Federal Register / Vol. 60, No. 100 / Wednesday, May 24, 1995 / Proposed Rules 27453

Comments that provide the factual basis

supporting the views and suggestions

presented are particularly helpful in

developing reasoned regulatory

decisions on the proposal. Comments

are specifically invited on the overall

regulatory, economic, environmental,

and energy-related aspects of the

proposal. Communications should

identify the airspace docket number and

be submitted in triplicate to the address

listed above. Commenters wishing the

FAA to acknowledge receipt of their

comments on this notice must submit

with those comments a self-addressed,

stamped postcard on which the

following statement is made:

‘‘Comments to Airspace Docket No. 95–

ACE–2.’’ The postcard will be date/time

stamped and returned to the

commenter. All communications

received on or before the closing date

for comments will be considered before

taking action on the proposed rule. The

proposal contained in this notice may

be changed in light of comments

received. All comments submitted will

be available for examination in the

Rules Docket both before and after the

closing date for comments. A report

summarizing each substantive public

contact with FAA personnel concerned

with this rulemaking will be filed in the

docket.

Availability of NPRMs

Any person may obtain a copy of this

Notice of Proposed Rulemaking (NPRM)

by submitting a request to the Federal

Aviation Administration, Office of

Public Affairs, Attention: Public Inquiry

Center, APA–230, 800 Independence

Avenue, SW, Washington, DC 20591, or

by calling (202) 267–3484.

Communications must identify the

notice number of this NPRM. Persons

interested in being placed on a mailing

list for future NPRMs should also

request a copy of Advisory Circular No.

11–2A, which describes the application

procedures.

The Proposal

The FAA is considering an

amendment to part 71 of the Federal

Aviation Regulations (14 CFR part 71) to

provide additional controlled airspace

for Instrument Flight Rules (IFR)

procedures at the Scribner State Airport.

The additional airspace would segregate

aircraft operating under VFR conditions

from aircraft operating under IFR

procedures. The area would be depicted

on appropriate aeronautical charts,

thereby enabling pilots to

circumnavigate the area or otherwise

comply with IFR procedures. Class E

airspace designations for airspace areas

extending upward from 700 feet or more

above the surface of the earth are

published in paragraph 6005 of FAA

Order 7400.9B, dated July 18, 1994, and

effective September 16, 1994, which is

incorporated by reference in 14 CFR

71.1. The Class E airspace designation

listed in this document would be

published subsequently in the Order.

The FAA has determined that this

proposed regulation only involves an

established body of technical

regulations for which frequent and

routine amendments are necessary to

keep them operationally current.

Therefore, this proposed regulation—(1)

is not a ‘‘significant regulatory action’’

under Executive Order 12866; (2) is not

a ‘‘significant rule’’ under DOT

Regulatory Policies and Procedures (44

FR 11034; February 26, 1979); and (3)

does not warrant preparation of a

Regulatory Evaluation as the anticipated

impact is so minimal. Since this is a

routine matter that will only affect air

traffic procedures and air navigation, it

is certified that this proposed rule will

not have a significant economic impact

on a substantial number of small entities

under the criteria of the Regulatory

Flexibility Act.

List of Subjects in 14 CFR Part 71

Airspace, Incorporation by reference,

Navigation (air).

The Proposed Amendment

Accordingly, pursuant to the

authority delegated to me, the Federal

Aviation Administration proposes to

amend part 71 of the Federal Aviation

Regulations (14 CFR part 71) as follows:

PART 71—[AMENDED]

1. The authority citation for part 71

continues to read as follows:

Authority: 49 U.S.C. app. 1348(a), 1354(a),

1510; E.O. 10854, 24 FR 9565, 3 CFR, 1959–

1963 Comp., p. 389; 49 U.S.C. 106(g); 14 CFR

11.69.

§ 71.1 [Amended]

2. The incorporation by reference in

14 CFR 71.1 of Federal Aviation

Administration Order 7400.9B, Airspace

Designations and Reporting Points,

dated July 18, 1994, and effective

September 16, 1994, is amended as

follows:

Paragraph 6005 Class E Airspace Areas

Extending Upward From 700 Feet or More

Above the Surface of the Earth

* * * * *

ACE NE E5 Scribner, NE [New]

Scribner State Airport, NE

(Lat. 41°36′46′′ N, long. 96°37′43′′ W)

That airspace extending upward from 700

feet above the surface within a 7-mile radius

of the Scribner State Airport.

* * * * *

Issued in Kansas City, MO, on May 3, 1995.

Herman J. Lyons, Jr.,

Acting Manager, Air Traffic Division, Central

Region.

[FR Doc. 95–12757 Filed 5–23–95; 8:45 am]

BILLING CODE 4910–13–M

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[INTL–0023–95]

RIN 1545–AT49

Allocation and Apportionment of

Research and Experimental

Expenditures

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document provides

guidance concerning the allocation and

apportionment of research and

experimental expenditures for purposes

of determining taxable income from

sources within and without the United

States. This document affects taxpayers

that have income from United States

and foreign sources and that have made

expenditures for research and

experimentation that the taxpayer

deducts under section 174 of the

Internal Revenue Code of 1986. This

document also provides notice of a

public hearing on these proposed

regulations.

DATES: Written comments must be

received by August 22, 1995. Outlines of

topics to be discussed at the public

hearing scheduled for September 8,

1995, at 10 a.m. must be received by

August 18, 1995.

ADDRESSES: Send submissions to:

CC:DOM:CORP:T:R (INTL–0023–95),

room 5228, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. In the

alternative, submissions may be hand

delivered between the hours of 8 a.m.

and 5 p.m. to: CC:DOM:CORP:T:R

(INTL–0023–95), Courier’s Desk,

Internal Revenue Service, 1111

Constitution Avenue, NW, Washington,

DC 20224. The public hearing will be

held in the Auditorium, Internal

Revenue Building, 1111 Constitution

Avenue NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Carl Cooper
27454 Federal Register / Vol. 60, No. 100 / Wednesday, May 24, 1995 / Proposed Rules

at (202) 622–3840; concerning

submissions, Michael Slaughter, (202)

622–8543 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

This notice of proposed rulemaking

does not contain collections of

information and, therefore, it has not

been submitted to the Office of

Management and Budget for review

under the Paperwork Reduction Act (44

U.S.C. 3504(h)).

Background and Explanation of

Provisions

Section 1.861–8(e)(3) of the Income

Tax Regulations provides rules

regarding the allocation and

apportionment of research and

experimental expenditures for purposes

of determining taxable income from

sources within and without the United

States.

