In order for the IRS to respect the allocation of income between the Cayman subsidiary and the parent, the cost-sharing arrangement to keep and improve the intangible assets needs to pass regulatory muster.  One of the requirements of the regulations is that stock-based compensation be included as one of the costs.  The taxpayers argued, well enough to convince the Tax Court and one of the three judges on the panel, that in an arms-length deal parties would never include stock-based compensation.  The IRS did not deny that, but argued that the regulations could never replicate comparable transactions among unrelated parties because they don’t happen enough.

You generally don’t have somebody thinking they want to find somebody in a small country to buy the right to their intellectual property which they will then license back for use in the rest of the world.  Further there will be a cost revenue split on future developments.  You pretty much only do that sort of thing with related parties to save taxes or possibly for asset protection or some other regulatory concern.  In an arms-length deal you could not consider stock-based compensation since there is a chance that the other party’s stock could really take off.