Material difference in utilization of stock-based compensation. (i) The facts are the same as in paragraph (i) of Example 3. (ii) No stock options are granted to the employees of Taxpayer that engage in the relevant business activity. Thus, no deduction for stock options is made in determining “reported operating profit” (within the meaning of § 1.482-5(d)(5)) for the taxable year under examination. (iii) Stock options are granted to the employees of Companies A, B, C, and D, but none of these companies expense stock options for financial accounting purposes. Under a method in accordance with U.S. generally accepted accounting principles, however, Companies A, B, C, and D disclose the fair value of the stock options for financial accounting purposes. The utilization and treatment of employee stock options is summarized in the following table: Salaries and other non-option compensation Stock options fair value Stock options expensed Taxpayer 1,000 0 N/A Company A 7,000 2,000 0 Company B 4,300 250 0 Company ...
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