This notice of proposed rulemaking

proposes three changes to the existing

regulations at § 1.861–8(e)(3).

First, allocation of research and

experimental expenditures to three digit

SIC code product categories of gross

income would be permitted. Existing

regulations require taxpayers to allocate

research and experimental expenditures

to two digit SIC code product categories.

Use of three digit SIC code product

categories would enable taxpayers to

allocate research and experimental

expenditures to narrower classes of

gross income than the classes of gross

income permitted by the existing

regulations.

Second, the percentage of research

and experimental expenditures that may

be exclusively apportioned to United

States source income under the sales

method of apportionment under

§ 1.861–8(e)(3)(ii) would be increased

from 30 percent to 50 percent. Thus,

where an apportionment based upon

geographic sources of income of a

deduction for research and experimental

expenses is necessary and the sales

method of apportionment is elected, an

amount equal to 50 percent of the

deduction for research and experimental

expenditures shall be apportioned

exclusively to the statutory or residual

grouping of gross income, as the case

may be, arising from the geographic

source where the research and

experimental activities which account

for more than 50 percent of the amount

of the deduction were performed.

Third, use of the optional gross

income methods of apportionment

would constitute a binding election to

use such methods in subsequent years.

The election would not be revocable

without the prior consent of the

Commissioner.

These changes would apply to taxable

years beginning after December 31,

1995. However, the taxpayer would

have the option to apply the new rules,

in their entirety, to taxable years

beginning after December 31, 1994.

Examples (3) through (8) of § 1.861–

8(g) are conformed to these changes.

Examples (9) through (16) and Example

(23) are removed and reserved.

The three changes are proposed in

part on the basis of an economic study

performed by the Treasury Department

pursuant to Rev. Proc. 92–56, 1992–2

C.B. 409, which is being simultaneously

published by Treasury. The Treasury

study evaluates the factual relationships

between taxpayer performed research

and experimental expenses and income

from foreign sources. The study

reviewed evidence of foreign returns

from research and experimental

expenditures in the form of both

royalties and the retained earnings and

profits of controlled foreign

corporations. Estimates of foreign

returns attributable to research and

experimental expenditures were

translated into appropriate allocations

and apportionments using two

alternative methodologies. One

methodology was based on estimated

comparable domestic returns for

research and experimental

expenditures. The other methodology

simulated the relationship expected

between the current returns from

research and experimental expenditures

and the level of current research and

experimental expenditures for taxpayers

with ongoing research programs. The

methodologies generated a range of

allocations and apportionments to

foreign income that were not

inconsistent with the available

evidence. The allocations and

apportionments to foreign income

which would result from adoption of

these proposed regulations are within

that range and are about 25 percent

lower than the allocations and

apportionments to foreign income

which result under the current

regulations.

In addition, the proposed regulations

provide explicit rules for allocating and

apportioning research and experimental

expenses incurred by a partnership and

for computing a partner’s sales for

purposes of apportioning research and

experimental expenses under the sales

method.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in EO 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) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed

rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

written comments (a signed original and

eight (8) copies) that are submitted

timely to the IRS. All comments will be

available for public inspection and

copying.

A public hearing has been scheduled

for September 8, 1995, at 10 a.m. in the

Auditorium, Internal Revenue Building,

1111 Constitution Avenue NW,

Washington, DC. Because of access

restrictions, visitors will not be

admitted beyond the building lobby

more than 15 minutes before the hearing

starts.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

Persons that wish to present oral

comments at the hearing must submit

written comments by August 22, 1995

and submit an outline of the topics to

be discussed and the time to be devoted

to each topic (signed original and eight

(8) copies) by August 18, 1995.

A period of 10 minutes will be

allotted to each person for making

comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information

The principal author of these

regulations is Carl Cooper, Office of the

Associate Chief Counsel (International).

However, other personnel from IRS and

Treasury participated in their

development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

proposed to be amended as follows:
Federal Register / Vol. 60, No. 100 / Wednesday, May 24, 1995 / Proposed Rules 27455

PART 1—INCOME TAXES

Paragraph 1. The authority citation

continues to read as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.861–8 is amended

by:

1. Revising paragraph (e)(3).

2. Revising paragraph (g), Examples

(3) through (8).

3. Removing and reserving paragraph

(g), Examples (9) through (16) and (23).

The revisions read as follows:

§ 1.861–8 Computation of taxable income

from sources within the United States and

from other sources and activities.

* * * * *

(e) * * *

* * * * *

(3) Research and experimental

expenditures—(i) Allocation—(A) In

general. The methods of allocation and

apportionment of research and

experimental expenditures set forth in

this paragraph (e)(3) recognize that

research and experimentation is an

inherently speculative activity, that

findings may contribute unexpected

benefits, and that the gross income

derived from successful research and

experimentation must bear the cost of

unsuccessful research and

experimentation. Expenditures for

research and experimentation which a

taxpayer deducts under section 174

ordinarily shall be considered

deductions which are definitely related

to all income reasonably connected with

the relevant broad product category (or

categories) of the taxpayer and therefore

allocable to all items of gross income as

a class (including income from sales,

royalties, and dividends) related to such

product category (or categories). For

purposes of this allocation, the product

category (or categories) which a

taxpayer may be considered to have

shall be determined in accordance with

the provisions of paragraph (e)(3)(i)(B)

of this section.

(B) Determination of product

categories. Ordinarily, a taxpayer’s

research and experimental expenditures

may be divided between the relevant

product categories. Where research and

experimentation is conducted with

respect to more than one product

category, the taxpayer may aggregate the

categories for purposes of allocation and

apportionment; however, the taxpayer

may not subdivide the categories. Where

research and experimentation is not

clearly identified with any product

category (or categories), it will be

considered conducted with respect to

all the taxpayer’s product categories. A

taxpayer shall determine the relevant

product categories by reference to the

three digit classification of the Standard

Industrial Classification Manual (SIC

code). A copy may be purchased from

the Superintendent of Documents,

United States Government Printing

Office, Washington, DC 20402. The

individual products included within

each category are enumerated in

Executive Office of the President, Office

of Management and Budget, Standard

Industrial Classification Manual, 1987

(or later edition, as available). Once a

taxpayer selects a product category for

the first taxable year for which this

paragraph (e)(3) is effective with respect

to the taxpayer, it must continue to use

that product category in following years,

unless the taxpayer establishes to the

satisfaction of the Commissioner that,

due to changes in the relevant facts, a

change in the product category is

appropriate. For this purpose, a change

in the taxpayer’s selection of a product

category shall include a change from a

three digit SIC code category to a two

digit SIC code category, a change from

a two digit SIC code category to a three

digit SIC code category, or any other

aggregation, disaggregation or change of

a previously selected SIC code category.

