                      T.C. Memo. 2000-388



                    UNITED STATES TAX COURT



   SEAGATE TECHNOLOGY, INC., SUCCESSOR IN INTEREST TO SEAGATE
PERIPHERALS, INC., f.k.a. CONNER PERIPHERALS, INC., Petitioner
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 15086-98.                Filed December 22, 2000.



         P, a domestic corporation, entered into a cost-
    sharing agreement with its foreign subsidiaries in
    connection with certain intangibles that were
    transferred to the subsidiaries. R determined that P
    should have included in the cost-sharing pool the cost
    of stock options for P’s employees who performed the
    research and development regarding the intangibles.
    Where there is a bona fide cost-sharing arrangement, R
    may make allocations only “to reflect each
    participant’s arm’s-length share of the cost of the
    risks of developing the property.” Sec. 1.482-2(d)(4),
    Income Tax Regs. P contends that R is limited to
    making allocations only where R is aware of actual
    arm’s-length circumstances where the cost of stock
    options is shared. P also contends that for purposes
    of summary judgment, R’s reliance on an expert’s
    opinion is not a “fact” for purposes of deciding
    whether the parties have a genuine dispute about a
    material fact.
                               - 2 -


          Held: Under the regulations, R is not required
     to be aware of arm’s-length circumstances as a
     prerequisite to the making of a determination
     allocating a cost in connection with a sharing
     agreement. Held further: Petitioner has not shown
     that there is no genuine issue of material fact.



     Mark A. Oates, Thomas V.M. Linguanti, John M. Peterson, Jr.,

Mary E. Wynn, and Andrew P. Crousore, for petitioner.

     Debra K. Estrem, Jeffrey A. Hatfield, Michael J. Cooper,

Bryce A. Kranzthor, Ewan D. Purkiss, and Mark S. Heroux, for

respondent.



                        MEMORANDUM OPINION

     GERBER, Judge:   Petitioner moved for partial summary

judgment1 concerning what has been denominated the “section 4822

stock option cost-sharing issue”.   In particular, petitioner

questions whether respondent may employ section 482 to make an

     1
       Petitioner has filed two motions for partial summary
judgment. This opinion addresses the issue that the parties have
denominated the “section 482 stock option cost-sharing issue”.
The other summary judgment motion involves what has been
denominated the “Read-Rite issue”, addressing whether the
“relation back doctrine” established in Arrowsmith v.
Commissioner, 344 U.S. 6 (1952), applies in characterizing
petitioner’s gain on the sale of stock for purposes of sec. 954.
See Seagate Technology, Inc. v. Commissioner, T.C. Memo. 2000-
361.
     2
       All section references are to the Internal Revenue Code in
effect for the 1990, 1991, and 1992 tax years, and all Rule
references are to the Tax Court Rules of Practice and Procedure,
unless otherwise indicated.
                               - 3 -

allocation to include petitioner’s cost, if any, of employee

stock options in the cost-sharing pool for purposes of a cost-

sharing agreement between petitioner and its foreign

subsidiaries.

     In support of its motion, petitioner argues that, as a

matter of law, respondent is prohibited from making an allocation

with respect to the cost-sharing arrangement for the following

reasons:   (1) Respondent is not aware of specific arm’s-length

dealings where stock option costs were shared; (2) respondent

relies on opinion as opposed to factual support for inclusion of

the “at-the-money” stock options3 in the pool of costs; (3)

section 1.482-2(b)(5)(ii), Income Tax Regs., excludes “expenses

associated with the issuance of stock”; and (4) petitioner

allocated and apportioned the costs of nonintegral support

services consistently using a reasonable method in keeping with

sound accounting practices within the meaning of section 1.482-

2(b)(6)(i), Income Tax Regs.




     3
       An “at-the-money” stock option is issued at an exercise
price pegged to the market value on the issue date. Accordingly,
if the market value of the stock remains at the option issue
price or lower, the option will not be exercised. Conversely, if
the market price exceeds the option issue price, the option would
more likely be exercised.
                                 - 4 -

     Respondent counters that:    (1) Section 1.482-2(d)(4)4 and

(b)(4), Income Tax Regs., requires that “all costs” be included

in cost-sharing arrangements, and “all costs” include employee

stock options; and (2) there are disputed material facts

concerning whether arm’s-length parties would share the cost of

stock options granted to employees who performed the research and

development for the transferred intangible.

