65550 Federal Register / Vol. 60, No. 244 / Wednesday, December 20, 1995 / Rules and Regulations

because $136,000 exceeds $100,000, the

minimum net worth necessary for Trustee X

to accept new accounts for 1996 is $136,000.

(d) For 1996, the amount determined under

§ 1.408–2(e)(6)(ii)(C) for Trustee X is

determined as follows: (1) two percent of

$4,100,000 equals $82,000; (2) one percent of

$1,400,000 equals $14,000; and (3) $82,000

minus $14,000 equals $68,000. Thus, because

$68,000 exceeds $50,000, the minimum net

worth necessary for Trustee X to avoid a

mandatory relinquishment of accounts for

1996 is $68,000.

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: December 12, 1995.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 95–30684 Filed 12–19–95; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Part 1

[TD 8640]

RIN 1545–AI52

Exempt Organizations Not Required To

File Annual Returns: Integrated

Auxiliaries of Churches

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations that exempt certain

integrated auxiliaries of churches from

filing information returns. These

regulations incorporate the rules of Rev.

Proc. 86–23 (1986–1 C.B. 564), into the

regulations defining integrated auxiliary

for purposes of determining what

entities must file information returns.

The new definition focuses on the

sources of an organization’s financial

support in addition to the nature of the

organization’s activities.

DATES: These regulations are effective

December 20, 1995.

For dates of applicability of these

regulations, see § 1.6033–2(h)(6).

FOR FURTHER INFORMATION CONTACT:

Terri Harris or Paul Accettura, of the

Office of the Associate Chief Counsel

(Employee Benefits and Exempt

Organizations), IRS, at 202–622–6070

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On December 15, 1994 proposed

regulations §§ 1.6033–2 and 1.508–1

[EE–41–86 (1995–2 I.R.B. 20)] under

sections 6033(a)(2) and 508 of the

Internal Revenue Code of 1986,

respectively, were published in the

Federal Register (59 FR 64633). The

proposed regulations adopted the rules

of Rev. Proc. 86–23 (1986–1, C.B. 564)

as the definition of integrated auxiliary

of a church replacing the current

definition set forth in § 1.6033–2(g)(5).

Additionally, section 508(c) excepts

integrated auxiliaries of a church from

the requirement that new organizations

notify the Secretary of the Treasury that

they are applying for recognition of

section 501(c)(3) status (Form 1023). For

consistency, § 1.508–1(a)(3)(i)(a), which

gives several examples of integrated

auxiliaries, was proposed to be

amended by deleting the examples and

by adding a cross-reference to § 1.6033–

2(h) for the definition of integrated

auxiliary of a church. After IRS and

Treasury consideration of the public

comments received regarding the

proposed regulations, the regulations

are adopted as revised by this Treasury

decision.

Explanation of Provisions

Section 6033(a)(1) requires

organizations that are exempt from

income tax under section 501(a) to file

annual returns. Section 6033(a)(2)(A)

provides exceptions to this requirement

for certain specified types of

organizations, including, among others,

churches, their integrated auxiliaries,

and conventions or associations of

churches. Section 6033(a)(2)(B) provides

that the Secretary may relieve any

organization from the filing requirement

where the Secretary determines that

filing is not necessary to the efficient

administration of the internal revenue

laws.

Prior to this Treasury decision,

§ 1.6033–2(g)(5)(i) defined the term

integrated auxiliary of a church as an

organization that is: (1) exempt from

taxation as an organization described in

section 501(c)(3); (2) affiliated with a

church (within the meaning of § 1.6033–

2(g)(5)(iii)); and (3) engaged in a

principal activity that is ‘‘exclusively

religious.’’ Section 1.6033–2(g)(5)(ii)

provides that an organization’s principal

activity is not ‘‘exclusively religious’’ if

that activity is educational, literary,

charitable, or of another nature (other

than religious) that would serve as a

basis for exemption under section

501(c)(3).

The ‘‘exclusively religious’’ element

of the definition was litigated in

Lutheran Social Service of Minnesota v.

