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IRS Issues Memorandum on Cost-Sharing Agreements with A Reverse-Claw Back Provision

26th July 2021

They say those who forget history are condemned to repeat it—which is just what the IRS does not want you to do. The Internal Revenue Service published a legal advice memorandum on cost-sharing agreements with reverse claw-back provision, inspired by its legal brawl with Altera. In case you need a refresher: The IRS and Altera went to the Ninth Circuit Court of Appeals in 2019 over the inclusion of stock-based compensation in cost-sharing agreements. Altera opposed its inclusion and lost, and the Supreme Court refused to hear its appeal last June. The recent memo looks at incidents where stock-based compensation is not included in cost sharing agreements, but a reverse claw-back provision is. A reverse claw back is when a taxpayer must include stock-based compensation amounts that were previously omitted into their cost pools because of a triggering event, like a court decision. The memo provides three conclusions regarding the taxable year of inclusion for any IRS adjustments, the impact of any IRS adjustment on any reserve claw-back true-up obligation, and the IRS’ authority to make other adjustments to ensure the arm’s length principle is met.