[Federal Register: November 9, 2006 (Volume 71, Number 217)]
[Rules and Regulations]
[Page 65722-65732]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09no06-7]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9296]
RIN 1545-BD60
Credit for Increasing Research Activities
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document contains final regulations relating to the
computation and allocation of the credit for increasing research
activities for members of a controlled group of corporations or a group
of trades or businesses under common control. These final regulations
reflect changes made to section 41 by the Revenue Reconciliation Act of
1989, which introduced the current computational regime for the credit,
and the Small Business Job Protection Act of 1996, which introduced the
alternative incremental research credit.
DATES: Effective Date: These regulations are effective November 9,
2006.
Applicability Dates: For dates of applicability see Sec. Sec.
1.41-6(j) and 1.41-8(b)(5).
FOR FURTHER INFORMATION CONTACT: Nicole R. Cimino (202) 622-3120 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document amends 26 CFR part 1 to provide revised rules for the
research credit under section 41, specifically section 41(f). On May
24, 2005, the Treasury Department and the IRS published in the Federal
Register (70 FR 29662) proposed amendments to the regulations under
section 41(f) by cross-reference to temporary regulations (REG-134030-
04) and temporary regulations (70 FR 29596) (TD 9205) (collectively,
the 2005 regulations) relating to the computation and allocation of the
credit for increasing research activities (research credit) under
section 41 for members of a controlled group of corporations or a group
of trades or businesses under common control (controlled groups). The
2005 notice of proposed rulemaking withdrew the proposed regulations
published in the Federal Register on July 29, 2003 (68 FR 44499) (REG-
133791-02) (the 2003 proposed regulations). A public hearing was held
on October 19, 2005. After considering the comments received and the
statements made at the public hearing regarding the 2005 regulations,
the 2005 regulations are adopted as revised by this Treasury decision.
These final regulations generally retain the provisions of the 2005
regulations with the modifications discussed below.
Summary of Comments and Explanation of Provisions
Allocation of the Group Credit
The 2005 regulations required that the group credit that did not
exceed the sum of the stand-alone entity credits of all the members of
the group be allocated among the members of a controlled group in
proportion to the relative amounts of each individual member's stand-
alone entity credit, computed for each member using the method that
would have yielded the largest stand-alone entity credit for that
member. Any excess of the group credit over the sum of the stand-alone
entity credits of all the members of the group was allocated among all
the members of the group based on the ratio of an individual member's
qualified research expenditures (QREs) to the sum of all the members'
QREs.
Although commentators generally agreed that the 2005 regulations
fixed the anomalous results (for example, none of the group credit
would be allocated to the members of the controlled group if no member
had stand-alone entity credits) created by the method in the 2003
proposed regulations, some commentators continued to disagree with the
stand-alone entity credit method. Commentators again suggested that the
members of a controlled group should be permitted to use any reasonable
method to allocate the group credit as long as the group's members
collectively do not claim more than 100 percent of the group credit, or
that if one method must be prescribed for all situations, a method that
allocates the group credit based on the relative amounts of each
member's total QREs (gross QREs method) is more appropriate than any
other method.
The Treasury Department and the IRS continue to believe that the
allocation method under section 41(f) should be based on a group
member's QREs in excess of a base amount, and that the stand-alone
entity credit method reflects the incremental nature of the credit. The
Treasury Department and the IRS believe that the stand-alone entity
credit method of the 2005 regulations is consistent with the purpose of
section 41(f) and its underlying legislative history. Further, a
single, prescribed method is necessary to ensure the group's members
collectively do not claim more than 100 percent of the group credit.
For the reasons stated above and in the preamble to the 2005
regulations, the final regulations do not adopt the changes suggested
by the commentators, and retain the allocation method contained in the
2005 regulations.
Special Allocation Rule for Consolidated Groups
The 2005 regulations provide that, for purposes of allocating the
group credit among the members of a controlled group (first-tier
allocation), a consolidated group (whose members are members of the
controlled group) is treated as a single member of the controlled
group, and a single stand-alone entity credit is computed for the
consolidated group. If the consolidated group is the only member of the
controlled group, the stand-alone entity credit computed for the
consolidated group is equal to the group credit. The portion of the
group credit allocated to a consolidated group must be allocated among
the members of the consolidated group (second-tier allocation) in
proportion to the stand-alone entity credits of the members of the
consolidated group. Under the 2005 regulations, this rule applied only
to taxable years ending on or after May 24, 2005.
One commentator argued that the treatment of a consolidated group
as a single member of a controlled group is contrary to the statutory
language of sections 41(f)(5) and 1563. The
[[Page 65723]]
Secretary is granted broad authority under section 1502 to provide
rules regarding the determination of the tax liability of an affiliated
group of corporations filing a consolidated return. The Treasury
Department and the IRS believe that the treatment of a consolidated
group as a single member of a controlled group of corporations for
purposes of section 41(f) is within the broad authority of section
1502. Moreover, this treatment is consistent with the single entity
treatment of a consolidated group under certain other provisions of the
Code.
One commentator argued that treating a consolidated group as a
single member of the controlled group adds unnecessary complexity and
is administratively burdensome because it requires additional rounds of
allocations of each consolidated group's credit among its members and
additional computations of each consolidated group member's stand-alone
entity credit. One commentator urged that, if the consolidated group
rule is retained, then the final regulations should not provide
specific rules for how the second-tier allocation is to be made.
The Treasury Department and the IRS continue to believe that
computing a stand-alone entity credit for each member of a consolidated
group does not impose a greater burden than computing a stand-alone
entity credit for a corporation that is not a member of a consolidated
group. The Treasury Department and the IRS also believe that specific
allocation rules are necessary with respect to the second-tier
allocation in order to prevent distortions and provide certainty
concerning each consolidated group member's share of the credit, for
example, if a member ceases to be a member of the consolidated group or
if a member's share of credits becomes subject to section 383.
Accordingly, the final regulations retain the rules contained in the
2005 regulations. The final regulations make clear, however, that the
special allocation rule for consolidated groups applies prospectively
only. Accordingly, the consolidated group rule contained in these final
regulations applies only to taxable years ending on or after the date
these final regulations are published in the Federal Register. For
taxable years ending on or after May 24, 2005, and before the date
these final regulations are published in the Federal Register,
taxpayers must use the special allocation rule for consolidated groups
contained in the 2005 regulations. However, taxpayers may choose to
apply the rule retroactively to taxable years ending before May 24,
2005, provided that all the members of the controlled group treat the
consolidated group as a single member of the controlled group.
One commentator stated that the 2005 regulations are unclear
whether, for purposes of the second-tier allocation, each consolidated
group member's stand-alone entity credit is to be computed in the same
manner as a controlled group member's stand-alone entity credit is
computed for purposes of a first-tier allocation (that is, using the
method that would have yielded the largest stand-alone entity credit
for that consolidated group member). The Treasury Department and the
IRS believe that the final regulations are clear that this is the rule,
as they provide that ``the principles of paragraph (c)'' (which
contains the rule) apply for purposes of the second-tier allocation. In
addition, this rule is illustrated in Example 3 of Sec. 1.41-6(e).
