80 FR 18096 - Allocation of Controlled Group Research Credit

DEPARTMENT OF THE TREASURY
Internal Revenue Service

Federal Register Volume 80, Issue 64 (April 3, 2015)

This document contains final and temporary regulations relating to the allocation of the credit for increasing research activities (research credit) to corporations and trades or businesses under common control (controlled groups)... This document also contains final and temporary regulations relating to the allocation of the railroad track maintenance credit and the election for a reduced research credit. The text of these temporary regulations also serves as the text of the proposed regulations (REG-133489-13) published in the Proposed Rules section in this issue of the Federal Register.

[Federal Register Volume 80, Number 64 (Friday, April 3, 2015)]
[Rules and Regulations]
[Pages 18096-18099]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-07331]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9717]
RIN 1545-BL77


Allocation of Controlled Group Research Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
relating to the allocation of the credit for increasing research 
activities (research credit) to corporations and trades or businesses 
under common control (controlled groups)... This document also contains 
final and temporary regulations relating to the allocation of the 
railroad track maintenance credit and the election for a reduced 
research credit. The text of these temporary regulations also serves as 
the text of the proposed regulations (REG-133489-13) published in the 
Proposed Rules section in this issue of the Federal Register.

DATES: Effective date: These regulations are effective April 3, 2015.
    Applicability date: For dates of applicability, see Sec. Sec.  
1.41-6T(j), 1.45G-1T(g), and 1.280C-4T(c).

FOR FURTHER INFORMATION CONTACT: James Holmes, at (202) 317-4137; (not 
a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains final and temporary regulations for Sec.  
1.41-6, Sec.  1.45G-1, and Sec.  1.280C-4 of the Income Tax Regulations 
(26 CFR part 1). These regulations update the rules in a manner that is 
consistent with the amendments made to section 41(f)(1)(A)(ii) and 
section 41(f)(1)(B)(ii) in Section 301(c) of the Act.

[[Page 18097]]

Explanation of Provisions

Section 41--Research Credit

    Section 41(a) provides an incremental tax credit for increasing 
research activities and is based on a percentage of a taxpayer's 
qualified research expenses over a base amount, basic research payments 
as determined under section 41(e)(1)(A), and amounts paid or incurred 
to energy research consortiums (collectively, ``QREs''). Under section 
41(f)(1) and Sec.  1.41-6(b), all members of a controlled group are 
treated as a single taxpayer for purposes of computing the research 
credit for the group (group credit). Section 1.41-6(b) provides that 
the group credit is computed by applying all of the section 41 
computational rules on an aggregate basis. Section 1.41-6(c) provides a 
method of allocating a group research credit among the members of the 
controlled group.
    Section 301(c) of the Act amended section 41(f)(1)(A)(ii) and 
section 41(f)(1)(B)(ii) by 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.'' Section 301(c) of the Act applies to taxable years beginning 
after December 31, 2011.
    Former section 41(f)(1)(A)(ii) and former section 41(f)(1)(B)(ii) 
provided that the research credit allowable to a controlled group 
member shall be its proportionate shares of the QREs giving rise to the 
credit. Prior to these regulations, Sec.  1.41-6(c)(1)(i) required a 
controlled group to allocate the group credit in proportion to each 
member's stand-alone entity credit, as defined in Sec.  1.41-6(c)(2), 
in cases in which the group credit does not exceed the sum of the 
stand-alone entity credits of all of the members. If the group credit 
does exceed this sum, then the excess of the group credit over the sum 
of the stand-alone entity credits of all of the members was allocated 
in proportion to the QREs of the members of the controlled group. See 
Sec.  1.41-6(c)(1)(ii).
    Notice 2013-20 (2013-15 IRB 902 (April 8, 2013)) was released on 
March 9, 2013, to provide interim guidance relating to the allocation 
of the controlled group research credit and is effective for taxable 
years beginning after December 31, 2011. Notice 2013-20 provides that 
the group credit is allocated to group members based on each member's 
share of QREs, without regard to whether the member would have a stand-
alone entity credit or what the amount of any such credit would be.
    The final and temporary regulations implement the Act's changes to 
the allocation of the controlled group research credit by revising the 
allocation method in Sec.  1.41-6(c), (d), and (e). Section 1.41-6T(c) 
provides an allocation method that follows the approach taken in Notice 
2013-20. Section 1.41-6T(c) provides that the group credit is allocated 
to group members based on a member's proportionate share of the 
controlled group's aggregate QREs. Members are no longer required to 
calculate a stand-alone entity credit. The temporary regulations also 
remove references to the stand-alone entity credit in Sec.  1.41-
6(d)(1) and (3). New examples are provided in Sec.  1.41-6T(e). The 
first example illustrates a general application of the allocation 
method provided in these temporary regulations. The second example 
demonstrates an allocation under these temporary regulations where a 
consolidated group is treated as a single member of a controlled group 
pursuant to Sec.  1.41-6T(d).
    A commenter to Notice 2013-20 suggested that the IRS adopt a safe 
harbor under Sec.  1.41-6(c) that permits taxpayers to calculate and 
allocate group credits for taxable years ending prior to January 1, 
2013, under the new law. The commenter's proposal would effectively 
make the Act's amendments retroactive to before the effective date of 
the statutory change (change effective for taxable years beginning 
after December 31, 2011). Therefore, the regulations do not adopt this 
suggestion for taxable years beginning before January 1, 2012. For 
taxable years beginning before January 1, 2012, taxpayers must apply 
the rules applicable to such taxable years.

