Consent for a cost-sharing arrangement to switch to the elective method for valuing stock-based compensation

Plain-English summary

When a U.S. company and its foreign subsidiary share the cost of developing intangibles under a cost sharing arrangement (CSA), the transfer pricing rules require them to include the cost of stock-based compensation (stock options, restricted shares, and restricted share units) given to employees who work on that development. There are two ways to measure and time that cost. The default method ties the cost to the tax deduction the company gets (for example, under section 83(h)). An alternative "elective" method, allowed by Treas. Reg. § 1.482-7(d)(3)(iii)(B) and extended by Notice 2005-99, instead uses the fair value charged against income in audited financial statements. Once a taxpayer has already been using the default method, switching to the elective method for existing arrangements requires the Commissioner's consent. Here a domestic corporation and its foreign subsidiary asked to change, going forward, from the default method to the elective method and from grant-date identification to period-by-period identification. Based on the taxpayer's representations, the IRS granted consent, effective for 60 days from the letter date, and only for stock options granted in tax years after the year consent is obtained. The IRS took no position on whether the taxpayer's past failure to include stock-based compensation costs was correct; that remains subject to audit.

Ruling snapshot

• Question: Will the IRS consent to a cost sharing arrangement prospectively switching to the elective method (and period-by-period identification) for stock-based compensation costs?
• Outcome: Approved (consent granted; taxpayer must amend its CSAs within 60 days, effective only for options granted in later tax years).
• Key authorities: IRC § 482; Treas. Reg. § 1.482-7(d)(1) and (d)(3)(ii)-(iii); Notice 2005-99, 2005-2 C.B. 1214.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202607005 Third Party Communication: None
Release Date: 2/13/2026 Date of Communication: Not Applicable
Index Number: 482.11-13
Person To Contact:
[Redacted] [Redacted], ID No. [Redacted]
[Redacted] Telephone Number:
[Redacted] [Redacted]
Refer Reply To:
CC:INTL:B06
PLR-110012-25
Date:
November 10, 2025

Legend

Taxpayer = [Redacted]
Company Z = [Redacted]
Year 1 = [Redacted]
Year 2 = [Redacted]
Year 3 = [Redacted]

Dear [Redacted]:

This responds to correspondence dated April 4, 2025, and August 29, 2025, submitted by
your representatives. The correspondence requests that the Internal Revenue Service (the
"Service") grant Taxpayer consent to use the methods described in Treas. Reg.
§ 1.482-7(d)(3)(iii)(B) and Notice 2005-99, 2005-2 C.B. 1214, for identifying, measuring, and
determining the timing of Taxpayer's costs of employee stock options, restricted shares,
and restricted share units (collectively referred to herein as "SBC") incurred in the intangible
development activities ("IDAs") of its cost sharing arrangements (each, a "CSA"), for
purposes of determining the amount Taxpayer must include as intangible development
costs ("IDCs").

The consent granted by this letter is based on facts and representations submitted by
Taxpayer and its representatives and accompanied by a penalties of perjury statement
executed by an appropriate party. This office has not verified any of the material submitted
in support of the request for rulings. Verification of the factual information, representations,
and other data may be required as part of the audit process.

FACTS
Taxpayer, a domestic corporation, was formed in Year 1. Between Years 2 and 3, Taxpayer
and its foreign subsidiary, Company Z, entered into multiple agreements that they intended
would qualify as CSAs within the meaning of Treas. Reg. § 1.482-7(b) (together, the
"Covered CSAs").

For certain years beginning after Year 2, Taxpayer and Company Z did not include SBC
costs in connection with the IDA in the Covered CSAs in its IDC pools. Taxpayer's failure to
include SBC costs in its IDC pools under the Covered CSAs, contrary to the requirement in
Treas. Reg. § 1.482-7(d)(1)(iii), is subject to audit by the Service.

Taxpayer filed this request for the Commissioner's consent to prospectively change its
method for measuring and determining the timing of SBC that Taxpayer must include as
IDCs from the default method to the method described in Treas. Reg. § 1.482-7(d)(3)(iii)(B),
as extended to cover certain restricted shares and restricted share units by Notice 2005-99
(the "elective method"). Taxpayer also requested consent to prospectively change its
method for identifying SBC allocable to each IDA from grant date identification as provided
in Treas. Reg. § 1.482-7(d)(3)(ii) to period-by-period identification as provided in Notice
2005-99.