Start-Up Companies
For purposes of computing the group credit, Sec. 1.41-6T(b)(2) of
the 2005 regulations treated a controlled group as a start-up company
if the first taxable year in which at least one member of the group had
gross receipts and at least one member of the group had QREs begins
after December 31, 1983; or there were fewer than 3 taxable years
beginning after December 31, 1983, and before January 1, 1989, in which
at least one member of the group had gross receipts and at least one
member of the group had QREs. One commentator suggested that the rule
was not clear in a situation in which one member of the group has both
gross receipts and QREs in a taxable year beginning before January 1,
1984. Although the Treasury Department and IRS believe that the
temporary regulations are clear that the start-up rules do not apply if
the group had QREs and gross receipts in a year beginning before
January 1, 1984, no matter which member(s) of the group had the QREs
and gross receipts, the final regulations clarify the start-up company
rule of Sec. 1.41-6(b)(2) to make it explicit.
Alternative Incremental Research Credit
Section 41(c)(4) provides an election to determine the research
credit using the alternative incremental research credit (AIRC)
computation. Section 41(c)(4)(B) provides that the election to use the
AIRC method applies to all succeeding taxable years unless revoked with
the consent of the Secretary. The 2005 regulations generally provide
that elections (or revocations) of the AIRC method are made by
completing the portion of Form 6765, ``Credit for Increasing Research
Activities,'' relating to the AIRC method (in the case of an election
of the AIRC method) or to the regular method (in the case of a
revocation of the AIRC method), and attaching the completed form to the
taxpayer's timely filed original Federal income tax return for the year
to which the election (or revocation) applies. Once an election (or
revocation) is made for a taxable year, the taxpayer may not change the
election (or revocation) on an amended return. The 2005 regulations
provide that the provisions relating to AIRC elections and revocations
apply to taxable years ending on or after May 24, 2005.
The 2005 regulations provide special rules for making (or revoking)
an election for controlled groups under section 41(f)(1) (in which one
or more of the members do not join in filing a consolidated return). In
such cases, the designated member must make (or revoke) the AIRC
election on behalf of the group's members. The election (or revocation)
by the designated member is binding on all the members of the group for
the taxable year to which the election (or revocation) relates. The
2005 regulations provide that the designated member is that member of
the group that is allocated the greatest amount of the group credit. In
the event the members of a group compute the group credit using
different methods (either the regular method or the AIRC method) and at
least two members of the group qualify as the designated member, the
designated member is the member that computes the group credit using
the method that yields the greater group credit. If all the members of
a controlled group are members of a single consolidated group, the AIRC
election (or revocation) is made by the agent of the consolidated
group, determined pursuant to the rules of Sec. 1.1502-77.
One commentator suggested that the language contained in Sec.
1.41-8T(b)(4)(i) of the 2005 regulations be clarified to avoid any
implication that additional requirements (other than completing the
appropriate portion of Form 6765 and attaching the form to a timely
filed original Federal income tax return) apply to a designated member
seeking to elect (or revoke) the AIRC method. The final regulations
clarify that a designated member must follow the same procedures for
making (or revoking) an AIRC election that apply to other taxpayers.
A commentator also noted that the regulations do not address
whether and how changes to a member's research credit information after
the original Federal income tax return is timely filed may affect its
status as the designated
[[Page 65724]]
member. The commentator suggested that the final regulations clarify
what happens if the designated member at the time of filing
subsequently is determined not to be the designated member. The
Treasury Department and the IRS agree that clarification regarding this
issue is needed. Accordingly, the final regulations are clarified to
provide that the term designated member means the member of the group
that is allocated the greatest amount of the group credit under
paragraph (c) of Sec. 1.41-6 based on the amount of credit reported on
the original timely filed Federal income tax return.
A commentator questioned what happens if the designated member
fails to timely file an original Federal income tax return. The
Treasury Department and the IRS believe that the designated member must
timely file a return in order for the group to elect (or revoke) the
AIRC method. Accordingly, if the designated member fails to timely file
for the current credit year (and thus, fails to elect (or revoke) the
AIRC method for that year), then the method used by the group in the
immediately preceding credit year remains the method in effect for the
current credit year. The final regulations are amended to clarify this
rule.
The commentator also suggested that the final regulations allow the
members of a controlled group to decide which member of the group will
be the designated member. The Treasury Department and the IRS believe
that it is necessary to have a bright-line test, applicable to all
controlled groups, to provide certainty as to the identity of the
designated member, and that to allow the members of a controlled group
to decide which member's election (or revocation) will bind all the
members of the group would not provide certainty in all situations.
Accordingly, this comment has not been adopted.
Another commentator urged the Treasury Department and the IRS to
allow taxpayers to elect the AIRC method on an amended return.
Alternatively, the commentator argued that if taxpayers cannot elect
the AIRC method on an amended return, the final regulations should
provide a special rule under which a taxpayer's research credit,
computed by the taxpayer under the regular method, may not be adjusted
on audit below the amount that would have been allowable under the AIRC
method. The Treasury Department and the IRS believe that requiring an
election to be made only on a timely filed original Federal income tax
return is consistent with the statute and the doctrine of elections,
and that the commentator's suggestion would inappropriately limit the
authority of the IRS to conduct examinations. Thus, these final
regulations retain the rules as contained in the 2005 regulations.
Finally, a commentator suggested that, with respect to the AIRC
provisions, the effective date for the 2005 regulations should not be
limited to taxable years ending on or after May 24, 2005, but should
apply as well to any taxable year ending before that date, provided
that the original Federal income tax return for that year has not yet
been filed. The Treasury Department and the IRS believe that making
this option available retroactively to taxpayers that have not yet
filed their returns would treat similarly situated taxpayers
differently. For example, taxpayers that already had filed their
returns would have been required to request permission for a
revocation, while taxpayers that had not filed their returns would be
eligible for the automatic revocation procedures set forth in the 2005
regulations. Thus, the Treasury Department and the IRS believe that it
is appropriate to limit the application of this rule to prospective use
only. The final regulations are effective for taxable years ending on
or after the date these final regulations are published in the Federal
Register. For taxable years ending on or after May 24, 2005, and before
the date these final regulations are published in the Federal Register,
taxpayers must use the rules contained in the 2005 regulations.
Other
Several commentators mentioned that the definition of trade or
business in the 2005 regulations was changed from the prior
regulations. The change in the 2005 regulations was inadvertent, and
the definition has been returned to the language from the regulations
existing prior to the issuance of the 2005 regulations. For taxable
years prior to the effective date of these final regulations, taxpayers
may rely upon the definition of trade or business in these final
regulations.
Another commentator requested that the regulations provide guidance
as to whether the section 280C(c) election is made member by member or
by the entire controlled group. This issue is beyond the scope of these
final regulations, as guidance would have to be provided under the
authority of section 280C rather than section 41. The Treasury
Department and the IRS may consider addressing this issue in separate
guidance.
Effective Date
The preamble to the 2005 regulations states that because the
Treasury Department and the IRS decided to retain the general rules for
the computation and allocation of the group credit contained in the
2003 proposed regulations, with certain modifications, the 2005
regulations were effective for taxable years ending on or after May 24,
2005. For taxable years prior to those covered by the 2005 regulations,
a taxpayer generally may use any reasonable method of computing and
allocating the group credit. As explained in the preamble to the 2005
regulations, paragraph (b) of the 2005 regulations, relating to the
computation of the group credit, and paragraph (c) of the 2005
regulations, relating to the allocation of the group credit, apply to
taxable years ending on or after December 29, 1999, if the members of a
controlled group, as a whole, claimed more than 100 percent of the
amount that would be allowable under paragraph (b). In the case of a
controlled group whose members have different taxable years and whose
members use inconsistent methods of allocation, the members of the
controlled group are deemed to have, as a whole, claimed more than 100
percent of the amount that would be allowable under paragraph (b).
