The IRS on July 16 released AM 2021-004, a legal advice memorandum issued by Associate Chief Counsel (International) (the "CCM"). The CCM provides non-taxpayer-specific legal advice regarding the potential timing and amount of adjustments arising from transfer pricing examinations of stock-based compensation (SBC) costs involving taxpayers' cost-sharing agreements (CSAs) that included so-called "reverse claw-back" provisions which are assumed to have been triggered by a final decision in the Altera litigation. (See our July 7, 2020 Tax Insight for details of the case.)
The CCM provides an indication of the adjustments that the IRS intends to pursue on examination of taxpayers that did not include SBC costs under their CSAs, and in particular how the IRS intends to coordinate such adjustments with the income inclusions triggered under taxpayers’ contractual reverse claw-back clauses. The CCM represents the IRS’s effort to provide definitive answers on this coordination issue.
The takeaway: Overall, the CCM can be seen as helpful in terms of providing taxpayers with more certainty as to how the IRS intends to handle the inclusion of SBC costs for prior years under CSAs, and by appearing to eliminate the chance that the same income will be double-counted in connection with prior-year adjustments and reverse claw-back true-ups. Taxpayers have been put on notice, however, that for SBC costs incurred in closed years, the IRS plans to hold taxpayers to their contractually established prices under such reverse claw-back provisions and thus could pursue adjustments that effectively include unshared SBC costs from closed years.