The two digit SIC code category

‘‘Wholesale trade’’ is not applicable

with respect to sales by the taxpayer of

goods and services from any other of the

taxpayer’s product categories and is not

applicable with respect to a domestic

international sales corporation (DISC) or

foreign sales corporation (FSC) for

which the taxpayer is a related supplier

of goods and services from any of the

taxpayer’s product categories. The two

digit SIC code category ‘‘Retail trade’’ is

not applicable with respect to sales by

the taxpayer of goods and services from

any other of the taxpayer’s product

categories, except Wholesale trade, and

is not applicable with respect to a DISC

or FSC for which the taxpayer is a

related supplier of goods and services

from any other of the taxpayer’s product

categories, except Wholesale trade.

(C) Affiliated Group. (1) Except as

provided in paragraph (e)(3)(i)(C)(2) of

this section, the allocation and

apportionment required by this

paragraph (e)(3) shall be determined as

if all members of the affiliated group (as

defined in § 1.861–14T(d)) were a single

corporation. See § 1.861–14T.

(2) For purposes of the allocation and

apportionment required by this

paragraph (e)(3), sales and gross income

from products produced in whole or in

part in a possession by an electing

corporation (within the meaning of

section 936(h)(5)(E)), and dividends

from an electing corporation, shall not

be taken into account, except that this

paragraph (e)(3)(i)(C)(2) shall not apply

to sales of (and gross income and

dividends attributable to sales of)

products with respect to which an

election under section 936(h)(5)(F) is

not in effect.

(3) The research and experimental

expenditures taken into account for

purposes of this paragraph (e)(3) shall

be reduced by the amount of such

expenditures included in computing the

cost-sharing amount (determined under

section 936(h)(5)(C)(i)(I)).

(D) Exception. Where research and

experimentation is undertaken solely to

meet legal requirements imposed by a

political entity with respect to

improvement or marketing of specific

products or processes, and the results

cannot reasonably be expected to

generate amounts of gross income

(beyond de minimis amounts) outside a

single geographic source, the deduction

for such research and experimentation

shall be considered definitely related

and therefore allocable only to the

grouping (or groupings) of gross income

within that geographic source as a class

(and apportioned, if necessary, between

such groupings as set forth in

paragraphs (e)(3)(ii)(B) and (iii) of this

section). For example, where a taxpayer

performs tests on a product in response

to a requirement imposed by the U.S.

Food and Drug Administration, and the

test results cannot reasonably be

expected to generate amounts of gross

income (beyond de minimis amounts)

outside the United States, the costs of

testing shall be allocated solely to gross

income from sources within the United

States.

(ii) Apportionment of research and

experimentation—sales method—(A)

Exclusive apportionment. Where an

apportionment based upon geographic

sources of income of a deduction for

research and experimentation is

necessary (after applying the exception

in paragraph (e)(3)(i)(D) of this section),

an amount equal to fifty percent (50%)

of such deduction for research and

experimentation shall be apportioned

exclusively to the statutory grouping of

gross income or the residual grouping of

gross income, as the case may be, arising

from the geographic source where the

research and experimental activities

which account for more than fifty

percent (50%) of the amount of such

deduction were performed. If the fifty

percent test of the preceding sentence is

not met, then no part of the deduction

shall be apportioned under this

paragraph (e)(3)(ii)(A). This exclusive

apportionment reflects the view that

research and experimentation is often

most valuable in the country where it is

performed, for two reasons. First,
27456 Federal Register / Vol. 60, No. 100 / Wednesday, May 24, 1995 / Proposed Rules

research and experimentation often

benefits a broad product category,

consisting of many individual products,

all of which may be sold in the nearest

market but only some of which may be

sold in foreign markets. Second,

research and experimentation often is

utilized in the nearest market before it

is used in other markets, and in such

cases, has a lower value per unit of sales

when used in foreign markets. The

taxpayer may establish to the

satisfaction of the Commissioner that, in

its case, one or both of the conditions

mentioned in the preceding sentences

warrant a significantly greater percent

than 50 percent (50%) because the

research and experimentation is

reasonably expected to have very

limited or long delayed application

outside the geographic source where it

was performed. For purposes of

establishing that only some products

within the product category (or

categories) are sold in foreign markets,

the taxpayer shall compare the

commercial production of individual

products in domestic and foreign

markets made by itself, by uncontrolled

parties (as defined under paragraph

(e)(3)(ii)(C) of this section) of products

involving intangible property which

was licensed or sold by the taxpayer,

and by those controlled corporations (as

defined under paragraph (e)(3)(ii)(D) of

this section) which can reasonably be

expected to benefit directly or indirectly

from any of the taxpayer’s research

expense connected with the product

category (or categories). The individual

products compared for this purpose

shall be limited, for nonmanufactured

categories, solely to those enumerated in

Executive Office of the President, Office

of Management and Budget Standard

Industrial Classification Manual, 1987

(or later edition, as available), and, for

manufactured categories, solely to those

enumerated at a 7-digit level in the U.S.

Bureau of the Census, Census of

Manufacturers: 1992, Numerical List of

Manufactured Products, 1993 (or later

edition, as available). Copies of both of

these documents may be purchased

from the Superintendent of Documents,

United States Government Printing

Office, Washington, DC 20402. For

purposes of establishing the delayed

application of research findings abroad,

the taxpayer shall compare the

commercial introduction of its own

particular products and processes (not

limited by those listed in the Standard

Industrial Classification Manual or the

Numerical List of Manufactured

Products) in the United States and

foreign markets, made by itself, by

uncontrolled parties (as defined under

paragraph (e)(3)(ii)(C) of this section) of

products involving intangible property

which was licensed or sold by the

taxpayer, and by those controlled

corporations (as defined under

paragraph (e)(3)(ii)(D) of this section)

which can reasonably be expected to

benefit, directly or indirectly, from the

taxpayer’s research expense. For

purposes of evaluating the delay in the

application of research findings in

foreign markets, the taxpayer shall use

a safe haven discount rate of 10 percent

per year of delay unless he is able to

establish to the satisfaction of the

Commissioner, by reference to the cost

of money and the number of years

during which economic benefit can be

directly attributable to the results of the

taxpayer’s research, that another

discount rate is more appropriate.