One commentator argued that the 2005 regulations should not be
effective until final regulations are published in the Federal
Register. The Treasury Department and the IRS continue to believe that
the general May 24, 2005, effective date is appropriate, because these
final regulations are substantially similar to the 2003 proposed
regulations.
Another commentator objected to the use of the December 29, 1999,
effective date for the portions of the 2005 regulations that are
retroactive, because that is the date that the previous proposed
regulations (2000 proposed regulations) were sent to the Federal
Register, and not the date (January 4, 2000) on which they were
published. The Treasury Department and the IRS continue to believe that
the December 29, 1999, effective date is the appropriate date, because
this is the date the 2000 proposed regulations were filed with the
Federal Register and, thus, were made available to the public.
Additionally, section 7805(b)(3) allows any regulation to take effect
or apply retroactively to prevent abuse.
Another commentator criticized the retroactive application of the
rule requiring that a member's stand-alone entity credit be computed
using whichever method results in the greater stand-alone entity credit
for that member, without regard to the method used to compute the group
credit. The
[[Page 65725]]
commentator stated that the incentive effect sought can only be
achieved prospectively, and that to allow use of the rule retroactively
may cause abusive inconsistencies where some members of the group rely
on the 2003 proposed regulations, while other members amend to follow
the new rule. While the Treasury Department and the IRS do not want to
encourage potentially abusive inconsistencies in years that taxpayers
believe are settled, the Treasury Department and the IRS believe that
one bright line is appropriate and do not want to treat similarly
situated taxpayers differently.
Another commentator suggested that the final regulations make clear
that the special rule for consolidated groups is to be applied
prospectively only. The 2005 regulations required paragraph (b) of
those regulations, relating to the computation of the group credit, and
paragraph (c) of those regulations, relating to the allocation of the
group credit, to be applied retroactively in certain instances of
abuse. The 2005 regulations did not require paragraph (d), relating to
the special rule for consolidated groups, to be applied retroactively.
Thus, the Treasury Department and IRS did not intend that taxpayers be
required to apply retroactively the special rule for consolidated
groups. Accordingly, the final regulations clarify that the special
rule for consolidated groups applies only to taxable years ending on or
after the date these final regulations are published in the Federal
Register. The 2005 regulations apply for taxable years ending on or
after May 24, 2005, and before the date these final regulations are
published in the Federal Register. However, a controlled group may
choose to apply the rule in paragraph (d) retroactively if all the
members of the group do so, so that the controlled group, as a whole,
does not claim more than 100 percent of the group credit.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations and, because
these regulations do not impose on small entities a collection of
information requirement, the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis
is not required. Pursuant to section 7805(f) of the Code, the notice of
proposed rulemaking preceding these final regulations were submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.
Drafting Information
The principal author of these regulations is Nicole R. Cimino,
Office of Associate Chief Counsel (Passthroughs and Special
Industries). However, personnel from the IRS and Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by removing
the entry for Sec. 1.41-6T and adding an entry in numerical order to
read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.41-6 also issued under 26 U.S.C. 1502. * * *
0
Par. 2. In Sec. 1.41-0, the table of contents is amended by removing
the entries for Sec. 1.41-6T and Sec. 1.41-8T and adding entries for
Sec. 1.41-6 and Sec. 1.41-8 to read as follows:
Sec. 1.41-0 Table of contents.
* * * * *
Sec. 1.41-6 Aggregation of expenditures.
(a) Controlled groups of corporations; trades or businesses under
common control.
(1) In general.
(2) Consolidated groups.
(3) Definitions.
(b) Computation of the group credit.
(1) In general.
(2) Start-up companies.
(c) Allocation of the group credit.
(1) In general.
(2) Stand-alone entity credit.
(d) Special rules for consolidated groups.
(1) In general.
(2) Start-up company status.
(3) Special rule for allocation of group credit among consolidated
group members.
(e) Examples.
(f) For taxable years beginning before January 1, 1990.
(g) Tax accounting periods used.
(1) In general.
(2) Special rule when timing of research is manipulated.
(h) Membership during taxable year in more than one group.
(i) Intra-group transactions.
(1) In general.
(2) In-house research expenses.
(3) Contract research expenses.
(4) Lease payments.
(5) Payment for supplies.
(j) Effective date.
* * * * *
Sec. 1.41-8 Special rules for taxable years ending on or after May
24, 2005.
(a) Alternative incremental credit.
(b) Election.
(1) In general.
(2) Time and manner of election.
(3) Revocation.
(4) Special rules for controlled groups.
(5) Effective date.
0
Par. 3. Section 1.41-6 is added to read as follows.
Sec. 1.41-6 Aggregation of expenditures.
(a) Controlled group of corporations; trades or businesses under
common control--(1) In general. To determine the amount of research
credit (if any) allowable to a trade or business that at the end of its
taxable year is a member of a controlled group, a taxpayer must--
(i) Compute the group credit in the manner described in paragraph
(b) of this section; and
(ii) Allocate the group credit among the members of the group in
the manner described in paragraph (c) of this section.
(2) Consolidated groups. For special rules relating to consolidated
groups, see paragraph (d) of this section.
(3) Definitions. For purposes of this section--
(i) Consolidated group has the meaning set forth in Sec. 1.1502-
1(h).
(ii) Controlled group and group mean a controlled group of
corporations, as defined in section 41(f)(5), or a group of trades or
businesses under common control. For rules for determining whether
trades or businesses are under common control, see Sec. 1.52-1 (b)
through (g).
(iii) Credit year means the taxable year for which the member is
computing the credit.
(iv) Group credit means the research credit (if any) allowable to a
controlled group.
(v) Trade or business means a sole proprietorship, a partnership, a
trust, an estate, or a corporation that is carrying on a trade or
business (within the meaning of section 162). Any corporation that is a
member of a commonly controlled group shall be deemed to be carrying on
a trade or business if any other member of that group is carrying on
any trade or business.
(b) Computation of the group credit--(1) In general. All members of
a controlled group are treated as a single taxpayer for purposes of
computing the research credit. The group credit is
[[Page 65726]]
computed by applying all of the section 41 computational rules on an
aggregate basis. All members of a controlled group must use the same
method of computation, either the method described in section 41(a) or
the alternative incremental research credit (AIRC) method described in
section 41(c)(4), in computing the group credit for a credit year.
(2) Start-up companies--(i) In general. For purposes of computing
the group credit, a controlled group is treated as a start-up company
for purposes of section 41(c)(3)(B)(i) if--
(A) There was no taxable year beginning before January 1, 1984, in
which a member of the group had gross receipts and either the same
member or another member also had qualified research expenditures
(QREs); or
(B) There were fewer than three taxable years beginning after
December 31, 1983, and before January 1, 1989, in which a member of the
group had gross receipts and either the same member or another member
also had QREs.