United States, 583 F. Supp. 1298 (D.

Minn. 1984), rev’d 758 F.2d 1283 (8th

Cir. 1985), and Tennessee Baptist

Children’s Homes, Inc. v. United States,

604 F. Supp. 210 (M.D. Tenn. 1984)

aff’d, 790 F.2d 534 (6th Cir. 1986).

While the litigation over the

‘‘exclusively religious’’ standard was

proceeding, Congress enacted section

3121(w) of the Internal Revenue Code,

Tax Reform Act of 1984, Pub. L. 98–369,

section 2603(b), 98 Stat. 494, 1128

(1984), which permits certain churchrelated organizations to elect out of

social security coverage if they meet a

standard based on the degree of

financial support they receive from a

church. In light of this litigation and the

enactment of section 3121(w), IRS

personnel met with representatives of

various church organizations to

encourage voluntary compliance with

the filing requirements and to develop

a less controversial and more objective

standard for identifying an integrated

auxiliary of a church.

Subsequent to these meetings the IRS

published Rev. Proc. 86–23, which

provides that, for tax years beginning

after December 31, 1975, an

organization is not required to file Form

990 if it is: (1) described in sections

501(c)(3) and 509(a) (1), (2), or (3); (2)

affiliated with a church or a convention

or association of churches; and (3)

internally supported. With respect to

this last criterion, Rev. Proc. 86–23 sets

forth an internal support standard that

is similar to the financial support

standard in section 3121(w).

The proposed regulations adopted the

rules of Rev. Proc. 86–23 as the

definition of the term integrated

auxiliary of a church replacing the

current definition set forth in § 1.6033–

2(g)(5). The final regulations retain the

definition of an integrated auxiliary of a

church that is contained in the proposed

regulations.

Under this Treasury decision, to be an

integrated auxiliary of a church an

organization must first be described in

section 501(c)(3) and section 509(a) (1),

(2), or (3), and be affiliated with a

church in accordance with standards set

forth in the regulations. An organization

meeting those tests is an integrated

auxiliary if it either: (1) does not offer

admissions, goods, services, or facilities

for sale, other than on an incidental

basis, to the general public; or (2) offers

admissions, goods, services, or facilities

for sale, other than on an incidental

basis, to the general public and not more

than 50 percent of its support comes

from a combination of government

sources, public solicitation of

contributions, and receipts other than

those from an unrelated trade or

business.

Some commentators have noted that

certain church-related organizations that

finance, fund and manage pension

programs were originally excused from

filing by Notice 84–2 (1984–1 C.B. 331),

which was issued pursuant to the

Commissioner’s discretionary authority
Federal Register / Vol. 60, No. 244 / Wednesday, December 20, 1995 / Rules and Regulations 65551

under section 6033(a)(2)(B). Rev. Proc.

86–23 states that Notice 84–2 is

superseded by Rev. Proc. 86–23 because

the organizations excused from filing

under the notice are excused from filing

by the revenue procedure. The

commentators have expressed concern

that the proposed regulations did not

relieve church pension plans described

in Notice 84–2 from the filing

requirement. The organizations excused

from filing under Notice 84–2 do not

necessarily meet the definition of an

integrated auxiliary of a church under

these final regulations. Nevertheless, the

proposed regulations were not intended

to alter the exemption from filing

provided in Notice 84–2 and reaffirmed

in Rev. Proc. 86–23. To make this intent

clear, the IRS is issuing Revenue

Procedure 96–10 at the same time that

it issues these final regulations. Rev.

Proc. 96–10 carries over the exemption

from filing for church pension plan

organizations that was set forth in

Notice 84–2. Having reaffirmed those

parts of Rev. Proc. 86–23 that were not

incorporated into these final

regulations, Rev. Proc. 96–10 also

obsoletes Rev. Proc. 86–23.

The IRS developed the internal

support test contained in the proposed

regulations based on its conclusion that

Congress intended that organizations

receiving a majority of their support

from public and government sources, as

opposed to those receiving a majority of

their support from church sources,

should file annual information returns

in order that the public have a means of

inspecting the returns of these

organizations. The annual information

return also was intended to serve as a

means by which the IRS could examine,

if necessary, those organizations

receiving substantial non-church

support.