(B) Remaining apportionment. The

amount equal to the remaining portion

of such deduction for research and

experimentation, not apportioned under

paragraph (e)(3)(ii)(A) of this section,

shall be apportioned between the

statutory grouping (or among the

statutory groupings) within the class of

gross income and the residual grouping

within such class in the same

proportions that the amount of sales

from the product category (or categories)

which resulted in such gross income

within the statutory grouping (or

statutory groupings) and in the residual

grouping bear, respectively, to the total

amount of sales from the product

category (or categories). For purposes of

this paragraph (e)(3), amounts received

from the lease of equipment during a

taxable year shall be regarded as sales

receipts for such taxable year. Amounts

apportioned under this paragraph (e)(3)

may exceed the amount of gross income

related to the product category within

the statutory grouping. In such case, the

excess shall be applied against other

gross income within the statutory

grouping. See paragraph (d)(1) of this

section for instances where the

apportionment leads to an excess of

deductions over gross income within

the statutory grouping.

(C) Sales of uncontrolled parties. For

purposes of the apportionment under

paragraph (e)(3)(ii)(B) of this section, the

sales from the product category (or

categories) by each party uncontrolled

by the taxpayer, of particular products

involving intangible property which

was licensed or sold by the taxpayer to

such uncontrolled party shall be taken

fully into account both for determining

the taxpayer’s apportionment and for

determining the apportionment of any

other member of a controlled group of

corporations to which the taxpayer

belongs if the uncontrolled party can

reasonably be expected to benefit

directly or indirectly (through any

member of the controlled group of

corporations to which the taxpayer

belongs) from the research expense

connected with the product category (or

categories) of such other member. In the

case of licensed products, if the amount

of sales of such products is unknown

(for example, where the licensed

product is a component of a large

machine), a reasonable estimate should

be made. In the case of sales of

intangible property, and in cases where

a reasonable estimate of sales of

licensed products cannot be made, the

sales taken into account shall be an

amount which is ten times the amount

received or accrued for the intangible

during the taxpayer’s taxable year. For

purposes of this paragraph (e)(3)(ii)(C),

the term uncontrolled party means a

party which is not a person with a

relationship to the taxpayer (specified in

section 267(b)), or is not a member of a

controlled group of corporations to

which the taxpayer belongs (within the

meaning of section 993(a)(3) or section

927(d)(4)). An uncontrolled party can

reasonably be expected to benefit from

the research expense of a member of a

controlled group of corporations to

which the taxpayer belongs if such

member can reasonably be expected to

license, sell, or transfer intangible

property to that uncontrolled party or

transfer secret processes to that

uncontrolled party, directly or

indirectly, through a member of the

controlled group of corporations to

which the taxpayer belongs.

(D) Sales of controlled parties. For

purposes of the apportionment under

paragraph (e)(3)(ii)(B) of this section, the

sales from the product category (or

categories) of the taxpayer shall be taken

fully into account and the sales from the

product category (or categories) of a

corporation controlled by the taxpayer

shall be taken into account to the extent

provided in this paragraph (e)(3)(ii)(D)

for determining the taxpayer’s

apportionment, if such corporation can

reasonably be expected to benefit

directly or indirectly (through another

member of the controlled group of

corporations to which the taxpayer

belongs) from the taxpayer’s research

expense connected with the product

category (or categories). However, sales

from the product category (or categories)

between or among such controlled

corporations or the taxpayer shall not be

taken into account more than once; in

such a situation, the amount sold by the

selling corporation to the buying

corporation shall be subtracted from the

sales of the buying corporation. For
Federal Register / Vol. 60, No. 100 / Wednesday, May 24, 1995 / Proposed Rules 27457

purposes of this paragraph (e)(3)(ii)(D),

the term a corporation controlled by the

taxpayer means any corporation other

than an uncontrolled party as defined in

paragraph (e)(3)(ii)(C) of this section. A

corporation controlled by the taxpayer

can reasonably be expected to benefit

from the taxpayer’s research expense if

the taxpayer can be expected to license,

sell, or transfer intangible property to

that corporation or transfer secret

processes to that corporation, either

directly or indirectly through a member

of the controlled group of corporations

to which the taxpayer belongs. Past

experience with research and

experimentation shall be considered in

determining reasonable expectations.

However, if the corporation controlled

by the taxpayer has entered into a bona

fide cost-sharing arrangement, in

accordance with the provisions of

§ 1.482–7, with the taxpayer for the

purpose of developing intangible

property, then that corporation shall not

reasonably be expected to benefit from

the taxpayer’s share of the research

expense. The sales from the product

category (or categories) of a corporation

controlled by the taxpayer taken into

account shall be equal to the amount of

sales that bear the same proportion to

total sales of the controlled corporation

as the taxpayer’s direct or indirect

ownership, as defined in section 1563,

of the total combined voting power of

all classes of stock entitled to vote of

such corporation bears to the total

outstanding combined voting power of

all such classes of stock of such

corporation.

(iii) Apportionment of research and

experimentation—gross income

methods. In lieu of apportioning the

deduction for research and experimental

expense under paragraph (e)(3)(ii) of

this section, a taxpayer may make a

binding election pursuant to paragraph

(e)(3)(iii)(C) of this section to apportion

such deduction, as prescribed in

paragraph (e)(3)(iii)(A) or (B) of this

section, between the statutory grouping

(or among the statutory groupings) of

gross income and the residual grouping

of gross income. These optional

methods must be applied to the

taxpayer’s entire deduction for research

and experimental expense remaining

after applying the exception in

paragraph (e)(3)(i)(D) of this section, and

may not be applied on a product

category basis. Thus, after the allocation

of the taxpayer’s entire deduction for

research and experimental expense

under paragraph (e)(3)(i) of this section

(by attribution to SIC code categories),

the taxpayer must then apportion as

necessary the entire deduction as

allocated by separate amounts to various

product categories, using only the sales

method under paragraph (e)(3)(ii) of this

section or only the optional gross

income methods under this paragraph

(e)(3)(iii). The taxpayer may not use the

sales method for a portion of the

deduction and optional gross income

methods for the remainder of the

deduction separately allocated.

(A) Option one. The taxpayer may

apportion its research and experimental

expenditures ratably on the basis of

gross income between the statutory

grouping (or among the statutory

groupings) of gross income and the

residual grouping of gross income in the

same proportions that the amount of

gross income in the statutory grouping

(or groupings) and the amount of gross

income in the residual grouping bear,

respectively, to the total amount of gross

income, if both of the following two

conditions are met.

(1) The amount of research and

experimental expense ratably

apportioned to the statutory grouping

(or groupings in the aggregate) is not

less than fifty percent (50%) of the

amount which would have been so

apportioned if the taxpayer had used the

method described in paragraph (e)(3)(ii)

of this section; and

(2) The amount of research and

experimental expense ratably

apportioned to the residual grouping is

not less than fifty percent (50%) of the

amount which would have been so

apportioned if the taxpayer had used the

method described in paragraph (e)(3)(ii)

of this section.