(ii) Example. The following example illustrates the principles of
paragraph (b)(2)(i) of this section:
Example. A, B, and C, all of which are calendar year taxpayers,
are members of a controlled group. During the 1983 taxable year, A
had QREs, but no gross receipts; B had gross receipts, but no QREs;
and C had no QREs or gross receipts. The 1984 taxable year was the
first taxable year for which each of A, B, and C had both QREs and
gross receipts. A, B, and C had both QREs and gross receipts in
1985, 1986, 1987, and 1988. Because the first taxable year for which
each of A, B, and C had both QREs and gross receipts began after
December 31, 1983, each of A, B, and C is a start-up company under
section 41(c)(3)(B)(i) and each is a start-up company for purposes
of computing the stand-alone entity credit. During the 1983 taxable
year, at least one member of the group, A, had QREs and at least one
member of the group, B, had gross receipts, thus, the group had both
QREs and gross receipts in 1983. Therefore, the controlled group is
not a start-up company because the first taxable year for which the
group had both QREs and gross receipts did not begin after December
31, 1983, and there were not fewer than three taxable years
beginning after December 31, 1983, and before January 1, 1989, in
which a member of the group had gross receipts and QREs.
(iii) First taxable year after December 31, 1993, for which the
controlled group had QREs. In the case of a controlled group that is
treated as a start-up company under section 41(c)(3)(B)(i) and
paragraph (b)(2)(i) of this section, for purposes of determining the
group's fixed-base percentage under section 41(c)(3)(B)(ii), the first
taxable year after December 31, 1993, for which the group has QREs is
the first taxable year in which at least one member of the group has
QREs.
(iv) Example. The following example illustrates the principles of
paragraph (b)(2)(iii) of this section:
Example. D, E, and F, all of which are calendar year taxpayers,
are members of a controlled group. The group is treated as a start-
up company under section 41(c)(3)(B)(i) and paragraph (b)(2)(i) of
this section. The first taxable year after December 31, 1993, for
which D had QREs was 1994. The first taxable year after December 31,
1993, for which E had QREs was 1995. The first taxable year after
December 31, 1993, for which F had QREs was 1996. Because the 1994
taxable year was the first taxable year after December 31, 1993, for
which at least one member of the group, D, had QREs, for purposes of
determining the group's fixed-based percentage under section
41(c)(3)(B)(ii), the 1994 taxable year was the first taxable year
after December 31, 1993, for which the group had QREs.
(c) Allocation of the group credit--(1) In general. (i) To the
extent the group credit (if any) computed under paragraph (b) of this
section does not exceed the sum of the stand-alone entity credits of
all of the members of a controlled group, computed under paragraph
(c)(2) of this section, such group credit shall be allocated among the
members of the controlled group in proportion to the stand-alone entity
credits of the members of the controlled group, computed under
paragraph (c)(2) of this section:
[GRAPHIC] [TIFF OMITTED] TR09NO06.005
(ii) To the extent that the group credit (if any) computed under
paragraph (b) of this section exceeds the sum of the stand-alone entity
credits of all of the members of the controlled group, computed under
paragraph (c)(2) of this section, such excess shall be allocated among
the members of a controlled group in proportion to the QREs of the
members of the controlled group:
[GRAPHIC] [TIFF OMITTED] TR09NO06.006
(2) Stand-alone entity credit. The term stand-alone entity credit
means the research credit (if any) that would be allowable to a member
of a controlled group if the credit were computed as if section
41(f)(1) did not apply, except that the member must apply the rules
provided in paragraphs (d)(1) (relating to consolidated groups) and (i)
(relating to intra-group transactions) of this section. Each member's
stand-alone entity credit for any credit year must be computed under
whichever method (the method described in section 41(a) or the method
described in section 41(c)(4)) results in the greater stand-alone
entity credit for that member, without regard to the method used to
compute the group credit.
(d) Special rules for consolidated groups--(1) In general. For
purposes of applying paragraph (c) of this section, a consolidated
group whose members are members of a controlled group is treated as a
single member of the controlled group and a single stand-alone entity
credit is computed for the consolidated group.
(2) Start-up company status. A consolidated group's status as a
start-up company and the first taxable year after December 31, 1993,
for which a consolidated group has QREs are determined in accordance
with the principles of paragraph (b)(2) of this section.
(3) Special rule for allocation of group credit among consolidated
group members. The portion of the group credit that is allocated to a
consolidated group is allocated to the members of the consolidated
group in accordance with the principles of paragraph (c) of this
section. However, for this purpose, the stand-alone entity credit of a
member of a consolidated group is computed without regard to section
41(f)(1), but
[[Page 65727]]
with regard to paragraph (i) of this section.
(e) Examples. The following examples illustrate the provisions of
this section. Unless otherwise stated, no members of a controlled group
are members of a consolidated group, no member of the group made any
basic research payments or paid or incurred any amounts to an energy
research consortium, and except as provided in Example 6, the group has
not made an AIRC election:
Example 1. Group credit is less than sum of members' stand-alone
entity credits--(i) Facts. A, B, and C, all of which are calendar-
year taxpayers, are members of a controlled group. For purposes of
computing the group credit for the 2004 taxable year (the credit
year), A, B, and C had the following:
----------------------------------------------------------------------------------------------------------------
Group
A B C aggregate
----------------------------------------------------------------------------------------------------------------
Credit Year QREs................................ $200x $20x $110x $330x
1984-1988 QREs.................................. 40x 10x 100x 150x
1984-1988 Gross Receipts........................ 1,000x 350x 150x 1,500x
Average Annual Gross Receipts for 4 Years 1,200x 200x 300x 1,700x
Preceding the Credit Year......................
----------------------------------------------------------------------------------------------------------------
(ii) Computation of the group credit--(A) In general. The research
credit allowable to the group is computed as if A, B, and C were one
taxpayer. The group credit is equal to 20 percent of the excess of the
group's aggregate credit year QREs ($330x) over the group's base amount
($170x). The group credit is 0.20 x ($330x-$170x), which equals $32x.
(B) Group's base amount--(1) Computation. The group's base amount
equals the greater of: The group's fixed-base percentage (10 percent)
multiplied by the group's aggregate average annual gross receipts for
the 4 taxable years preceding the credit year ($1,700x), or the group's
minimum base amount ($165x). The group's base amount, therefore, is
$170x, which is the greater of: 0.10 x $1,700x, which equals $170x, or
$165x.
(2) Group's minimum base amount. The group's minimum base amount is
50 percent of the group's aggregate credit year QREs. The group's
minimum base amount is 0.50 x $330x, which equals $165x.
(3) Group's fixed-base percentage. The group's fixed-base
percentage is the lesser of: The ratio that the group's aggregate QREs
for the taxable years beginning after December 31, 1983, and before
January 1, 1989, bear to the group's aggregate gross receipts for the
same period, or 16 percent (the statutory maximum). The group's fixed-
base percentage, therefore, is 10 percent, which is the lesser of:
$150x/$1,500x, which equals 10 percent, or 16 percent.