Taxpayer has made the following representations:

1. Taxpayer is in compliance with all record-keeping requirements of Treas. Reg.
   § 1.482-7.
2. The SBC that are the subject of this ruling request are publicly traded stock within
   the meaning of Treas. Reg. § 1.482-7(d)(3)(iii)(B)(2).
3. The SBC are not subject to market conditions or significant post-vesting restrictions
   within the meaning of Accounting Standards Codification, Topic 718 (ASC
   718)/Statement of Financial Accounting Standards No. 123 (SFAS 123R)
   (predecessor of ACS 718).
4. The SBC's service and performance vesting restrictions do not have a substantial
   effect on the fair value of the SBC under U.S. GAAP and do not result in
   unreasonably long vesting periods within the meaning of ASC 718/ SFAS 123R.
5. With respect to any SBC the fair value of which is not reflected as a charge against
   income in audited financial statements, Taxpayer will identify such SBC for purposes
   of Treas. Reg. § 1.482-7 as if the fair value of such compensation were reflected as
   a charge against income in audited financial statements.
6. Taxpayer will treat SBC granted, but not vested, during the terms of the Covered
   CSAs, as vesting immediately before expiration or termination of the Covered CSA
   for purposes of Treas. Reg. § 1.482-7.
7. For all SBC granted on or after the first day of the taxable year beginning after the
   Taxpayer receives the Service's consent, Taxpayer will use the elective method and
   period-by-period identification.
8. If consent is granted, Taxpayer will amend its Covered CSAs to elect the elective
   method within 60 days of receiving such consent.
9. Taxpayer will apply the identification method consistently as required by and under
   the principles of Treas. Reg. § 1.482-7(d)(3)(iii)(C).
10. SBC granted prior to the term of its Covered CSAs will be excluded from the
    participants' IDCs.

LAW
Measurement and Timing of SBC Related to Intangible Development

Treas. Reg. § 1.482-7(d)(3)(iii)(A) provides, in relevant part, the default method for
measurement and timing of SBC IDCs as follows:

   the cost attributable to stock-based compensation is equal to the amount
   allowable to the controlled participant as a deduction for federal income tax
   purposes with respect to that stock-based compensation (for example,
   under section 83(h)) and is taken into account as an IDC under this section for
   the taxable year for which the deduction is allowable.

Treas. Reg. § 1.482-7(d)(3)(iii)(B)(1) provides the alternative elective method for
measurement and timing of SBC IDCs with respect to options on publicly traded stock as
follows:

   With respect to stock-based compensation in the form of options on publicly
   traded stock, the controlled participants in a CSA may elect to take into account
   all IDCs attributable to those stock options in the same amount, and as of the
   same time, as the fair value of the stock options reflected as a charge against
   income in audited financial statements or disclosed in footnotes to such
   financial statements, provided that such statements are prepared in
   accordance with United States generally accepted accounting principles by or
   on behalf of the company issuing the publicly traded stock.

Treas. Reg. § 1.482-7(d)(3)(iii)(B)(4) provides for the time and manner of making the
election, in relevant part, as follows:

   The election described in this paragraph (d)(3)(iii)(B) is made by an explicit
   reference to the election in the written contract required by paragraph (k)(1) of
   this section or in a written amendment to the CSA entered into with the consent
   of the Commissioner pursuant to paragraph (d)(3)(iii)(C) of this section.

Treas. Reg. § 1.482-7(d)(3)(iii)(C) provides, in relevant part:

   [I]f controlled participants already have granted stock options that have been
   or will be taken into account under the general rule of paragraph (d)(3)(iii)(A)
   of this section, then… the controlled participants may make the election
   described in paragraph (d)(3)(iii)(B) of this section only with the consent of the
   Commissioner, and the consent will apply only to stock options granted in
   taxable years subsequent to the taxable year in which consent is obtained.

Notice 2005-99 extended the elective method to:

   [N]onvested equity shares or nonvested equity share units within the meaning
   of Statement of Financial Accounting Standards No. 123, "Share-Based
   Payment," Financial Accounting Standards Board (rev. 2004) (SFAS 123R),
   provided that those shares or share units: (i) constitute or are issued with
   respect to publicly traded stock within the meaning of § 1.482-7(d)(2)(iii)(B)(2);
   and (ii) are not subject to market conditions or significant post-vesting
   restrictions within the meaning of SFAS 123R.

We refer to such shares and share units as "restricted shares and share units." An election
to apply the elective method to restricted shares or share units is generally made in the time
and manner set forth in Treas. Reg. § 1.482-7(d)(3)(iii)(B)(4). However, the consent of the
Commissioner is not required to elect the elective method for restricted shares and share
units if the election is made by a written amendment to the CSA not later than the latest due
date (with regard to extensions) of a federal income tax return of any controlled participant
for the first taxable year beginning after December 8, 2005.

