Source: http://taxcreditology.com/2015/06/30/final-and-temporary-treasury-regulations-on-the-allocation-of-a-controlled-groups-research-credit-to-its-member-entities/
Timestamp: 2017-11-21 06:19:31
Document Index: 779090470

Matched Legal Cases: ['§ 1563', '§ 44', '§ 41', '§ 41', '§ 41', '§ 41', '§ 1', '§ 41', '§ 1', '§ 41', '§ 1563', '§ 221', '§ 44', '§ 1', '§ 301', '§ 301', '§ 41', '§ 1', '§ 45', '§ 280']

The controlled group provisions were first added to the Internal Revenue Code in 1964 to provide tax incentives for small businesses operating as corporate entities. [1] Under I.R.C. § 1563, a controlled group is a combination of two or more corporations or trades or businesses that are under common control. The Code includes various ownership tests to determine if a controlled group exists for purposes of applying certain Code sections. [2] If a controlled group exists, all members of the controlled group are treated as a single taxpayer. [3]
When the research credit was first enacted in 1981, a similar rule was provided for computing the research credit of a group under common control. [4] Former I.R.C. § 44F(f)(1)(A)(i) provided that, in computing the amount of the research credit, “all members of the same controlled group of corporations shall be treated as a single taxpayer.” [5] The rule prevented taxpayers from creating artificial increases in qualified research expenditures by simply shifting those expenses between commonly controlled corporations or trades and businesses.
Earlier this year, the IRS published final and temporary regulations (T.D. 9717) concerning the allocation of research credits to corporations and trades or businesses under common control (controlled groups). [6] To understand why these temporary regulations were issued, it is helpful to look back to the American Taxpayer Relief Act of 2012 (“the Act”), which was passed by Congress and signed into law by President Obama in January 2013, and its impact on the research credit. The Act has a scope far beyond that of the research credit but it extended the credit as well as amended subsections concerning the allocation of the research credit to controlled group members. [7]
Section 301(c) of the Act amended I.R.C. § 41(f)(1)(A)(ii) and § 41(f)(1)(B)(ii), requiring the allocation of research credits to each controlled group member “on a proportionate basis to its share of the aggregate of the qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums, taken into account by such controlled group for purposes of this section.” [8] In contrast, former § 41(f)(1)(A)(ii) and former § 41(f)(1)(B)(ii) provided a more ambiguous clause stating that the research credit allowable to a controlled group member shall be its proportionate share of the qualified research expenditures (“QREs”) giving rise to the credit. [9] One would have to look to the Treasury Regulations to determine how to allocate a controlled group research credit to its members. Prior to the issuance of T.D. 9717, Treas. Reg. § 1.41-6(c)(1)(i) required allocation of the controlled group research credit based on the proportionate share of the sum of each members stand-alone entity credits. If the group credit exceeded the sum of the of the stand-alone entity credits, the excess of the group credit was allocated in proportion to the QREs of the members of the controlled group. [10]
Given the incongruity between § 41(f)(1)(A)(ii) and (f)(1)(B)(ii), as amended, and the Treasury Regulations pertaining to the allocation of controlled group credits, the IRS issued Notice 2013-20. [11] The Notice required that for taxable years beginning after December 31, 2011, Treas. Reg. § 1.41-6(c) shall not apply. [12] Rather, controlled groups must allocate the group credit in proportion to each member’s contribution of QREs for the controlled group credit for that taxable year. [13] The temporary regulations merely implement the Act’s changes by providing an allocation method, along with examples, consistent with both Notice 2013-20 and the amended § 41(f)(1)(A)(ii) and (f)(1)(B)(ii) and remove references to a stand-alone entity credit. [14] Under T.D. 9717, the group credit is allocated in proportion to the QREs each controlled group member contributed.
These temporary regulations underscore the importance of understanding the nuances in the research credit, such as the determination of controlled groups and how to allocate research credits to the controlled group members. At Tax Credit Co., we understand the complexity that a controlled group can have on the research credit and our consultants provide training and field questions on these issues and others. For information on how to determine a controlled group, please download the presentation located here. Please contact us with any questions you may have.
Peter Mehta, J.D., LL.M
(323) 238-3243
Dan Laughlin, J.D.
(323) 807-0171
Elizabeth Chic, J.D.
echic@taxcreditco.com
(323) 238-3274
[1] Revenue Act of 1964, Pub. L. No. 88-272, 78 Stat. 19 (1964).
[2] I.R.C. § 1563.
[3] For example, the controlled group rules apply to determine whether all employees should be treated as employed by a single employer for ERISA and ACA purposes.
[4] Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, § 221, 95 Stat. 241, 243-44 (1981).
[5] I.R.C. § 44F(f)(1)(A)(i) (1981).
[6] T.D. 9717. The text of these temporary regulations also serve as the text of proposed regulations, which were issued concurrently. Prop. Treas. Reg. § 1.41-6, 80 Fed. Reg. 18,171 (Apr. 3, 2015).
[7] American Taxpayer Relief Act of 2012, Pub. L. No. 112-240, § 301, 126 Stat. 2326, 2326-28 (2013).
[8] Id. § 301, 126 Stat. at 2328.
[9] See I.R.C. § 41(f)(1)(A)(ii), (f)(1)(B)(ii) (2011).
[10] Treas. Reg. § 1.41-6(c)(1)(ii).
[11] I.R.S. Notice 2013-20, 2013-15 I.R.B. 902.
[12] Id. at 902.
[14] In addition, T.D. 9717 provides temporary regulations for controlled group allocation of the railroad track maintenance credit (RTMC) under I.R.C. § 45G and election of reduced credits for members of controlled claiming research credits under I.R.C. § 280C.