(iii) Allocation of the group credit. Under paragraph (c)(2) of
this section, each member's stand-alone entity credit must be computed
using the method that results in the greater stand-alone entity credit
for that member. The stand-alone entity credit for each of A, B, and C
is greater using the method described in section 41(a). Therefore, the
stand-alone entity credit for each of A, B, and C must be computed
using the method described in section 41(a). A's stand-alone entity
credit is $20x. B's stand-alone entity credit is $2x. C's stand-alone
entity credit is $11x. The sum of the members' stand-alone entity
credits is $33x. Because the group credit of $32x is less than the sum
of the stand-alone entity credits of all the members of the group
($33x), the group credit is allocated among the members of the group
based on the ratio that each member's stand-alone entity credit bears
to the sum of the stand-alone entity credits of all the members of the
group. The $32x group credit is allocated as follows:
----------------------------------------------------------------------------------------------------------------
A B C Total
----------------------------------------------------------------------------------------------------------------
Stand-Alone Entity Credit....................... $20x $2x $11x $33x
Allocation Ratio (Stand-Alone Entity Credit/Sum 20/33 2/33 11/33 ..............
of Stand-Alone Entity Credits).................
Multiplied by: Group Credit..................... $32x $32x $32x ..............
Equals: Credit Allocated to Member.............. $19.39x $1.94x $10.67x 32x
----------------------------------------------------------------------------------------------------------------
Example 2. Group credit exceeds sum of members' stand-alone
entity credits--(i) Facts. D, E, F, and G, all of which are
calendar-year taxpayers, are members of a controlled group. For
purposes of computing the group credit for the 2004 taxable year
(the credit year), D, E, F, and G had the following:
----------------------------------------------------------------------------------------------------------------
Group
D E F G aggregate
----------------------------------------------------------------------------------------------------------------
Credit Year QREs................ $580x $10x $70x $15x $675x
1984-1988 QREs.................. 500x 25x 100x 25x 650x
1984-1988 Gross Receipts........ 4,000x 5,000x 2,000x 10,000x 21,000x
Average Annual Gross Receipts 5,000x 5,000x 2,000x 5,000x 17,000x
for 4 Years Preceding the
Credit Year....................
----------------------------------------------------------------------------------------------------------------
(ii) Computation of the group credit--(A) In general. The research
credit allowable to the group is computed as if D, E, F, and G were one
taxpayer. The group credit is equal to 20 percent of the excess of the
group's aggregate credit year QREs ($675x) over the group's base amount
($527x). The group credit is 0.20 x ($675x-$527x), which equals
$29.76x.
(B) Group's base amount--(1) Computation. The group's base amount
equals the greater of: The group's fixed-base percentage (3.10 percent)
multiplied by the group's aggregate average annual gross receipts for
the 4 taxable years preceding the credit year ($17,000x), or the
group's minimum
[[Page 65728]]
base amount ($337.50x). The group's base amount, therefore, is $527x,
which is the greater of: 0.031 x $17,000x, which equals $527x, or
$337.50x.
(2) Group's minimum base amount. The group's minimum base amount is
50 percent of the group's aggregate credit year QREs. The group's
minimum base amount is 0.50 x $675x, which equals $337.50x.
(3) Group's fixed-base percentage. The group's fixed-base
percentage is the lesser of: The ratio that the group's aggregate QREs
for the taxable years beginning after December 31, 1983, and before
January 1, 1989, bear to the group's aggregate gross receipts for the
same period, or 16 percent (the statutory maximum). The group's fixed-
base percentage, therefore, is 3.10 percent, which is the lesser of:
$650x/$21,000x, which equals 3.10 percent, or 16 percent.
(iii) Allocation of the group credit. Under paragraph (c)(2) of
this section, each member's stand-alone entity credit must be computed
using the method that results in the greater stand-alone entity credit
for that member. The stand-alone entity credits for D ($19.46x) and F
($1.71x) are greater using the AIRC method. Therefore, the stand-alone
entity credits for D and F must be computed using the AIRC method. The
stand-alone entity credit for G ($0.50x) is greater using the method
described in section 41(a). Therefore, the stand-alone entity credit
for G must be computed using the method described in section 41(a). E's
stand-alone entity credit computed under either method is zero. The sum
of the members' stand-alone entity credits is $21.67x. Because the
group credit of $29.76x is greater than the sum of the stand-alone
entity credits of all the members of the group ($21.67x), each member
of the group is allocated an amount of the group credit equal to that
member's stand-alone entity credit. The excess of the group credit over
the sum of the members' stand alone entity credits ($8.09x) is
allocated among the members of the group based on the ratio that each
member's QREs bear to the sum of the QREs of all the members of the
group. The $29.76x group credit is allocated as follows:
----------------------------------------------------------------------------------------------------------------
D E F G Total
----------------------------------------------------------------------------------------------------------------
Group Credit.................... .............. .............. .............. .............. $29.76x
Minus: Sum of Stand-Alone Entity $19.46x $0.00x $1.71x $0.50x 21.67x
Credits........................
Equals: Excess Group Credit..... .............. .............. .............. .............. 8.09x
Excess Group Credit............. $8.09x $8.09x $8.09x $8.09x ..............
Multiplied By Allocation Ratio: 580/675 10/675 70/675 15/675 ..............
QREs/Sum of QREs...............
Excess Group Credit Allocated... $6.95x $0.12x $0.84x $0.18x ..............
Plus: Stand-Alone Entity Credit. $19.46x $0.00x $1.71x $0.50x ..............
Equals: Credit Allocated to $26.41x $0.12x $2.55x $0.68x $29.76x
Member.........................
----------------------------------------------------------------------------------------------------------------
Example 3. Consolidated group within a controlled group--(i)
Facts. The facts are the same as in Example 2, except that D and E
file a consolidated return.
(ii) Allocation of the group credit--(A) In general. For purposes
of allocating the controlled group's research credit of $29.76x among
the members of the controlled group, D and E are treated as a single
member of the controlled group.
(B) Computation of stand-alone entity credits. The stand-alone
entity credit for the consolidated group is computed by treating D and
E as a single entity. Under paragraph (c)(2) of this section, the
stand-alone entity credit for each member must be computed using the
method that results in the greater stand-alone entity credit for that
member. The stand-alone entity credit for each of the DE consolidated
group ($17.55x) and F ($1.71x) is greater using the AIRC method.
Therefore, the stand-alone entity credit for each of the DE
consolidated group and F must be computed using the AIRC method. The
stand-alone entity credit for G ($0.50x) is greater using the method
described in section 41(a). Therefore, the stand-alone entity credit
for G must be computed using the method described in section 41(a). The
sum of the members' stand-alone entity credits is $19.76x.
(C) Allocation of controlled group credit. Because the group credit
of $29.76x is greater than the sum of the stand-alone entity credits of
all the members of the group ($19.76x), each member of the group is
allocated an amount of the group credit equal to that member's stand-
alone entity credit. The excess of the group credit over the sum of the
members' stand-alone entity credits ($10.00x) is allocated among the
members of the group based on the ratio that each member's QREs bear to
the sum of the QREs of all the members of the group. The group credit
of $29.76x is allocated as follows:
----------------------------------------------------------------------------------------------------------------
DE F G Total
----------------------------------------------------------------------------------------------------------------
Group Credit.................................... .............. .............. .............. $29.76x
Minus: Sum of Stand-Alone Entity Credits........ $17.55x $1.71x $0.50x 19.76x
Equals: Excess Group Credit..................... .............. .............. .............. $10.00x
Excess Group Credit............................. $10.00x $10.00x $10.00x
Multiplied By Allocation Ratio: QREs/Sum of QREs 590/675 70/675 15/675 ..............
Excess Group Credit Allocated................... $8.74x $1.04x $0.22x ..............