Section 45G--Railroad Track Maintenance Credit (RTMC)

    Section 45G, subject to limitations, generally provides a RTMC in 
an amount equal to fifty percent of the qualified railroad track 
maintenance expenditures paid or incurred by an eligible taxpayer 
during the year. Section 45G(e)(2) provides, for controlled groups, 
that rules similar to the rules of section 41(f)(1) shall apply for 
purposes of section 45G. Section 1.45G-1(f) provides guidance on 
determining the amount of RTMC under section 45G if a taxpayer is a 
member of a controlled group. Section 1.45G-1(f) applies rules similar 
to the rules of Sec.  1.41-6 for allocating a group RTMC.
    The temporary regulations add Sec.  1.45G-1T(f)(4) to provide an 
allocation method for the RTMC that is consistent with the Act's 
amendments to section 41(f)(1). Section 1.45G-1T(f)(5)(i) and (ii) of 
the temporary regulations remove references to the stand-alone entity 
credit.

Section 280C(c)--Credit for Increasing Research Activities

    Section 280C(c)(1) generally disallows otherwise allowable 
deductions for QREs in an amount equal to the research credit 
determined under 41(a) for a taxable year. Section 280C(c)(3) provides 
a method to elect a reduced amount of research credit. Section 
280C(c)(4) provides, by reference to section 280C(b)(3), that in the 
case of a corporation which is a member of a controlled group of 
corporations (within the meaning of section 41(f)(5)) or a trade or 
business treated as being under common control with other trades or 
business (within the meaning of section 41(f)(1)(B)), section 280C(c) 
shall be applied under rules prescribed by the Secretary similar to the 
rules applicable under section 41(f)(1)(A) and (B). Section 1.280C-4(b) 
relates to the election under section 280C(c)(3) that a member of a 
controlled group may make. Section 1.280C-4(b)(2) contains an example 
that includes references to the rules in Sec.  1.41-6(c). The temporary 
regulations update the example in Sec.  1.280C-4(b)(2) because it 
describes the rules of section 41(f) in effect before the Act's 
amendments.

Effect on Other Documents

    Notice 2013-20 (2013-15 IRB 902) is obsolete for taxable years 
beginning on or after April 3, 2015.

Effective/Applicability Dates

    The temporary regulations are applicable for taxable years 
beginning on or after April 3, 2015 and expire on April 2, 2018. A 
taxpayer may apply Sec. Sec.  1.41-6T, 1.45G-1T, and 1.280C-4T to 
taxable years beginning after December 31, 2011, but before April 3, 
2015. For a taxpayer that does not apply these temporary regulations to 
a taxable year beginning after December 31, 2011, but before April 3, 
2015, the guidance that applies to such taxable year is contained in 
Notice 2013-20 (2013-15 IRB 902).

