this Withdrawal, examiners should continue applying Treas. Reg. §§ 1.482-7A(d)(2) and 1.482-7(d)(3), including opening new examinations of CSA SBC issues when appropriate.  These issues may be factually intensive, and transfer pricing teams should develop the facts to support their analyses and conclusions.  Where appropriate, Issue Teams should consider consulting the Practice Network and Counsel for support in developing the most reliable analyses of this issue.  We will continue to monitor any further developments related to the Ninth Circuit’s decision.  

Effective Date: July 31, 2019