Plus: Stand-Alone Entity Credit................. $17.55x $1.71x $0.50x ..............
Equals: Credit Allocated to Member.............. $26.29x $2.75x $0.72x 29.76x
----------------------------------------------------------------------------------------------------------------
(iii) Allocation of the group credit allocated to consolidated
group--(A) In general. The group credit that is allocated to a
consolidated group is allocated among the members of the consolidated
group in accordance with the principles of paragraph (c) of this
section.
(B) Computation of stand-alone entity credits. Under paragraph
(c)(2) of this section, the stand-alone entity credit for each member
of the consolidated group must be computed using the method that
results in the greater stand-alone entity credit for that member. The
stand-alone entity credit for D ($19.46x) is
[[Page 65729]]
greater using the AIRC method. Therefore, the stand-alone entity credit
for D must be computed using the AIRC method. The stand-alone entity
credit for E is zero under either method. The sum of the stand-alone
entity credits of the members of the consolidated group is $19.46x.
(C) Allocation among members of consolidated group. Because the
amount of the group credit allocated to the consolidated group
($26.29x) is greater than $19.46x, the sum of the stand-alone entity
credits of all the members of the consolidated group, each member of
the consolidated group is allocated an amount of the group credit
allocated to the consolidated group equal to that member's stand-alone
entity credit The excess of the group credit allocated to the
consolidated group over the sum of the consolidated group members'
stand alone entity credits ($6.83x) is allocated among the members of
the consolidated group based on the ratio that each member's QREs bear
to the sum of the QREs of all the members of the consolidated group.
The group credit of $26.29x allocated to the DE consolidated group is
allocated between D and E as follows:
----------------------------------------------------------------------------------------------------------------
D E Total
----------------------------------------------------------------------------------------------------------------
Group Credit.................................................... .............. .............. $26.29x
Minus: Sum of Stand-Alone Entity Credits........................ $19.46x $0.00x 19.46x
Excess Group Credit............................................. .............. .............. 6.83x
Excess Group Credit............................................. $6.83x $6.83x ..............
Multiplied By Allocation Ratio: QREs/Sum of QREs................ 580/590 10/590 ..............
Excess Group Credit Allocated................................... $6.71x $0.12x ..............
Plus: Stand-Alone Entity Credit................................. $19.46x $0.00x ..............
Equals: Credit Allocated to Member.............................. $26.17x $0.12x 26.29x
----------------------------------------------------------------------------------------------------------------
Example 4. Member is a start-up company--(i) Facts. H, I, and J,
all of which are calendar-year taxpayers, are members of a
controlled group. The first taxable year for which J has both QREs
and gross receipts begins after December 31, 1983, therefore, J is a
start-up company under section 41(c)(3)(B)(i). The first taxable
year for which H and I had both QREs and gross receipts began before
December 31, 1983, therefore, H and I are not start-up companies
under section 41(c)(3)(B)(i). For purposes of computing the group
credit for the 2004 taxable year (the credit year), H, I, and J had
the following:
----------------------------------------------------------------------------------------------------------------
Group
H I J aggregate
----------------------------------------------------------------------------------------------------------------
Credit Year QREs................................ $200x $20x $50x $270x
1984-1988 QREs.................................. 55x 15x 0x 70x
1984-1988 Gross Receipts........................ 1,000x 400x 0x 1,400x
Average Annual Gross Receipts for 4 Years 1,200x 200x 0x 1,400x
Preceding the Credit Year......................
----------------------------------------------------------------------------------------------------------------
(ii) Computation of the group credit--(A) In general. The
research credit allowable to the group is computed as if H, I, and J
were one taxpayer. The group credit is equal to 20 percent of the
excess of the group's aggregate credit year QREs ($270x) over the
group's base amount ($135x). The group credit is 0.20 x ($270x--
$135x), which equals $27x.
(B) Group's base amount--(1) Computation. The group's base
amount equals the greater of: the group's fixed-base percentage (5
percent) multiplied by the group's aggregate average annual gross
receipts for the 4 taxable years preceding the credit year
($1,400x), or the group's minimum base amount ($135x). The group's
base amount, therefore, is $135x, which is the greater of: 0.05 x
$1,400x, which equals $70x, or $135x.
(2) Group's minimum base amount. The group's minimum base amount
is 50 percent of the group's aggregate credit year QREs. The group's
minimum base amount is 0.50 x $270x, which equals $135x.
(3) Group's fixed-base percentage. Because the first taxable
year in which at least one member of the group has QREs and at least
one member of the group has gross receipts does not begin after
December 31, 1983, the group is not a start-up company. Therefore,
the group's fixed-base percentage is the lesser of: the ratio that
the group's aggregate QREs for the taxable years beginning after
December 31, 1983, and before January 1, 1989, bear to the group's
aggregate gross receipts for the same period, or 16 percent (the
statutory maximum). The group's fixed-base percentage, therefore, is
5 percent, which is the lesser of: $70x/$1,400x, which equals 5
percent, or 16 percent.
(iii) Allocation of the group credit. Under paragraph (c)(2) of
this section, the stand-alone entity credit for each member of the
group must be computed using the method that results in the greater
stand-alone entity credit for that member. The stand-alone entity
credits for H ($20x), I ($2x), and J ($5x) are greater using the
method described in section 41(a). Therefore, the stand-alone entity
credits for each of H, I, and J must be computed using the method
described in section 41(a). The sum of the stand-alone entity
credits of the members of the group is $27x. Because the group
credit of $27x is equal to the sum of the stand-alone entity credits
of all the members of the group ($27x), the group credit is
allocated among the members of the group based on the ratio that
each member's stand-alone entity credit bears to the sum of the
stand-alone entity credits of all the members of the group. The
group credit of $27x is allocated as follows:
----------------------------------------------------------------------------------------------------------------
H I J Total
----------------------------------------------------------------------------------------------------------------
Stand-Alone Entity Credit....................... $20x $2x $5x $27x
Allocation Ratio (Stand-Alone Entity Credit/Sum 20/27 2/27 5/27 ..............
of Stand-Alone Entity Credits).................
Multiplied by: Group Credit..................... $27x $27x $27x ..............
Equals: Credit Allocated to Member.............. $20x $2x $5x 27x
----------------------------------------------------------------------------------------------------------------
Example 5. Group is a start-up company--(i) Facts. K, L, and M,
all of which are calendar-year taxpayers, are members of a
controlled group. The taxable year ending on December 31, 1999, is
the first taxable year in which a member of the group had QREs and
either the same member or another member also had gross receipts. In
that year, each of K, L, and M had both QREs and gross
[[Page 65730]]
receipts. The 2004 taxable year is the fifth taxable year beginning
after December 31, 1993, for which at least one member of the group
had QREs For purposes of computing the group credit for the 2004
taxable year (the credit year), K, L, and M had the following:
----------------------------------------------------------------------------------------------------------------
Group
K L M aggregate
----------------------------------------------------------------------------------------------------------------
Credit Year QREs................................ $255x $25x $100x $380x
1984-1988 QREs.................................. 0x 0x 0x 0x
1984-1988 Gross Receipts........................ 0x 0x 0x 0x
Average Annual Gross Receipts for 4 Years 1,600x 340x 300x 2,240x
Preceding the Credit Year......................