(B) Option two. If, when the amount

of research and experimental expense is

apportioned ratably on the basis of gross

income, either of the conditions

described in paragraph (e)(3)(iii)(A) (1)

or (2) of this section is not met, the

taxpayer may either—

(1) Where the condition of paragraph

(e)(3)(iii)(A)(1) of this section is not met,

apportion fifty percent (50%) of the

amount of research and experimental

expense which would have been

apportioned to the statutory grouping

(or groupings in the aggregate) under

paragraph (e)(3)(ii) of this section to

such statutory grouping (or to such

statutory groupings in the aggregate and

then among such groupings on the basis

of gross income within each grouping),

and apportion the balance of the amount

of research and experimental expenses

to the residual grouping; or

(2) Where the condition of paragraph

(e)(3)(iii)(A)(2) of this section is not met,

apportion fifty percent (50%) of the

amount of research and experimental

expense which would have been

apportioned to the residual grouping

under paragraph (e)(3)(ii) of this section

to such residual grouping, and

apportion the balance of the amount of

research and experimental expenses to

the statutory grouping (or to the

statutory groupings in the aggregate and

then among such groupings ratably on

the basis of gross income within each

grouping).

(C) Binding election to use optional

gross income methods. A taxpayer may

use either the sales method under

paragraph (e)(3)(ii) of this section or the

optional gross income methods under

this paragraph (e)(3)(iii) for its return

filed for its first taxable year to which

this paragraph (e)(3) applies. The

taxpayer’s use of the optional gross

income methods for its return filed for

its first taxable year to which this

paragraph (e)(3) applies or for any

subsequent taxable year shall constitute

a binding election to use the optional

gross income methods for all taxable

years thereafter. The taxpayer’s election

to use the optional gross income

methods may not be revoked without

the prior consent of the Commissioner.

(iv) Special rules for partnerships. For

purposes of applying this paragraph

(e)(3), if research and experimental

expenditures are incurred by a

partnership in which the taxpayer is a

partner, the taxpayer’s research and

experimental expenditures shall include

the taxpayer’s distributive share of the

partnership’s research and experimental

expenditures. In applying the exception

for expenditures undertaken to meet

legal requirements under paragraph

(e)(3)(i)(D) of this section and the

exclusive apportionment for the sales

method under paragraph (e)(3)(ii)(A) of

this section, a partner’s distributive

share of research and experimental

expenditures incurred by a partnership

shall be treated as incurred by the

partner for the same purpose and in the

same location as incurred by the

partnership. In applying the remaining

apportionment for the sales method

under paragraph (e)(3)(ii)(B) of this

section, a taxpayer’s sales from a

product category shall include the

taxpayer’s share of any sales from the

product category of any partnership in

which the taxpayer is a partner. For

purposes of the preceding sentence, a

taxpayer’s share of sales shall be

proportionate to the taxpayer’s

distributive share of the partnership’s

gross income in the product category,

but the sales of the partnership taken

into account by the taxpayer shall in no

event be less than ten times the amount

received or accrued for any intangible

from the partnership during the

taxpayer’s taxable year.
27458 Federal Register / Vol. 60, No. 100 / Wednesday, May 24, 1995 / Proposed Rules

(v) Examples. Examples (3) through

(8) of paragraph (g) of this section

illustrate the allocation and

apportionment of research and

experimental deductions.

(vi) Effective date. This paragraph

(e)(3) applies to taxable years beginning

after December 31, 1995. However, the

taxpayer may at its option, apply this

paragraph (e)(3) in its entirety to taxable

years beginning after December 31,

1994.

* * * * *

(g) * * *

* * * * *

Example 3—Research and

Experimentation—(i) Facts. X, a domestic

corporation, is a manufacturer and

distributor of small gasoline engines for lawn

mowers. Gasoline engines are a product

within the category, Engines and Turbines

(SIC Industry Group 351). Y, a wholly owned

foreign subsidiary of X, also manufactures

and sells these engines abroad. During 1996,

X incurred expenditures of $60,000 on

research and experimentation, which it

deducts as a current expense, to invent and

patent a new and improved gasoline engine.

All of the research and experimentation was

performed in the United States. In 1996, the

domestic sales by X of the new engine total

$500,000 and foreign sales by Y total

$300,000. X provides technology for the

manufacture of engines to Y via a license that

requires the payment of an arm’s length

royalty. In 1996, X’s income is $150,000, of

which $140,000 is from domestic sales and

$10,000 is royalties from Y.

(ii) Allocation. The research and

experimental expenditures were incurred in

connection with small gasoline engines and

they are definitely related to the items of

gross income to which the research gives rise,

namely gross income from the sale of small

gasoline engines in the United States and

royalties received from subsidiary Y, a

foreign manufacturer of gasoline engines.

Accordingly, the expenses are allocable to

this class of gross income.

(iii) Apportionment. (A) For purposes of

applying the foreign tax credit limitation, the

statutory grouping is general limitation gross

income from sources without the United

States and the residual grouping is general

limitation gross income from sources within

the United States. Since the related class of

gross income derived from the use of engine

technology consists of both gross income

from sources without the United States

(royalties from Y) and gross income from

sources within the United States (gross

income from engine sales), X’s deduction of

$60,000 for its research and experimental

expenditure must be apportioned between

the statutory and residual grouping before the

foreign tax credit limitation may be

determined. Because more than 50 percent of

X’s research and experimental activity was

performed in the United States, 50 percent of

that deduction can be apportioned

exclusively to the residual grouping of gross

income, gross income from sources within

the United States. The remaining 50 percent

of the deduction can then be apportioned

between the residual and statutory groupings

on the basis of sales by X and Y.

Alternatively, X’s deduction for research and

experimentation can be apportioned under

the optional gross income method. The

apportionment for 1996 is as follows:

(1) Tentative Apportionment on the Basis

of Sales.

(i) Research and experimental expense to

be apportioned between residual and

statutory groupings of gross income: $60,000.

(ii) Less: Exclusive apportionment of

research and experimental expense to the

residual grouping of gross income

($60,000×50 percent): $30,000.

(iii) Research and experimental expense to

be apportioned between residual and

statutory groupings of gross income on the

basis of sales: $30,000.

(iv) Apportionment of research and

experimental expense to the residual

grouping of gross income ($30,000×$500,000/

($500,000+$300,000)): $18,750.

(v) Apportionment of research and

experimental expense to the statutory

grouping of gross income ($30,000×$300,000/

($500,000+$300,000)): $11,250.