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. It also has been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to these

[[Page 18098]]

regulations. For the applicability of the Regulatory Flexibility Act (5 
U.S.C. chapter 6), refer to the Special Analyses section of the 
preamble to the cross-referenced notice of proposed rulemaking 
published in the Proposed Rules section in this issue of the Federal 
Register. Pursuant to section 7805(f) of the Code, these regulations 
have been submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on their impact on small business.

Drafting Information

    The principal author of these regulations is James Holmes, Office 
of the Associate Chief Counsel (Passthroughs and Special Industries). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.41-6T also issued under 26 U.S.C. 41(f)(1) * * *
    Section 1.45G-1T also issued under 26 U.S.C. 45G(e)(2) * * *
    Section 1.280C-4T also issued under 26 U.S.C. 280C(c)(4) * * *


0
Par. 2. Section 1.41-0 is amended by removing the entries in the table 
of contents for Sec.  1.41-6(c)(1) and Sec.  1.41-6(c)(2) and adding an 
entry for Sec. Sec.  1.41-6(j)(4) and (5) to read as follows:


Sec.  1.41-0.  Table of contents.

* * * * *
    (j) * * *
    (4) Taxable years beginning after December 31, 2011.
    (5) Taxable years ending before January 1, 2012.

0
Par. 3. Section 1.41-6 is amended by revising paragraphs (c), (d)(1) 
and (3), and (e) and adding paragraphs (j)(4) and (5) to read as 
follows:


Sec.  1.41-6.  Aggregation of expenditures.

* * * * *
    (c) [Reserved]. For further guidance, see Sec.  1.41-6T(c).
* * * * *
    (d) * * *
    (1) [Reserved]. For further guidance, see Sec.  1.41-6T(d)(1).
* * * * *
    (3) [Reserved]. For further guidance, see Sec.  1.41-6T(d)(3).
    (e) [Reserved]. For further guidance, see Sec.  1.41-6T(e).
* * * * *
    (j) * * *
    (4) Taxable years beginning after December 31, 2011. [Reserved]. 
For further guidance, see Sec.  1.41-6T(j)(4).
    (5) Taxable years ending before January 1, 2012. [Reserved]. For 
further guidance, see Sec.  1.41-6T(j)(5).

0
Par. 4. Section 1.41-6T is added to read as follows:


Sec.  1.41-6T.  Aggregation of expenditures (temporary).

    (a) through (b) [Reserved]. For further guidance, see Sec.  1.41-
6(a) through (b).
    (c) Allocation of the group credit. The group credit is allocated 
to each member of the controlled group 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 (collectively ``QREs'' for purposes of paragraphs (c), (d), 
and (e) of this section) taken into account for the taxable year by 
such controlled group for purposes of the credit.
    (d) Special rules for consolidated groups--(1) In general. For 
purposes of applying paragraph (c) of this section, members of a 
consolidated group who are members of a controlled group are treated as 
a single member of the controlled group.
    (2) [Reserved]. For further guidance, see Sec.  1.41-6(d)(2).
    (3) Special rule for allocation of group credit among consolidated 
group members. The portion of the group credit that is allocated to a 
consolidated group is allocated to each member of the consolidated 
group on a proportionate basis to its share of the aggregate of the 
QREs taken into account for the taxable year by such consolidated group 
for purposes of the credit.
    (e) Examples. The following examples illustrate the provisions of 
paragraphs (c) and (d) of this section.