----------------------------------------------------------------------------------------------------------------
(ii) Computation of the group credit--(A) In general. The
research credit allowable to the group is computed as if K, L, and M
were one taxpayer. The group credit is equal to 20 percent of the
excess of the group's aggregate credit year QREs ($380x) over the
group's base amount ($190x). The group credit is 0.20 ($380x--
$190x), which equals $38x.
(B) Group's base amount--(1) Computation. The group's base
amount equals the greater of: the group's fixed-base percentage (3
percent) multiplied by the group's aggregate average annual gross
receipts for the 4 taxable years preceding the credit year
($2,240x), or the group's minimum base amount ($190x). The group's
base amount, therefore, is $190x, which is the greater of: 0.03 x
$2,240x, which equals $67.20x, or $190x.
(2) Group's minimum base amount. The group's minimum base amount
is 50 percent of the group's aggregate credit year QREs. The group's
minimum base amount is 0.50 x $380x, which equals $190x.
(3) Group's fixed-base percentage. Because the first taxable
year in which at least one member of the group has QREs and at least
one member of the group has gross receipts begins after December 31,
1983, the group is treated as a start-up company under section
41(c)(3)(B)(i) and paragraph (b)(2)(i) of this section. Because the
2004 taxable year is the fifth taxable year beginning after December
31, 1993, for which at least one member of the group had QREs, under
section 41(c)(3)(B)(ii)(I), the group's fixed-base percentage is 3
percent.
(iii) Allocation of the group credit. Under paragraph (c)(2) of
this section, the stand-alone entity credit for each member of the
group must be computed using the method that results in the greater
stand-alone entity credit for that member. The stand-alone entity
credit for each of K ($25.5x), L ($2.5x), and M ($10x) is greater
using the method described in section 41(a). Therefore the stand-
alone entity credits for each of K, L, and M must be computed using
the method described in section 41(a). The sum of the stand-alone
entity credits of all the members of the group is $38x. Because the
group credit of $38x is equal to sum of the stand-alone entity
credits of all the members of the group ($38x), the group credit is
allocated among the members of the group based on the ratio that
each member's stand-alone entity credit bears to the sum of the
stand-alone entity credits of all the members of the group. The $38x
group credit is allocated as follows:
----------------------------------------------------------------------------------------------------------------
K L M Total
----------------------------------------------------------------------------------------------------------------
Stand-Alone Entity Credit....................... $25.5x $2.5x $10x $38x
Allocation Ratio (Stand-Alone Entity Credit/Sum 25.5/38 2.5/38 10/38 ..............
of Stand-Alone Entity Credits).................
Multiplied by: Group Credit..................... $38x $38x $38x ..............
Equals: Credit Allocated to Member.............. $25.5x $2.5x $10x 38x
----------------------------------------------------------------------------------------------------------------
Example 6. Group alternative incremental research credit--(i)
Facts. N, O, and P, all of which are calendar-year taxpayers, are
members of a controlled group. The research credit under section
41(a) is not allowable to the group for the 2004 taxable year
because the group's aggregate QREs for the 2004 taxable year are
less than the group's base amount. The group credit is computed
using the AIRC rules of section 41(c)(4). For purposes of computing
the group credit for the 2004 taxable year (the credit year), N, O,
and P had the following:
----------------------------------------------------------------------------------------------------------------
Group
N O P aggregate
----------------------------------------------------------------------------------------------------------------
Credit Year QREs................................ $0x $20x $110x $130x
Average Annual Gross Receipts for 4 Years 1,200x 200x 300x 1,700x
Preceding the Credit Year......................
----------------------------------------------------------------------------------------------------------------
(ii) Computation of the group credit. The research credit
allowable to the group is computed as if N, O, and P were one
taxpayer. The group credit is equal to the sum of: 2.65 percent of
so much of the group's aggregate QREs for the taxable year as
exceeds 1 percent of the group's aggregate average annual gross
receipts for the 4 taxable years preceding the credit year, but does
not exceed 1.5 percent of such average; 3.2 percent of so much of
the group's aggregate QREs as exceeds 1.5 percent of such average
but does not exceed 2 percent of such average; and 3.75 percent of
so much of such QREs as exceeds 2 percent of such average. The group
credit is [0.0265 x [($1,700x x 0.015)--($1,700x x 0.01)]] + [0.032
x [($1,700x x 0.02)--($1,700x x 0.015)]] + [0.0375 x [$130x--
($1,700x x 0.02)]], which equals $4.10x.
(iii) Allocation of the group credit. Under paragraph (c)(2) of
this section, the stand-alone entity credit for each member of the
group must be computed using the method that results in the greater
stand-alone entity credit for that member. The stand-alone entity
credit for N is zero under either method. The stand-alone entity
credit for each of O ($0.66x) and P ($3.99x) is greater using the
AIRC method. Therefore, the stand-alone entity credits for each of O
and P must be computed using the AIRC method. The sum of the stand-
alone entity credits of the members of the group is $4.65x. Because
the group credit of $4.10x is less than the sum of the stand-alone
entity credits of all the members of the group ($4.65x), the group
credit is allocated among the members of the group based on the
ratio that each member's stand-alone entity credit bears to the sum
of the stand-alone entity credits of all the members of the group.
The $4.10x group credit is allocated as follows:
----------------------------------------------------------------------------------------------------------------
N O P Total
----------------------------------------------------------------------------------------------------------------
Stand-Alone Entity Credit....................... $0.00x $0.66x $3.99x $4.65x
[[Page 65731]]
Allocation Ratio (Stand-Alone Entity Credit/Sum 0/4.65 0.66/4.65 3.99/4.65 ..............
of Stand-Alone Entity Credits).................
Multiplied by: Group Credit..................... $4.10x $4.10x $4.10x ..............
Equals: Credit Allocated to Member.............. $0.00x $0.58x $3.52x 4.10x
----------------------------------------------------------------------------------------------------------------
(f) For taxable years beginning before January 1, 1990. For taxable
years beginning before January 1, 1990, see Sec. 1.41-6 as contained
in 26 CFR part 1, revised April 1, 2005.
(g) Tax accounting periods used--(1) In general. The credit
allowable to a member of a controlled group is that member's share of
the group credit computed as of the end of that member's taxable year.
In computing the group credit for a group whose members have different
taxable years, a member generally should treat the taxable year of
another member that ends with or within the credit year of the
computing member as the credit year of that other member. For example,
Q, R, and S are members of a controlled group of corporations. Both Q
and R are calendar year taxpayers. S files a return using a fiscal year
ending June 30. For purposes of computing the group credit at the end
of Q's and R's taxable year on December 31, S's fiscal year ending June
30, which ends within Q's and R's taxable year, is treated as S's
credit year.
(2) Special rule when timing of research is manipulated. If the
timing of research by members using different tax accounting periods is
manipulated to generate a credit in excess of the amount that would be
allowable if all members of the group used the same tax accounting
period, then the appropriate Internal Revenue Service official in the
operating division that has examination jurisdiction of the return may
require each member of the group to calculate the credit in the current
taxable year and all future years as if all members of the group had
the same taxable year and base period as the computing member.