One commentator has suggested that

the definition of an integrated auxiliary

of a church should consist of a churchrelated structural test rather than an

internal support test. The IRS and the

Treasury Department believe that the

use of a structural test could lead to

problems similar to those caused by the

‘‘exclusively religious’’ test.

Additionally, the suggested definition

would frustrate Congress’ intended

objective of allowing ongoing public

scrutiny of organizations receiving the

majority of their support from public

and government sources.

A commentator has also suggested

that by using the internal support test as

part of the new definition of an

integrated auxiliary of a church, the IRS

is attempting to ‘‘overrule’’ the holdings

in the previously mentioned court cases

(i.e. Tennessee Baptist Children’s Home

and Lutheran Social Service of

Minnesota).

The IRS and the Treasury Department

believe that the courts’ rulings

questioned the validity of the

‘‘exclusively religious’’ activity

requirement contained in the former

regulation on the basis that it is not

within the Service’s discretion to assess

the religious nature of a church’s

activities. Having eliminated the

‘‘exclusively religious’’ activity test from

the definition of integrated auxiliary of

a church, the IRS and the Treasury

Department believe that the definition

in the final regulation is consistent with

the courts’ holdings as well as the

statute and the legislative history.

Some commentators have suggested

that the first sentence of § 1.6033–

2(g)(5)(iv) of the regulations in effect

prior to this Treasury decision should

be included in the final regulations.

That sentence identified specific types

of organizations as integrated auxiliaries

of churches in accordance with

legislative history. Although § 1.6033–

2(h) of the proposed regulations was

intended to provide a general definition

that could apply in all instances, the IRS

and the Treasury Department agree that,

in order to be consistent with the

legislative history, parts of § 1.6033–

2(g)(5)(iv) of the regulations should be

included in these final regulations.

Therefore, these final regulations

include § 1.6033–2(h)(5) that states that

‘‘a men’s or women’s organization, a

seminary, a mission society, or a youth

group’’ is an integrated auxiliary of a

church regardless of whether it meets

the internal support test in to § 1.6033–

2(h)(1)(iii). (The tests under § 1.6033–

2(h)(1) (i) and (ii) must still be met.)

Comments were received objecting

that Example 4 relating to seminaries

did not describe a realistic set of facts

and, therefore, could lead to confusion.

Accordingly, Example 4 has been

eliminated. Also, the treatment of

seminaries has been clarified by

§ 1.6033–2(h)(5). We also note that, in

addition to the exception for seminaries,

§ 1.6033–2(g)(1)(vii) of the regulations

excepts certain schools below college

level that are affiliated with a church or

operated by a religious order from the

filing requirements of section 6033.

Except for a paragraph numbering

change contained in a cross-reference,

§ 1.6033–2(g)(1)(vii) is unchanged by

these final regulations.

Several commentators have suggested

that expanded definitions of certain

terms used in the internal support test

be included in this Treasury decision.

The final regulations do not incorporate

this suggestion. The IRS and the

Treasury Department intend for these

final regulations to reissue the test

published in Rev. Proc. 86–23 as the

new definition for an integrated

auxiliary of a church. If guidance is

necessary on the application of the

definition to specific cases, that

guidance is more appropriately

provided in non-regulatory form, such

as through private letter rulings or

revenue rulings.

The amendment to § 1.6033–2(g)(5) is

effective with respect to returns filed for

taxable years beginning after December

31, 1969. However, for returns filed for

taxable years beginning after December

31, 1969, but before December 20, 1995,

the exclusively religious test contained

in § 1.6033–2(g)(5) prior to its

amendment by these final regulations

may, at the entity’s option, be used as

an alternative to the financial support

test in determining whether an entity is

an integrated auxiliary of a church. The

remainder of the amendments are

effective with respect to returns for

taxable years beginning after December

31, 1969. Therefore, for returns filed for

taxable years beginning after December

20, 1995, the definition of integrated

auxiliary of a church contained in

§ 1.6033–2(h) will be used in

determining whether an entity is an

integrated auxiliary of a church.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore,a regulatory

assessment is not required. It has also

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, Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, the notice of proposed rulemaking

preceding these regulations was

submitted to the Chief Counsel for

Advocacy of the Small Business

Administration for comment on its

impact on small business.