    Example 1. Controlled group. A, B, and C are a controlled group. 
A had $100x, B $300x, and C $500x of qualified research expenses for 
the year, totaling $900x for the group. A, in the course of its 
trade or business, also made a payment of $100x to an energy 
research consortium for energy research. The group's QREs total 
1000x and the group calculated its total research credit to be $60x 
for the year. Based on each member's proportionate share of the 
controlled group's aggregate QREs, A is allocated $12x, B $18x, and 
C $30x of the credit.
    Example 2.  Consolidated group is a member of controlled group. 
The controlled group's members are D, E, F, G, and H. F, G, and H 
file a consolidated return and are treated as a single member (FGH) 
of the controlled group. D had $240x, E $360x, and FGH $600x of 
qualified research expenses for the year ($1,200x aggregate). The 
group calculated its research credit to be $100x for the year. Based 
on the proportion of each member's share of QREs to the controlled 
group's aggregate QREs for the taxable year D is allocated $20x, E 
$30x, and FGH $50x of the credit. The $50x of credit allocated to 
FGH is then allocated to the consolidated group members based on the 
proportion of each consolidated group member's share of QREs to the 
consolidated group's aggregate QREs. F had $120x, G $240x, and H 
$240x of QREs for the year. Therefore, F is allocated $10x, G is 
allocated $20x, and H is allocated $20x.

    (f) through (i) [Reserved]. For further guidance, see Sec.  1.41-
6(f) through (i).
    (j)(1) through (3) [Reserved]. For further guidance, see Sec.  
1.41-6(j)(1) through (3).
    (4) Taxable years beginning after December 31, 2011. Section 1.41-
6T is applicable for taxable years beginning on or after April 3, 2015. 
Taxpayers may apply Sec.  1.41-6T to taxable years beginning after 
December 31, 2011, but before April 3, 2015. For a taxpayer that does 
not apply Sec.  1.41-6T to a taxable year beginning after December 31, 
2011, but before April 3, 2015, the guidance that applies to such 
taxable year is contained in Notice 2013-20 (2013-15 IRB 902).
    (5) Taxable years beginning before January 1, 2012. See Sec.  1.41-
6 as contained in 26 CFR part 1, revised April 1, 2014.
    (6) Expiration date. The applicability of Sec.  1.41-6T expires on 
April 2, 2018.

0
Par. 5. Section 1.45G-0 is amended by removing the entries in the table 
of contents for Sec.  1.45G-1(f)(4)(i) and Sec.  1.45G-1(f)(4)(ii) and 
adding an entry in the table of contents for Sec. Sec.  1.45G-1(g)(4) 
and (5) to read as follows:


Sec.  1.45G-0.  Table of contents for the railroad track maintenance 
credit.

* * * * *
    (g) * * *
    (4) Taxable years beginning after December 31, 2011.
    (5) Taxable years beginning before January 1, 2012.

0
Par. 6. Section 1.45G-1 is amended by revising paragraphs (f)(4) and 
(f)(5)(i) and (ii) and adding paragraphs (g)(4) and (5) to read as 
follows:


Sec.  1.45G-1.  Railroad track maintenance credit.

* * * * *
    (f) * * *
    (4) [Reserved]. For further guidance, see Sec.  1.45G-1T(f)(4).

[[Page 18099]]

    (5) [Reserved]. For further guidance see Sec.  1.45G-1T(f)(5).
    (g) * * *
    (4) Taxable years beginning after December 31, 2011. [Reserved]. 
For further guidance see Sec.  1.45G-1T(g)(4).
    (5) Taxable years beginning before January 1, 2012. [Reserved]. For 
further guidance see Sec.  1.45G-1T(g)(5).

0
Par. 7. Section 1.45G-1T is added to read as follows:


Sec.  1.45G-1T.  Railroad track maintenance credit (temporary).