(h) Membership during taxable year in more than one group. A trade
or business may be a member of only one group for a taxable year. If,
without application of this paragraph, a business would be a member of
more than one group at the end of its taxable year, the business shall
be treated as a member of the group in which it was included for its
preceding taxable year. If the business was not included for its
preceding taxable year in any group in which it could be included as of
the end of its taxable year, the business shall designate in its timely
filed (including extensions) return the group in which it is being
included. If the return for a taxable year is due before July 1, 1983,
the business may designate its group membership through an amended
return for that year filed on or before June 30, 1983. If the business
does not so designate, then the appropriate Internal Revenue Service
official in the operating division that has examination jurisdiction of
the return will determine the group in which the business is to be
included.
(i) Intra-group transactions--(1) In general. Because all members
of a group under common control are treated as a single taxpayer for
purposes of determining the research credit, transfers between members
of the group are generally disregarded.
(2) In-house research expenses. If one member of a group performs
qualified research on behalf of another member, the member performing
the research shall include in its QREs any in-house research expenses
for that work and shall not treat any amount received or accrued as
funding the research. Conversely, the member for whom the research is
performed shall not treat any part of any amount paid or incurred as a
contract research expense. For purposes of determining whether the in-
house research for that work is qualified research, the member
performing the research shall be treated as carrying on any trade or
business carried on by the member on whose behalf the research is
performed.
(3) Contract research expenses. If a member of a group pays or
incurs contract research expenses to a person outside the group in
carrying on the member's trade or business, that member shall include
those expenses as QREs. However, if the expenses are not paid or
incurred in carrying on any trade or business of that member, those
expenses may be taken into account as contract research expenses by
another member of the group provided that the other member--
(i) Reimburses the member paying or incurring the expenses; and
(ii) Carries on a trade or business to which the research relates.
(4) Lease Payments. The amount paid or incurred to another member
of the group for the lease of personal property owned by a member of
the group is not taken into account for purposes of section 41. Amounts
paid or incurred to another member of the group for the lease of
personal property owned by a person outside the group shall be taken
into account as in-house research expenses for purposes of section 41
only to the extent of the lesser of--
(i) The amount paid or incurred to the other member; or
(ii) The amount of the lease expenses paid to the person outside
the group.
(5) Payment for supplies. Amounts paid or incurred to another
member of the group for supplies shall be taken into account as in-
house research expenses for purposes of section 41 only to the extent
of the lesser of--
(i) The amount paid or incurred to the other member; or
(ii) The amount of the other member's basis in the supplies.
(j) Effective date--(1) In general. Except for paragraph (d) of
this section, these regulations are applicable for taxable years ending
on or after May 24, 2005. Generally, a taxpayer may use any reasonable
method of computing and allocating the credit (including use of the
consolidated group rule contained in paragraph (d) of this section) for
taxable years ending before May 24, 2005. However, paragraph (b) of
this section, relating to the computation of the group credit, and
paragraph (c) of this section, relating to the allocation of the group
credit, (applied without regard to paragraph (d) of this section) will
apply to taxable years ending on or after December 29, 1999, if the
members of a controlled group, as a whole, claimed more than 100
percent of the amount that would be allowable under paragraph (b) of
this section. In the case of a controlled group whose members have
different taxable years and whose members use inconsistent methods of
allocation, the members of the controlled group shall be deemed to
have, as a whole, claimed more than 100 percent of the amount that
would be allowable under paragraph (b) of this section.
(2) Consolidated group rule. Paragraph (d) of this section is
applicable for taxable years ending on or after November 9, 2006. For
taxable years ending on or after May 24, 2005, and before November 9,
2006, see Sec. 1.41-6(d) as contained in 26 CFR part 1, revised April
1, 2006.
Sec. 1.41-6T [Removed]
0
Par. 4. Section 1.41-6T is removed.
[[Page 65732]]
0
Par. 5. Section 1.41-8 is added to read as follows.
Sec. 1.41-8 Special rules for taxable years ending on or after
November 9, 2006.
(a) Alternative incremental credit. At the election of the
taxpayer, the credit determined under section 41(a)(1) equals the
amount determined under section 41(c)(4).
(b) Election--(1) In general. A taxpayer may elect to apply the
provisions of the alternative incremental research credit (AIRC) in
section 41(c)(4) for any taxable year of the taxpayer beginning after
June 30, 1996. If a taxpayer makes an election under section 41(c)(4),
the election applies to the taxable year for which made and all
subsequent taxable years unless revoked in the manner prescribed in
paragraph (b)(3) of this section.
(2) Time and manner of election. An election under section 41(c)(4)
is made by completing the portion of Form 6765, ``Credit for Increasing
Research Activities,'' relating to the election of the AIRC, and
attaching the completed form to the taxpayer's timely filed (including
extensions) original return for the taxable year to which the election
applies. An election under section 41(c)(4) may not be made on an
amended return.
(3) Revocation. An election under this section may not be revoked
except with the consent of the Commissioner. A taxpayer is deemed to
have requested, and to have been granted, the consent of the
Commissioner to revoke an election under section 41(c)(4) if the
taxpayer completes the portion of Form 6765 relating to the regular
credit and attaches the completed form to the taxpayer's timely filed
(including extensions) original return for the year to which the
revocation applies. An election under section 41(c)(4) may not be
revoked on an amended return.
(4) Special rules for controlled groups--(i) In general. In the
case of a controlled group of corporations, all the members of which
are not included on a single consolidated return, an election (or
revocation) must be made by the designated member by satisfying the
requirements of paragraph (b)(2) or (b)(3) of this section (whichever
applies), and such election (or revocation) by the designated member
shall be binding on all the members of the group for the credit year to
which the election (or revocation) relates. If the designated member
fails to timely make (or revoke) an election, each member of the group
must compute the group credit using the method used to compute the
group credit for the immediately preceding credit year.
(ii) Designated member. For purposes of this paragraph (b)(4) of
this section, for any credit year, the term designated member means
that member of the group that is allocated the greatest amount of the
group credit under paragraph (c) of this section based on the amount of
credit reported on the original timely filed Federal income tax return
(even if that member subsequently is determined not to be the
designated member). If the members of a group compute the group credit
using different methods (either the method described in section 41(a)
or the AIRC method of section 41(c)(4)) and at least two members of the
group qualify as the designated member, then the term designated member
means that member that computes the group credit using the method that
yields the greater group credit. For example, A, B, C, and D are
members of a controlled group but are not members of a consolidated
group. For the 2005 taxable year, the group credit using the method
described in section 41(a) is $10x. Under this method, A would be
allocated $5x of the group credit, which would be the largest share of
the group credit under this method. For the 2005 taxable year, the
group credit using the AIRC method is $15x. Under the AIRC method, C
would be allocated $5x of the group credit, which is the largest share
of the group credit computed using the AIRC method. Because the group
credit is greater using the AIRC method and C is allocated the greatest
amount of credit under that method, C is the designated member.
Therefore, C's section 41(c)(4) election is binding on all the members
of the group for the 2005 taxable year.
(5) Effective date. These regulations are applicable for taxable
years ending on or after November 9, 2006. For taxable years ending on
or after May 24, 2005, and before November 9, 2006, see Sec. 1.41-
6T(b)(5) as contained in 26 CFR part 1, revised April 1, 2006.
Sec. 1.41-8T [Removed]
0
Par. 6. Section 1.41-8T is removed.
Steven T. Miller,
Acting Deputy Commissioner for Services and Enforcement.
Approved: October 18, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. E6-18909 Filed 11-8-06; 8:45 am]
BILLING CODE 4830-01-P