McKesson Corporation (McKesson) has petitioned the U.S. District Court for the Northern District of Texas to refund about $9.6 million in taxes for tax years 2007—2012 (McKesson Corp. v. United States, No. 3:25-cv-01102 (May 2, 2025). McKesson alleges that the IRS should not have required McKesson to include stock-based compensation (SBC) in shared cost pools under its cost-sharing arrangements (CSAs) with foreign affiliates. McKesson further alleges that the regulation under IRC Section 482 upon which this determination was based is an invalid interpretation of IRC Section 482 because it (1) departs from the arm's length standard, and (2) is entitled to "no deference, respect or weight" under Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024).

Stock-based compensation

McKesson and its Irish subsidiary, McKesson Financial Holdings Limited, entered into several CSAs for the purpose of research and development of intangible assets. McKesson Corp. did not include the SBC paid to its employees as a shared cost in any of its CSAs during the years at issue. The IRS proposed an adjustment to increase McKesson's income; McKesson then paid the restated amount and timely applied for a refund.

McKesson alleges in its complaint that (1) the SBC rule is not a valid interpretation of IRC Section 482 following Loper Bright, and (2) the Treasury and IRS did not properly comply with the Administrative Procedure Act's reasoned decision-making standard and procedural requirements when issuing the SBC rule.

Altera

The last case that litigated the inclusion of SBC in CSAs was Altera v. Commissioner (Altera). In July 2015, the US Tax Court, in a unanimous decision reviewed by the full court, held in Altera that the 2003 regulation requiring participants in CSAs to share SBC costs was invalid (Altera v. Commissioner, 145 T.C. 91 (2015)). In June 2019, a divided panel of the US Court of Appeals for the Ninth Circuit reversed the Tax Court and upheld the 2003 regulation requiring controlled participants to include the cost of SBC in a CSA (Altera v. Commissioner, 926 F.3d 1061 (9th Cir. 2019)). In June 2020, the US Supreme Court denied Altera's petition for a writ of certiorari.

In September 2020, the IRS released a new practice unit titled "Cost Sharing Arrangements with Stock Based Compensation" (DCN INT-T-226), focusing on the inclusion of SBC as an intangible development cost (IDC) under a CSA subject to Treas. Reg. Section 1.482-7 (see Tax Alert 2020-2413). In July 2021, the IRS Office of Chief Counsel released a generic legal advice memorandum (AM 2021-004), in the context of SBC costs in CSAs that include a "reverse claw-back" provision, but do not share SBC costs, asserting that the IRS can make certain allocations to make the cost-sharing transactions consistent with an arm's-length result (see Tax Alert 2021-1389).

In one of the first transfer pricing regulatory challenges that will be decided under Loper Bright, Abbott Laboratories has disputed the IRS adjusting its income by adding SBC to (1) intercompany service fees that Abbott and certain US affiliates charged to certain foreign affiliates, and (2) a shared cost pool under a qualified cost-sharing arrangement between two group entities. Abbott asserts that the intercompany service fees were arm's length and argues that requiring SBC to be included in the cost base for services under Treas. Reg. Section 1.482-9, and in the cost pool for a cost-sharing arrangement under Treas. Reg. Section 1.482-7(d)(1) and (3), is inconsistent with IRC Section 482 (see Tax Alert 2025-0195).

Implications

An appeal from the Northern District of Texas in McKesson would lie in the US Court of Appeals for the Fifth Circuit, while an appeal from the Tax Court in Abbott would lie in the Seventh Circuit. Either of these cases could lead to a split of authority on the SBC issue with Altera in the Ninth Circuit. In such an instance, the US Supreme Court could have the final say on this longstanding issue.