                            Background

     Petitioner is the successor in interest to Conner

Peripherals, Inc. (Conner Domestic), which developed and

manufactured hard disk drives for sale to personal computer

manufacturers and others.   Effective January 1, 1988, Conner

Domestic and its wholly owned foreign manufacturing subsidiary,

Conner Peripherals Singapore, Ltd. (Conner Foreign 1), entered

into a cost-sharing agreement.    Effective July 1, 1990, Conner

Domestic, Conner Foreign 1, and Conner Domestic’s wholly owned

Singapore corporation, Conner Peripherals Pte., Ltd., entered

into a new cost-sharing agreement for sharing research and

development (R&D) costs, and the 1988 cost-sharing agreement was



     4
       Sec. 1.482-2(d), Income Tax Regs., was amended in 1993,
and respondent refers to the amended version (sec. 1.482-2A(d),
Income Tax Regs.) in his materials. Petitioner, on the other
hand, refers to the unamended version. While the years we
consider predate the amendment, the amended version, to the
extent pertinent here, has not been changed. Accordingly, the
references used by the parties are interchangeable.
                               - 5 -

terminated.   Pursuant to the new agreement, the three

corporations shared $62.9 million, $85 million, and $94.7 million

of R&D costs for the development of a new generation of disk

drives for 1990, 1991, and 1992, respectively.

     In connection with an audit, respondent challenged certain

of the allocations under the cost-sharing agreement.     Agreement

was reached with respect to all determined allocations with the

exception of respondent’s determination that the value or cost of

stock options granted to Conner Domestic’s employees had to be

included in the cost-sharing pool.     Petitioner contended that

arm’s-length parties would not share the cost, if any, of

employee stock options, and respondent was not aware of any

arm’s-length cost-sharing arrangement where the parties shared

the cost incurred with respect to the grant of an at-the-money

stock option to the employees of one of the parties.

                            Discussion

     Summary judgment is an appropriate means by which to decide

a legal issue if the pleadings, admissions, and other materials,

including affidavits, demonstrate that no genuine issue exists as

to any material fact and a decision may be rendered as a matter

of law.   See Rule 121(b); Sundstrand Corp. v. Commissioner, 98

T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).     Summary

judgment is a device used to expedite litigation, but it is not a

substitute for a trial in that disputes over factual issues are
                                   - 6 -

not to be resolved in such proceedings.          See Espinoza v.

Commissioner, 78 T.C. 412, 415-416 (1982); Shiosaki v.

Commissioner, 61 T.C. 861 (1974).      The party moving for summary

judgment has the burden of showing the absence of a genuine issue

as to any material fact.    See Shiosaki v. Commissioner, supra.

     The dispute here concerns a cross-border transfer of

intangibles by a domestic parent to its foreign subsidiaries.

Under the regulations in effect for the years under

consideration, if a group of controlled entities participated in

a “bona fide cost-sharing arrangement” as to the development of

intangibles, then the district director is limited in his

approach to reallocation.   Sec. 1.482-2(d)(4), Income Tax Regs.

In particular, the regulation provides that if there is a “bona

fide cost-sharing arrangement”, then “the district director shall

not make allocations with respect to such acquisition [of

intangibles] except as may be appropriate to reflect each

participant’s arm’s length share of the costs and risks of

developing the property.”    Id.

     The regulation goes on to direct that cost-sharing

arrangements will be considered “arm’s length” where the “terms

and conditions * * * [are] comparable to those which would have

been adopted by unrelated parties similarly situated had they

entered into such an arrangement.”         Id.   There is no disagreement

about the bona fides of the cost-sharing agreements between the
                               - 7 -

controlled entities in this case.   Respondent and petitioner have

also resolved their differences regarding several other

reallocations determined by respondent.   The only question

presented is whether the controlled entities must share the cost,

if any, of the domestic parent’s stock options given to the

parent’s employees who performed research and development

regarding particular intangibles.

     Petitioner argues that where a bona fide cost-sharing

arrangement exists, section 1.482-2(d)(4), Income Tax Regs.,

requires respondent to have a factual predicate in order to make

any allocations.   Petitioner also points out that respondent has

admitted that he does not have evidence or knowledge of an actual

arm’s-length transaction where stock option costs were shared.