(vi) Total apportioned deduction for

research and experimentation: $60,000.

(vii) Amount apportioned to the residual

grouping ($30,000+$18,750): $48,750.

(viii) Amount apportioned to the statutory

grouping: $11,250.

(2) Tentative Apportionment on the Basis

of Gross Income.

(i) Research and experimental expense

apportioned to sources within the United

States (residual grouping)

($60,000×$140,000/($140,000+$10,000)):

$56,000.

(ii) Research and experimental expense

apportioned to sources within country Y

(statutory grouping) ($60,000×$10,000/

($140,000+$10,000)): $4,000.

(iii) Amount apportioned to the residual

grouping: $56,000.

(iv) Amount apportioned to the statutory

grouping: $4,000.

(B) The total research and experimental

expense apportioned to the statutory

grouping ($4,000) under the gross income

method is approximately 36 percent of the

amount apportioned to the statutory grouping

under the sales method. Thus, X may use

option two of the gross income method

(paragraph (e)(3)(iii)(B) of this section) and

apportion to the statutory grouping fifty

percent (50%) of the $11,250 apportioned to

that grouping under the sales method. Thus,

X apportions $5,625 of research and

experimental expense to the statutory

grouping. X’s use of the optional gross

income method will constitute a binding

election to use the optional gross income

method for all taxable years thereafter.

Example 4—Research and

Experimentation—(i) Facts. Assume the same

facts as in Example 3 except that X also

spends $30,000 in 1996 for research on steam

turbines, all of which is performed in the

United States, and X has steam turbine sales

in the United States of $400,000. X’s foreign

subsidiary Y neither manufactures nor sells

steam turbines. The steam turbine research is

in addition to the $60,000 in research which

X does on gasoline engines for lawnmowers.

X thus has a deduction of $90,000 for its

research activity. X’s gross income is

$200,000, of which $140,000 is from sales of

gasoline engines, $50,000 is from sales of

steam turbines, and $10,000 is royalties from

Y.

(ii) Allocation. X’s research expenses

generate income from sales of small gasoline

engines and steam turbines. Both of these

products are in the same three digit SIC code

category, Engines and Turbines (SIC Industry

Group 351). Therefore, the deduction is

definitely related to this product category

and allocable to all items of income

attributable to it. These items of X’s income

are gross income from the sale of small

gasoline engines and steam turbines in the

United States and royalties from foreign

subsidiary Y, a foreign manufacturer and

seller of small gasoline engines.

(iii) Apportionment. (A) For purposes of

applying the foreign tax credit limitation, the

statutory grouping is general limitation gross

income from sources outside the United

States and the residual grouping is general

limitation gross income from sources within

the United States. X’s deduction of $90,000

must be apportioned between the statutory

and residual groupings. Because more than

50 percent of X’s research and experimental

activity was performed in the United States,

50 percent of that deduction can be

apportioned exclusively to the residual

grouping, general limitation gross income

from sources within the United States. The

remaining 50 percent of the deduction can

then be apportioned between the residual

and statutory groupings on the basis of total

sales by X and Y. Alternatively, X’s

deduction for research and experimentation

can be apportioned under the optional gross

income methods. The apportionment for

1996 is as follows:

(1) Tentative Apportionment on the Basis

of Sales.

(i) Research and experimental expense to

be apportioned between residual and

statutory groupings of gross income: $90,000.

(ii) Less: Exclusive apportionment of the

research and experimental expense to the

residual grouping of gross income

($90,000×50 percent): $45,000.

(iv) Research and experimental expense to

be apportioned between the residual and

statutory groupings of gross income on the

basis of sales: $45,000.

(iv) Apportionment of research and

experimental expense to the residual

grouping of gross income

($45,000×($500,000+400,000)/

($500,000+$400,000+$300,000)): $33,750.

(v) Apportionment of research and

experimental expense to the statutory

grouping of gross income ($45,000×$300,000/

($500,000+$400,000+$300,000)): $11,250.

(vi) Total apportioned deduction for

research and experimentation: $90,000.

(vii) Amount apportioned to the residual

grouping ($45,000+$33,750): $78,750.

(viii) Amount apportioned to the statutory

grouping: $11,250.

(2) Tentative Apportionment on the Basis

of Gross Income.

(i) Research and experimental expense

apportioned to sources within the United

States (residual grouping)
Federal Register / Vol. 60, No. 100 / Wednesday, May 24, 1995 / Proposed Rules 27459

($90,000×$190,000/

($140,000+$50,000+10,000)): $85,500.

(ii) Research and experimental expense

apportioned to sources within country Y

(statutory grouping) ($90,000×$10,000/

($140,000+$50,000+$10,000)): $4,500.

(iii) Amount apportioned to the residual

grouping: $85,500.

(iv) Amount apportioned to the statutory

grouping: $4,500.

(B) The total research and experimental

expense apportioned to the statutory

grouping ($4,500) under the gross income

method is 40 percent of the amount

apportioned to the statutory grouping under

the sales method. Thus, X, may use option

two of the gross income method (paragraph

(e)(3)(iii)(B) of this section) and apportion to

the statutory grouping fifty percent (50%) of

the $11,250 apportioned to that grouping

under the sales method. Thus, X apportions

$5,625 of research and experimental expense

to the statutory grouping. X’s use of the

optional gross income method will constitute

a binding election to use the optional gross

income method for all taxable years

thereafter.

Example 5—Research and

Experimentation—(i) Facts. Assume the same

facts as in Example 3 except that in 1997 X

continues its sales of the new engines, with

sales of $600,000 in the United States and

$400,000 by subsidiary Y. X also acquires a

60 percent ownership interest in foreign

corporation Z and a 100 percent ownership

interest in foreign corporation C. X transfers

its engine technology to Z for a royalty equal

to 5 percent of sales, and X enters into an

arm’s length cost-sharing arrangement with C

to share the funding of all of X’s research

activity. In 1997, corporation Z has sales in

country Z equal to $1,000,000. X incurs

expense of $80,000 on research and

experimentation in 1997, and in addition, X

performs $15,000 of research on gasoline

engines which was funded by the costsharing arrangement with C. All of Z’s sales

are from the product category, Engines and

Turbines (SIC Industry Group 351). X

performs all of its research in the United

States and $20,000 of its expenditure of

$80,000 is made solely to meet pollution

standards mandated by law. X establishes, to

the satisfaction of the Commissioner, that the

expenditure in response to pollution

standards is not expected to generate gross

income (beyond de minimis amounts)

outside the United States.