Drafting Information

The principal author of this Treasury

decision is Terri Harris, Office of the

Associate Chief Counsel (Employee

Benefits and Exempt Organizations),

IRS. However, personnel from other

offices of the IRS and the Treasury

Department participated in their

development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.
65552 Federal Register / Vol. 60, No. 244 / Wednesday, December 20, 1995 / Rules and Regulations

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority for part 1

continues to read in part as follows:

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

Par. 2. Section 1.508–1 is amended by

revising paragraphs(a)(3)(i) introductory

text and (a)(3)(i)(a) to read as follows:

§ 1.508–1 Notices.

(a) * * *

(3) * * * (i) Paragraphs (a) (1) and (2)

of this section are inapplicable to the

following organizations:

(a) Churches, interchurch

organizations of local units of a church,

conventions or associations of churches,

or integrated auxiliaries of a church. See

§ 1.6033–2(h) regarding the definition of

integrated auxiliary of a church;

* * * * *

Par. 3. Section 1.6033–2 is amended

as follows:

1. Paragraphs (g)(1)(i) and (g)(vii) are

revised.

2. Paragraph (g)(5) is removed and

reserved.

3. Paragraphs (h) through (j) are

redesignated as paragraphs (i) through

(k).

4. New paragraph (h) is added.

The added and revised provisions

read as follows:

§ 1.6033–2 Returns by exempt

organizations (taxable years beginning after

December 31, 1969) and returns by certain

nonexempt organizations (taxable years

beginning after December 31, 1980).

* * * * *

(g) * * *

(1) * * *

(i) A church, an interchurch

organization of local units of a church,

a convention or association of churches,

or an integrated auxiliary of a church (as

defined in paragraph (h) of this section);

* * * * *

(vii) An educational organization

(below college level) that is described in

section 170(b)(1)(A)(ii), that has a

program of a general academic nature,

and that is affiliated (within the

meaning of paragraph (h)(2) of this

section) with a church or operated by a

religious order.

* * * * *

(h) Integrated auxiliary—(1) In

general. For purposes of this title, the

term integrated auxiliary of a church

means an organization that is—

(i) Described both in sections

501(c)(3) and 509(a) (1), (2), or (3);

(ii) Affiliated with a church or a

convention or association of churches;

and

(iii) Internally supported.

(2) Affiliation. An organization is

affiliated with a church or a convention

or association of churches, for purposes

of paragraph (h)(1)(ii) of this section,

if—

(i) The organization is covered by a

group exemption letter issued under

applicable administrative procedures,

(such as Rev. Proc. 80–27 (1980–1 C.B.

677); See § 601.601(a)(2)(ii)(b)), to a

church or a convention or association of

churches;

(ii) The organization is operated,

supervised, or controlled by or in

connection with (as defined in

§ 1.509(a)–4) a church or a convention

or association of churches; or

(iii) Relevant facts and circumstances

show that it is so affiliated.

(3) Facts and circumstances. For

purposes of paragraph (h)(2)(iii) of this

section, relevant facts and

circumstances that indicate an

organization is affiliated with a church

or a convention or association of

churches include the following factors.

However, the absence of one or more of

the following factors does not

necessarily preclude classification of an

organization as being affiliated with a

church or a convention or association of

churches—

(i) The organization’s enabling

instrument (corporate charter, trust

instrument, articles of association,

constitution or similar document) or bylaws affirm that the organization shares

common religious doctrines, principles,

disciplines, or practices with a church

or a convention or association of

churches;

(ii) A church or a convention or

association of churches has the

authority to appoint or remove, or to

control the appointment or removal of,

at least one of the organization’s officers

or directors;

(iii) The corporate name of the

organization indicates an institutional

relationship with a church or a

convention or association of churches;

(iv) The organization reports at least

annually on its financial and general

operations to a church or a convention

or association of churches;

(v) An institutional relationship

between the organization and a church

or a convention or association of

churches is affirmed by the church, or

convention or association of churches,

or a designee thereof; and

(vi) In the event of dissolution, the

organization’s assets are required to be

distributed to a church or a convention

or association of churches, or to an

affiliate thereof within the meaning of

this paragraph (h).

