Xilinx, the Arm’s Length Standard and Independent Behavior: Can an Undue Emphasis on Independent Party Behavior Distort Arm’s Length?

Abstract

In this paper, we examine the controversy surrounding the Xilinx case and the question as to whether stock option costs are appropriately included in cost sharing agreements. Although the revised Ninth Circuit decision now affirms the findings of the Tax Court that stock options should not be included in costs sharing agreements, controversy and uncertainty remains. Drawing on the OECD report on employee stock options, we suggest that focusing exclusively on what independent parties do not share may obscure the issue as to exactly what independent parties do share. That is, an undue focus on the specifics of stock option costs and how to share these diverts attention from the fact that the parties are sharing an outcome (i.e. the benefits flowing from the intangible). We conclude by summarizing the uncertainty taxpayers are left with as a result of the Xilinx decisions.