Identifying SBC Related to Intangible Development

Treas. Reg. § 1.482-7(d)(3)(ii) provides the rule for identification of SBC with the IDA ("grant
date identification"), in relevant part, as follows:

   The determination of whether stock-based compensation is directly identified
   with, or reasonably allocable to, the IDA is made as of the date that the stock-
   based compensation is granted. Accordingly, all stock-based compensation
   that is granted during the term of the CSA and, at date of grant, is directly
   identified with, or reasonably allocable to, the IDA is included as an IDC under
   paragraph (d)(1) of this section.

Notice 2005-99 provides that a taxpayer may choose to determine whether SBC measured
by the elective method is allocable to an IDA on a period-by-period basis based on the
activities of the employee recipients of the SBC in the financial reporting periods in which
the SBC is taken into account for U.S. GAAP ("period-by-period identification"), rather than
using grant date identification. Notice 2005-99 further provides:

   Taxpayers' implementation of this identification method based on financial
   reporting periods must meet four requirements. First, the identification
   methodology must be applied consistently (under the principles of § 1.482-
   7(d)(2)(iii)(C)). Second, any stock-based compensation the fair value of which
   is not reflected as a charge against income in audited financial statements (for
   example, as in the case of certain stock options the fair value of which was
   disclosed in footnotes prior to the effective date of SFAS 123R) must be
   identified for purposes of § 1.482-7 as if the fair value of such compensation
   were reflected as a charge against income in audited financial statements.
   Third, as under the grant-date identification rule, controlled participants using
   this identification methodology must exclude stock-based compensation
   granted prior to the term of the QCSA. Fourth and finally, stock-based
   compensation granted but not vested during the term of the QCSA must be
   treated as vesting immediately before expiration or termination of the QCSA
   for purposes of § 1.482-7. Under this final requirement, if costs attributable to
   stock-based compensation granted during the term of the QCSA are allocable
   under U.S. GAAP to reporting periods subsequent to the term of the QCSA,
   the determination of whether these costs must be taken into account as
   intangible development costs must be based on the employee's activities as of
   the financial reporting period during which the date of the expiration or
   termination of the QCSA occurs.

Generally, pursuant to Treas. Reg. § 1.482-7(d)(3)(iii)(C) and (B)(4), a change of
identification method may be made only by a written amendment to the CSA entered into
with the consent of the Commissioner. However, Notice 2005-99 further provides that the
consent of the Commissioner is not required to change from grant date identification to
period-by-period identification if such written amendment is "made no later than the latest
due date (with regard to extensions) of a federal income tax return of any controlled
participant for the first taxable year beginning after December 8, 2005."

In applying period-by-period identification, Notice 2005-99 provides:

   [A]ctivities within the intangible development area are not necessarily
   coextensive with those activities classified as "research and development" for
   financial reporting purposes. Consequently, nothing in this notice should be
   interpreted as eliminating the requirement to take into account all stock-based
   compensation costs related to the intangible development area. Controlled
   participants must identify the stock-based compensation that is related to the
   intangible development area, notwithstanding that the activities conducted to
   develop intangibles covered by the QCSA may differ from the activities
   classified as "research and development" for U.S. GAAP purposes.

ANALYSIS
Based on the facts and representations Taxpayer has made, the Service grants Taxpayer
prospective consent to change to the elective method and period-by-period identification for
SBC in the Covered CSAs covered by Treas. Reg. § 1.482-7(d)(3)(iii)(B) and Notice 2005-
99. This consent is effective for 60 days from the date of this letter. Therefore, Taxpayer
must make the written elections in its Covered CSAs within 60 days from the date of this
letter. Those elections are effective "only with respect to stock options granted during
taxable years subsequent to the taxable year in which the Commissioner's consent is
obtained." See Treas. Reg. § 1.482-7(d)(3)(iii)(C).

The sole purpose of this private letter ruling is to grant consent for Taxpayer to use the
elective method and period-by-period identification for purposes of including SBC as an IDC
that Taxpayer must share for purposes of its Covered CSAs. Except as expressly provided
herein, no opinion is expressed or implied concerning the tax consequences of any aspect
of any transaction or item discussed or referenced in this letter, including the Covered
CSAs, or concerning the validity of any provisions within the Covered CSAs.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being
sent to your authorized representatives.

Sincerely,

Robert Z. Kelley

Branch Chief, Branch 6

Office of Associate Chief Counsel

(International)

CC:

[Redacted]