Respondent, instead, relies on an affidavit containing an

expert’s opinion that options are part of the costs that would be

shared between arm’s-length parties.   Where a bona fide cost-

sharing arrangement exists, petitioner contends that respondent

may not rely solely on an expert’s opinion as a basis for a stock

option cost-sharing allocation.   Petitioner also argues that

respondent’s expert’s opinion is unreliable under the standard

set forth in Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579

(1993), and related cases.   Additionally, petitioner contends

that even if the expert’s opinion was acceptable and/or

admissible, it is “opinion” and not “fact” and, therefore, could
                                - 8 -

not be the basis for a genuine issue as to a material fact so as

to preclude the use of summary judgment.

     Petitioner contends that it has shown that stock option

costs would not be shared in an arm’s-length transaction.

Petitioner’s proof on this point consists of the experiences of

its officers and employees, some of whom have worked for or with

unrelated third parties.    Petitioner also relies on the fact that

the Federal Acquisition Regulations System (FARS) classifies

qualifying employee stock purchase plans as “noncompensatory.”

That classification precludes payment by the Federal Government

for costs of qualified employee stock options in connection with

contracts governed by FARS.    Because FARS governs all civil and

military Federal executive branch contracts with private business

for goods and services, petitioner reasons that a large number of

“arm’s-length transactions” do not include the cost-sharing of

employee stock options.

     Respondent counters that the regulations provide that all

costs should be included and that stock option costs are “costs”

that may be allocated.    In addition, respondent relies on an

expert’s opinion that stock option costs would be accounted for

in an arm’s-length business relationship.    Respondent also relies

on what he believes are analogous court opinions in which the

stock options have been treated as compensation or as part of the

consideration for a transaction.    Finally, respondent contends
                                 - 9 -

that the FARS contracts are not comparable to the circumstances

in this case.

     The parties’ disagreement raises several questions about the

regulations.    Firstly, we must consider whether the Commissioner

must be aware of an actual arm’s-length transaction before

allocating costs between controlled entities that have a bona

fide cost-sharing arrangement.    Secondly, if an actual arm’s-

length example is not required, then we must decide whether the

Commissioner must possess facts and/or admissible evidence before

making such an allocation.5

     We do not agree with petitioner’s perception that respondent

would have to be aware of an actual arm’s-length transaction as a

prerequisite to making any allocations.    Section 1.482-2(d)(4),

Income Tax Regs., limits the Commissioner’s ability to make an

allocation, in the case of a bona fide cost-sharing arrangement,

to the appropriate reflection of each participant’s arm’s-length

share of the costs and risks of developing the property.    The

regulation goes on to direct that cost-sharing arrangements will

be considered “arm’s length” where the “terms and conditions

[are] comparable to those which would have been adopted by

unrelated parties similarly situated had they entered into such


     5
       The parties have raised several other factual and/or legal
questions that need not be addressed in the setting of this
summary judgment motion because of our conclusion that there is a
genuine issue as to a material fact.
                                - 10 -

an arrangement.”    (Emphasis added.)    Accordingly, there is no

requirement that the Commissioner have actual knowledge of an

arm’s-length situation as a prerequisite to the determination of

an allocation in the case of a cost-sharing arrangement.

     In addition, the regulatory standard does not require that

the Commissioner rely on fact, as opposed to opinion, before

making an allocation where there is a bona fide cost-sharing

arrangement.   There is no specific minimum standard prerequisite

to the Commissioner’s determination that an allocation should be

made.   Such a determination, however, may ultimately be found to

be arbitrary, capricious, or unreasonable, but that standard is

not the threshold enabling the Commissioner’s determination that

an allocation should be made.

     We do not conclude that respondent’s determination is or is

not well founded.   Likewise, we do not, in the context of this

opinion, accept, agree with, or disagree with respondent’s

expert’s opinion.   We must however, observe that for better or

for worse, expert witnesses have become the prognosticators and

the bane of transfer pricing cases.      Both parties may rely on

expert advice/opinions in reaching their conclusions and/or

defending their positions.

