CIR

On this appeal from the tax court, we must decide whether, under the tax regulations in effect during tax years 1997, 1998 and 1999, related companies engaged in a joint venture to develop intangible property must include the value of certain stock option compensation one participant gives to its employees in the pool of costs to be shared under a cost sharing agreement, even when companies operating at arm’s length would not do so. The tax court found related companies are not required to share such costs and ruled that the Commissioner of Internal Revenue’s attempt to allocate such costs was arbitrary and capricious. We reverse and hold: (1) related companies in a cost sharing agreement to develop intangibles must share all costs related to the joint venture, even if unrelated companies would not do so; (2) stock options for which companies claim tax deductions are a cost under former 26 C.F.R. § 1.482-7 (d)(l); and (3) such costs are “related to” the intangible product development, as part of the compensation package offered to employees involved in activities under the joint venture.

I. BACKGROUND

Xilinx, Inc. (“Xilinx”) researches, develops, manufactures, markets and sells…