(ii) Allocation. The $20,000 of research

expense which X incurred in connection

with pollution standards is definitely related

and thus allocable to the residual grouping,

general limitation gross income from sources

within the United States. The remaining

$60,000 in research and experimental

expenditure incurred by X is definitely

related to all gasoline engines and is

therefore allocable to the class of gross

income to which the engines give rise, gross

income from sales in the United States,

royalties from country Y, and royalties from

country Z. No part of the $60,000 research

expense is allocable to dividends from

country C, because corporation C has already

paid, through its cost-sharing arrangement,

for research activity performed by X which

may benefit C.

(iii) Apportionment. For purposes of

applying the foreign tax credit limitation, the

statutory grouping is general limitation gross

income from sources without the United

States, and the residual grouping is general

limitation gross income from sources within

the United States. X’s deduction of $60,000

for its research and experimental expenditure

must be apportioned between these

groupings. Because more than 50 percent of

the research and experimentation was

performed in the United States, 50 percent of

the $60,000 deduction can be apportioned

exclusively to the residual grouping. The

remaining 50 percent of the deduction can

then be apportioned between the residual

and the statutory grouping on the basis of

sales by X, Y, and Z. (If X utilized the

optional gross income methods in 1996, then

its use of such methods constituted a binding

election to use the optional gross income

methods for all taxable years thereafter. The

optional gross income methods are not

illustrated in this Example 5 (see instead

Examples 3 and 4).) Since X has only a 60

percent ownership interest in corporation Z,

only 60 percent of Z’s sales (60% of

$1,000,000, or $600,000) are included for

purposes of apportionment. The allocation

and apportionment for 1997 is as follows:

(A) X’s total research expense: $80,000.

(B) Less: Legally mandated research

directly allocated to the residual grouping of

gross income: $20,000.

(C) Tentative apportionment on the basis of

sales.

(1) Research and experimental expense to

be apportioned between residual and

statutory groupings of gross income: $60,000.

(2) Less: Exclusive apportionment of

research and experimental expense to the

residual grouping of gross income

($60,000×50 percent): $30,000.

(3) Research and experimental expense to

be apportioned between the residual and the

statutory grouping on the basis of sales:

$30,000.

(4) Apportionment of research and

experimental expense to general limitation

gross income from sources within the United

States (residual grouping)

($30,000×$600,000/

($600,000+$400,000+$600,000)): $11,250.

(5) Apportionment of research and

experimental expense to general limitation

gross income from countries Y and Z

(statutory grouping)

($30,000×$400,000+$600,000/

($600,000+$400,000+$600,000)): $18,750.

(6) Total apportioned deduction for

research and experimentation

($30,000+$30,000): 60,000.

(7) Amount apportioned to the residual

grouping ($30,000+$11,250): $41,250.

(8) Amount apportioned to the statutory

grouping of sources within countries Y and

Z: $18,750.

Example 6—Research and

Experimentation—(i) Facts. X, a domestic

corporation, manufacturers and sells forklift

trucks and other types of materials handling

equipment in the United States. The

manufacture and sale of forklift trucks and

other materials handling equipment belongs

to the product category, Construction,

Mining, and Materials Handling Machinery

and Equipment (SIC Industry Group 353). X

also sells its forklift trucks to a wholesaling

subsidiary located in foreign country Y (but

title passes in the United States), and X

manufactures forklift trucks in foreign

country Z. The wholesaling of forklift trucks

to country Y also belongs to X’s product

category Transportation equipment and,

therefore, may not belong to the product

category, Wholesale trade (SIC Major Group

50 and 51). In 1997, X sold $7,000,000 of

forklift trucks to purchasers in the United

States, $3,000,000 of forklift trucks to the

wholesaling subsidiary in Y, and transferred

forklift truck components with an FOB

export value of $2,000,000 to its branch in Z.

The branch’s sales of finished forklift trucks

were $5,000,000. In response to legally

mndated emission control requirements, X’s

United States research department has been

engaged in a research project to improve the

performance and quality of engine exhaust

systems used on its products in the United

States. It incurs expenses of $100,000 for this

purpose in 1997. In the past, X has

customarily adapted the product

improvements developed originally for the

domestic market to its forklift trucks

manufactured abroad. During the taxable year

1997, development of an improved engine

exhaust system is completed and X begins

installing the new system during the latter

part of the taxable year in products

manufactured and sold in the United States.

X continues to manufacture and sell forklift

trucks in foreign countries without the

improved engine exhaust systems.

(ii) Allocation. X’s deduction for its

research expense is definitely related to the

income to which it gives rise, namely income

from the manufacture and sale of forklift

trucks within the United States and in

country Z. Although the research is

undertaken in response to a legal mandate, it

can reasonably be expected to generate gross

income from the manufacture and sale of

trucks by the branch in Z. Therefore, the

deduction is not allocable solely to income

from X’s domestic sales of forklift trucks. It

is allocable to income from such sales and

income from the sales of X’s branch in Z.

(iii) Apportionment. For the method of

apportionment on the basis of either sales or

gross income, see example 3. However, in

determining the amount of research

apportioned to income from foreign and

domestic sources, the net sales of the branch

in Z are $3,000,000 ($5,000,000 less

$2,000,000) and the sales within the United

States are $12,000,000 ($7,000,000 plus

$3,000,000 plus $2,000,000).

Example 7—Research and

Experimentation—(i) Facts. X, a domestic

corporation, is a drug company which

manufactures a wide variety of

pharmaceutical products for sale in the

United States. Pharmaceutical products

belong to the product category, Drugs (SIC

Industry Group 283). X exports its

pharmaceutical products through a foreign

sales corporation (FSC). X’s wholly owned

foreign subsidiary Y also manufactures

pharmaceutical products. In 1997, X has

domestic sales of $10,000,000, the FSC has

sales of $3,000,000, and Y has sales of

$5,000,000. In that same year, 1997, X incurs
27460 Federal Register / Vol. 60, No. 100 / Wednesday, May 24, 1995 / Proposed Rules

expense of $200,000 on research to test a

product in response to requirements imposed

by the United States Food and Drug

Administration (FDA). X is able to show that,

even though country Y imposes certain

testing requirements on pharmaceutical

products, the research performed in the

United States is not accepted by country Y

for purposes of its own licensing

requirements, and the research has minimal

use abroad. X is further able to show that its

FSC sells goods to countries which do not

accept or do not require research performed

in the United States for purposes of their own

licensing standards.

(ii) Allocation. Since X’s research expense

of $200,000 is undertaken to meet the

requirements of the United States Food and

Drug Administration, and since it is

reasonable to expect that the expenditure

will not generate gross income (beyond de

minimis amounts) outside the United States,

the deduction is definitely related and thus

allocable to the residual grouping.