(4) Internal support. An organization

is internally supported, for purposes of

paragraph (h)(1)(iii) of this section,

unless it both—

(i) Offers admissions, goods, services

or facilities for sale, other than on an

incidental basis, to the general public

(except goods, services, or facilities sold

at a nominal charge or for an

insubstantial portion of the cost); and

(ii) Normally receives more than 50

percent of its support from a

combination of governmental sources,

public solicitation of contributions, and

receipts from the sale of admissions,

goods, performance of services, or

furnishing of facilities in activities that

are not unrelated trades or businesses.

(5) Special rule. Men’s and women’s

organizations, seminaries, mission

societies, and youth groups that satisfy

paragraphs (h)(1) (i) and (ii) of this

section are integrated auxiliaries of a

church regardless of whether such an

organization meets the internal support

requirement under paragraph (h)(1)(iii)

of this section.

(6) Effective date. This paragraph (h)

applies for returns filed for taxable years

beginning after December 31, 1969. For

returns filed for taxable years beginning

after December 31, 1969 but beginning

before December 20, 1995, the definition

for the term integrated auxiliary of a

church set forth in § 1.6033–2(g)(5) (as

contained in the 26 CFR edition revised

as of April 1, 1995) may be used as an

alternative definition to such term set

forth in this paragraph (h).

(7) Examples of internal support. The

internal support test of this paragraph

(h) is illustrated by the following

examples, in each of which it is

assumed that the organization’s

provision of goods and services does not

constitute an unrelated trade or

business:

Example 1. Organization A is described in

sections 501(c)(3) and 509(a)(2) and is

affiliated (within the meaning of this

paragraph (h)) with a church. Organization A

publishes a weekly newspaper as its only

activity. On an incidental basis, some copies

of Organization A’s publication are sold to

nonmembers of the church with which it is

affiliated. Organization A advertises for

subscriptions at places of worship of the

church. Organization A is internally

supported, regardless of its sources of

financial support, because it does not offer

admissions, goods, services, or facilities for

sale, other than on an incidental basis, to the

general public. Organization A is an

integrated auxiliary.

Example 2. Organization B is a retirement

home described in sections 501(c)(3) and

509(a)(2). Organization B is affiliated (within

the meaning of this paragraph (h)) with a
Federal Register / Vol. 60, No. 244 / Wednesday, December 20, 1995 / Rules and Regulations 65553

church. Admission to Organization B is open

to all members of the community for a fee.

Organization B advertises in publications of

general distribution appealing to the elderly

and maintains its name on nondenominational listings of available

retirement homes. Therefore, Organization B

offers its services for sale to the general

public on more than an incidental basis.

Organization B receives a cash contribution

of $50,000 annually from the church. Fees

received by Organization B from its residents

total $100,000 annually. Organization B does

not receive any government support or

contributions from the general public. Total

support is $150,000 ($100,000 + $50,000),

and $100,000 of that total is from receipts

from the performance of services (662⁄3% of

total support). Therefore, Organization B

receives more than 50 percent of its support

from receipts from the performance of

services. Organization B is not internally

supported and is not an integrated auxiliary.

Example 3. Organization C is a hospital

that is described in sections 501(c)(3) and

509(a)(1). Organization C is affiliated (within

the meaning of this paragraph (h)) with a

church. Organization C is open to all persons

in need of hospital care in the community,

although most of Organization C’s patients

are members of the same denomination as the

church with which Organization C is

affiliated. Organization C maintains its name

on hospital listings used by the general

public, and participating doctors are allowed

to admit all patients. Therefore, Organization

C offers its services for sale to the general

public on more than an incidental basis.