     Here we will be engaged in deciding whether the sharing of

stock option costs is a circumstance “comparable to those which

would have been adopted by unrelated parties”.      Sec. 1.482-
                              - 11 -

2(d)(4), Income Tax Regs.   Petitioner, from a limited universe of

information, has attempted to show that it is not aware of an

arm’s-length transaction where the costs of stock options were

shared; i.e., that its officers and employees are not aware of

any circumstances where costs of stock options have been shared

in petitioner’s experiences and in those of employees who have

experience with other companies.   Through Government FARS

contract standards, petitioner has attempted to show that some

portion of the potential universe of unrelated (arm’s-length)

research and development transactions did not involve the sharing

of the cost of employee stock options.

     In the context of a partial summary judgment motion, we

should not undertake the role of a fact finder.   In such a

setting, a judge should not engage in credibility determinations,

weighing the evidence, or drawing inferences from the “facts”

that the moving and nonmoving parties present.    See Anderson v.

Liberty Lobby, Inc., 477 U.S. 242, 255 (1985); Naftel v.

Commissioner, 85 T.C. 527, 529 (1985).   As significantly, “The

evidence of the non-movant is to be believed, and all justifiable

inferences are to be drawn in his favor.”   Anderson v. Liberty

Lobby, Inc., supra at 255; see also Adickes v. S.H. Kress & Co.,

398 U.S. 144, 158-159 (1970); Blanton v. Commissioner, 94 T.C.

491, 494 (1990).
                               - 12 -

     Neither party has advanced evidence or affidavits completely

resolving, as a factual matter, the question of whether arm’s-

length parties to a similar transaction would share the cost of

employee stock options.   There are also questions about whether

the options had any cost to petitioner at the time of issuance

and/or the appropriate time to measure the cost of the stock

options.    Under these circumstances, we are compelled to hold

that there is a genuine dispute about material facts.    We cannot

say that either party has presented or had the opportunity to

fully present facts or other evidence adequately addressing, for

the benefit of a fact finder, whether the regulatory standard has

been met.   Accordingly, this matter is not ripe for summary

adjudication, and further development and/or a trial may be

necessary to resolve the disputed factual aspects of this case.

     As to petitioner’s argument that there is no genuine dispute

about a material fact because respondent relies solely on opinion

evidence, we disagree with petitioner’s perspective.    Petitioner

chooses to focus on the means by which respondent may attempt to

convince the Court that his determination is well founded and/or

that his determination is based on conditions that are comparable

to those that would have been adopted by unrelated parties

similarly situated had they entered into such an arrangement.

Even though an expert’s opinion may be hearsay (i.e., not based

on the expert’s personal knowledge but on his perception of the
                              - 13 -

operative facts of a case), courts may rely on the expert’s

affidavits in denying motions for summary judgment.   See Cabrales

v. County of Los Angeles, 864 F.2d 1454, 1460 (9th Cir. 1988),

vacated and remanded 490 U.S. 1087 (1989); see also Newhouse

Broad. Corp. v. Commissioner, T.C. Memo. 2000-270.

     As explained above, under the regulations, respondent is not

required to present an actual example of an arm’s-length

transaction where the costs of employee stock options were

shared.6   Petitioner, if it follows its present approach, will

try to show that such costs are not shared by proving a negative;

i.e., no transactions where there was cost sharing.   Respondent,

on the other hand, if he follows his present approach, will

attempt to show by means of expert opinion that such costs would

or should be shared within the meaning of the regulations.

Obviously, an expert’s opinion and/or testimony is generally not

admissible as fact because he or she generally renders opinions

after the fact.   Nevertheless, experts’ opinions are received for

the purpose of assisting the trier of fact in reaching a factual

conclusion.

     Our conclusion that there remains a genuine dispute about a

material fact does not presume that respondent’s expert(s) is

qualified or that the opinion(s) is necessarily helpful or


     6
       We note, however, that such a showing would be preferred
to opinion evidence.
                             - 14 -

admissible, but that such questions cannot be decided in the

context of this summary judgment motion.    Likewise, petitioner’s

proposed evidence of the nonexistence of such an arm’s-length

sharing of stock option costs is not being “judged” at this time.

     To reflect the foregoing,

                                      An order will be issued

                                 denying petitioner’s motion for

                                 partial summary judgment regarding

                                 the “section 482 stock-option cost-

                                 sharing issue”.