    (a) through (e) [Reserved]. For further guidance, see Sec.  1.45G-
1(a) through (e).
    (f)(1) through (3) [Reserved]. For further guidance, see Sec.  
1.45G-1(f)(1) through (3).
    (4) Allocation of the group credit. The group credit is allocated 
to each member of the controlled group on a proportionate basis to its 
share of the aggregate of the QRTMEs taken into account for the taxable 
year by such controlled group for purposes of the credit.
    (5) Special rules for consolidated groups--(i) In general. For 
purposes of applying paragraph (f)(4) of this section, members of a 
consolidated group who are members of a controlled group are treated as 
a single member of the controlled group.
    (ii) Special rule for allocation of group credit among consolidated 
group members. The portion of the group credit that is allocated to a 
consolidated group is allocated to each member of the consolidated 
group on a proportionate basis to its share of the aggregate of the 
QRTMEs taken into account for the taxable year by such consolidated 
group for purposes of the credit.
    (6) through (8) [Reserved]. For further guidance, see Sec.  1.45G-
1(f)(6) through (8).
    (g)(1) through (3) [Reserved]. For further guidance, see Sec.  
1.45G-1(g)(1) through (3).
    (4) Taxable years beginning after December 31, 2011. Section 1.45G-
1T is applicable for taxable years beginning on or after April 3, 2015. 
Taxpayers may apply Sec.  1.45G-1T to taxable years beginning after 
December 31, 2011, but before April 3, 2015. For a taxpayer that does 
not apply Sec.  1.45G-1T to a taxable year beginning after December 31, 
2011, but before April 3, 2015, the guidance that applies to such 
taxable year is contained in Notice 2013-20 (2013-15 IRB 902).
    (5) Taxable years ending before January 1, 2012. See Sec.  1.45-1 
as contained in 26 CFR part 1, revised April 1, 2014.
    (6) Expiration date. The applicability of Sec.  1.45G-1T expires on 
April 2, 2018.

0
Par. 8. Section 1.280C-4 is amended by revising paragraph (b)(2), 
redesignating paragraph (c) as (c)(1) and adding paragraphs (c)(2) and 
(3) to read as follows:


Sec.  1.280C-4.  Credit for increasing research activities.

* * * * *
    (b) * * *
    (2) [Reserved]. For further guidance, see Sec.  1.280C-4T(b)(2).
* * * * *
    (c) * * *
    (2) [Reserved]. For further guidance, see Sec.  1.280C-4T(c)(2).
    (3) [Reserved]. For further guidance, see Sec.  1.280C-4T(c)(3).

0
Par. 9. Section 1.280C-4T is added to read as follows:


Sec.  1.280C-4T.  Credit for increasing research activities 
(temporary).

    (a) [Reserved]. For further guidance, see Sec.  1.280C-4(a).
    (b) Controlled groups of corporations; trades or businesses under 
common control. (1) [Reserved]. For further guidance, see Sec.  1.280C-
4(b)(1).

    (2) Example.  The following example illustrates an application 
of paragraph (b) of this section: A, B, and C, all of which are 
calendar year taxpayers, are members of a controlled group of 
corporations (within the meaning of section 41(f)(5)). A, B, and C 
each attach a statement to the 2012 Form 6765, ``Credit for 
Increasing Research Activities,'' showing A and C were the only 
members of the controlled group to have qualified research expenses 
when calculating the group credit. A and C report their allocated 
portions of the group credit on the 2012 Form 6765 and B reports no 
research credit on Form 6765. Pursuant to Sec.  1.280C-4(a), A and 
B, but not C, each make an election for the reduced credit under 
section 280(c)(3)(B) on the 2012 Form 6765. In December 2013, B 
determines it had qualified research expenses in 2012 resulting in 
an increased group credit. On an amended 2012 Form 6765, A, B, and C 
each report their allocated portions of the group credit. B reports 
its credit as a regular credit under section 41(a) and reduces the 
credit under section 280C(c)(3)(B). C may not reduce its credit 
under section 280(c)(3)(B) because C did not make an election for 
the reduced credit with its original return.

    (c)(1) [Reserved]. For further guidance see Sec.  1.280C-4(c)(1).
    (2) Taxable years beginning after December 31, 2011. Section 
1.280C-4T is applicable for taxable years beginning on or after April 
3, 2015. Taxpayers may apply Sec.  1.280C-4T to taxable years beginning 
after December 31, 2011, but before April 3, 2015. For a taxpayer that 
does not apply Sec.  1.280C-4T to a taxable year beginning after 
December 31, 2011, but before April 3, 2015, the guidance that applies 
to such taxable year is contained in Notice 2013-20 (2013-15 IRB 902).
    (3) For taxable years ending before January 1, 2012. See Sec.  
1.280C-4 as contained in 26 CFR part 1, revised April 1, 2014.
    (4) Expiration date. The applicability of paragraph (b)(2) expires 
on April 2, 2018.

 John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: March 16, 2015.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2015-07331 Filed 4-2-15; 8:45 am]
 BILLING CODE 4830-01-P