Organization C annually receives $250,000 in

support from the church, $1,000,000 in

payments from patients and third party

payors (including Medicare, Medicaid and

other insurers) for patient care, $100,000 in

contributions from the public, $100,000 in

grants from the federal government (other

than Medicare and Medicaid payments) and

$50,000 in investment income. Total support

is $1,500,000 ($250,000 + $1,000,000 +

$100,000 + $100,000 + $50,000), and

$1,200,000 ($1,000,000 + $100,000 +

$100,000) of that total is support from

receipts from the performance of services,

government sources, and public

contributions (80% of total support).

Therefore, Organization C receives more than

50 percent of its support from receipts from

the performance of services, government

sources, and public contributions.

Organization C is not internally supported

and is not an integrated auxiliary.

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: November 27, 1995.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 95–30839 Filed 12–19–95; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Parts 1, 301 and 602

[TD 8632]

RIN 1544–AM00

Section 482 Cost Sharing Regulations

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to qualified cost

sharing arrangements under section 482

of the Internal Revenue Code. These

regulations reflect changes to section

482 made by the Tax Reform Act of

1986, and provide guidance to revenue

agents and taxpayers implementing the

changes.

DATES: These regulations are effective

January 1, 1996.

These regulations are applicable for

taxable years beginning on or after

January 1, 1996.

FOR FURTHER INFORMATION CONTACT: Lisa

Sams of the Office of Associate Chief

Counsel (International), IRS (202) 622–

3840 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information

contained in these final regulations have

been reviewed and approved by the

Office of Management and Budget in

accordance with the Paperwork

Reduction Act (44 U.S.C. 3507) under

control number 1545–1364. Responses

to these collections of information are

required to determine whether an

intangible development arrangement is

a qualified cost sharing arrangement and

who are the participants in such

arrangement.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number.

The estimated average annual burden

per recordkeeper is 8 hours. The

estimated average annual burden per

respondent is 0.5 hour.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, T:FP,

Washington, DC 20224, and to the

Office of Management and Budget, Attn:

Desk Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503.

Books and records relating to these

collections of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Background

Section 482 was amended by the Tax

Reform Act of 1986, Public Law 99–514,

100 Stat. 2085, 2561, et. seq. (1986–3

C.B. (Vol. 1) 1, 478). On January 30,

1992, a notice of proposed rulemaking

concerning the section 482 amendment

in the context of cost sharing was

published in the Federal Register

(INTL–0372–88, 57 FR 3571).

Written comments were received with

respect to the notice of proposed

rulemaking, and a public hearing was

held on August 31, 1992. After

consideration of all the comments, the

proposed regulations under section 482

are adopted as revised by this Treasury

decision, and the corresponding

temporary regulations (which contain

the cost sharing regulations as in effect

since 1968) are removed.

Explanation of Provisions

Introduction

The Tax Reform Act of 1986 (the Act)

amended section 482 to require that

consideration for intangible property

transferred in a controlled transaction

be commensurate with the income

attributable to the intangible. The

Conference Committee report to the Act

indicated that in revising section 482,

Congress did not intend to preclude the

use of bona fide research and

development cost sharing arrangements

as an appropriate method of allocating

income attributable to intangibles

among related parties. The Conference

Committee report stated, however, that

in order for cost sharing arrangements to

produce results consistent with the

commensurate-with-income standard,

(a) a cost sharer should be expected to

bear its portion of all research and

development costs, on unsuccessful as

well as successful products, within an

appropriate product area, and the costs

of research and development at all

relevant development stages should be

shared, (b) the allocation of costs

generally should be proportionate to

profit as determined before deduction

for research and development, and (c) to

the extent that one party contributes

funds toward research and development

at a significantly earlier point in time

than another (or is otherwise putting its

funds at risk to a greater extent than the

other) that party should receive an

appropriate return on its investment.

See H.R. Rep. 99–281, 99th Cong., 2d

Sess. (1986) at II–638.