(iii) Apportionment. No apportionment is

necessary since the entire expense is

allocated to the residual grouping, general

limitation gross income from sales within the

United States.

Example 8—Research and

Experimentation—(i) Facts. X, a domestic

corporation, is engaged in continuous

research and experimentation to improve the

quality of the products that it manufactures

and sells, which are floodlights, flashlights,

fuse boxes, and solderless connectors. X

incurs and deducts $100,000 of expenditure

for research and experimentation in 1997

which was performed exclusively in the

United States. As a result of this research

activity, X acquires patents which it uses in

its own manufacturing activity. X licenses its

floodlight patent to Y and Z, uncontrolled

foreign corporations, for use in their own

territories, countries Y and Z, respectively.

Corporation Y pays X an arm’s length royalty

of $3,000 plus $0.20 for each floodlight sold.

Sales of floodlights by Y for the taxable year

are $135,000 (at $4.50 per unit) or 30,000

units, and the royalty is $9,000

($3,000+$0.20×30,000). Y has sales of other

products of $500,000. Z pays X an arm’s

length royalty of $3,000 plus $0.30 for each

unit sold. Z manufactures 30,000 floodlights

in the taxable year, and the royalty is $12,000

($3,000+$0.30×30,000). The dollar value of

Z’s floodlight sales is not known and cannot

be reasonably estimated because, in this case,

the floodlights are not sold separately by Z

but are instead used as a component in Z’s

manufacture of lighting equipment for

theaters. The sales of all Z’s products,

including the lighting equipment for theaters,

are $1,000,000. Y and Z each sell the

floodlights exclusively within their

respective countries. X’s sales of floodlights

for the taxable year are $500,000 and its sales

of its other products, flashlights, fuse boxes,

and solderless connectors, are $400,000. X

has gross income of $500,000, consisting of

gross income from domestic sources of

$479,000, and royalty income of $9,000 and

$12,000 from foreign corporations Y and Z

respectively.

(ii) Allocation. X’s research and

experimental expenses are definitely related

to all of the products that it produces, which

are floodlights, flashlights, fuse boxes, and

solderless connectors. All of these products

are in the same three digit SIC Code category,

Electric Lighting and Wiring Equipment (SIC

Industry Group 364). Thus, X’s research and

experimental expenses are allocable to all

items of income attributable to this product

category, domestic sales income and royalty

income from the foreign countries in which

corporations Y and Z operate.

(iii) Apportionment. (A) The statutory

grouping of gross income is general

limitation income from sources without the

United States. The residual grouping is

general limitation gross income from sources

within the United States. X’s deduction of

$100,000 for its research expenditures must

be apportioned between the groupings. For

apportionment on the basis of sales in

accordance with paragraph (e)(3)(ii) of this

section, X is entitled to an exclusive

apportionment of 50 percent of its research

and experimental expense to the residual

grouping, general limitation gross income

from sources within the United States, since

more than 50 percent of the research activity

was performed in the United States. The

remaining 50 percent of the deduction can

then be apportioned between the residual

and statutory groupings on the basis of sales.

Since Y and Z are unrelated licensees of X,

only their sales of the licensed product,

floodlights, are included for purposes of

apportionment. Floodlight sales of Z are

unknown, but are estimated at ten times

royalties from Z, or $120,000. All of X’s sales

from the entire product category are included

for purposes of apportionment on the basis

of sales. Alternatively, X may apportion its

deduction on the basis of gross income, in

accordance with paragraph (e)(3)(iii) of this

section. The apportionment is as follows:

(1) Tentative Apportionment on the basis

of sales.

(i) Research and experimental expense to

be apportioned between statutory and

residual groupings of gross income: $100,000.

(ii) Less: Exclusive apportionment of

research and experimental expense to the

residual groupings of gross income ($100,000

x 50 percent): $50,000.

(iii) Research and experimental expense to

be apportioned between the statutory and

residual groupings of gross income on the

basis of sales: $50,000.

(iv) Apportionment of research and

experimental expense to the residual

groupings of gross income

($50,000×$900,000/

($900,000+$135,000+$120,000)): $38,961.

(v) Apportionment of research and

experimental expense to the statutory

grouping, royalty income from countries Y

and Z ($50,000×$135,000+$120,000/

($900,000+$135,000+$120,000)): $11,039.

(vi) Total apportioned deduction for

research and experimentation: $100,000.

(vii) Amount apportioned to the residual

grouping ($50,000+$38,961): $88,961.

(viii) Apportioned to the statutory grouping

of sources within countries Y and Z: $11,039.

(2) Tentative apportionment on gross

income basis.

(i) Apportionment of research and

experimental expense to the residual

grouping of gross income

($100,000×$479,000/$500,000): $95,800.

(ii) Apportionment of research and

experimental expense to the statutory

grouping of gross income

($100,000×$9,000+$12,000/$500,000):

$4,200.

(iii) Amount apportioned to the residual

grouping: $95,800.

(iv) Amount apportioned to the statutory

grouping of general limitation income from

sources without the United States: $4,200.

(B) Since X’s apportionment on the basis

of gross income to the statutory grouping,

$4,200, is less than 50 percent of its

apportionment on the basis of sales to the

statutory grouping, $11,039 it may use

Option two of paragraph (e)(3)(iii)(B) of this

section and apportion $5,520 (50 percent of

$11,039) to the statutory grouping.

Examples (9) through (16)—[Reserved]

* * * * *

Example (23)—[Reserved]

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 95–12621 Filed 5–19–95; 9:25 am]

BILLING CODE 4830–01–U

DEPARTMENT OF DEFENSE

Office of the Secretary

32 CFR Part 203

Technical Assistance for Public

Participation

AGENCY: Department of Defense, Office

of the Deputy Under Secretary of

Defense for Environmental Security

(DUSD(ES)).

ACTION: Notice of request for comments.

SUMMARY: Consistent with section 326 of

The National Defense Authorization Act

for Fiscal Year 1995 (NDAA–95), the

Department of Defense intends to

publish interim rules for providing

technical assistance funding to citizens

affected by the environmental

restoration of Department of Defense

facilities. This request for comments

discusses and solicits comments on

several options the Department of

Defense is considering for providing

assistance to community members of

Technical Review Committee (TRCs)

and Restoration Advisory Boards (RABs)

to obtain technical advisors and

facilitate the participation of these

members and affected citizens in

environmental restoration activities at

their associated installations. The

Department of Defense will consider

these comments in formulating an

Interim Final Rule.

DATES: Written comments must be

received on or before July 24, 1995.