83 FR 13183 - Allocation of Controlled Group Research Credit

DEPARTMENT OF THE TREASURY
Internal Revenue Service

Federal Register Volume 83, Issue 60 (March 28, 2018)

This document contains final 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 regulations relating to the allocation of the railroad track maintenance credit and the election for a reduced research credit.

[Federal Register Volume 83, Number 60 (Wednesday, March 28, 2018)]
[Rules and Regulations]
[Pages 13183-13185]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-06241]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9832]
RIN 1545-BL76


Allocation of Controlled Group Research Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations relating to the 
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 regulations 
relating to the allocation of the railroad track maintenance credit and 
the election for a reduced research credit.

DATES: Effective date: These regulations are effective on April 2, 
2018.
    Applicability date: For dates of applicability, see Sec. Sec.  
1.41-6(j), 1.45G-1(g), and 1.280C-4(c).

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

SUPPLEMENTARY INFORMATION:

Background

    This document amends 26 CFR part 1 to provide rules relating to 
sections 41, 45G, and 280C of the Internal Revenue Code (Code). On 
April 3, 2015, the Department of the Treasury (Treasury Department) and 
the IRS published final and temporary regulations (TD 9717) (temporary 
regulations) in the Federal Register (80 FR 18096) and a notice of 
proposed rulemaking by cross-reference to the temporary regulations 
(REG-133489-13) in the Federal Register (80 FR 18171) (proposed 
regulations). On April 27, 2015, the Treasury Department and the IRS 
published corrections to TD 9717 in the Federal Register (80 FR 23237 
and 80 FR 23238). The temporary regulations expire on April 2, 2018.
    The preamble to the temporary regulations fully describes the 
updates to the regulations under sections 41, 45G, and 280C. See 80 FR 
18097, April 3, 2015. The temporary regulations updated the section 41 
rules in a

[[Page 13184]]

manner that is consistent with the amendments made to section 
41(f)(1)(A)(ii) and section 41(f)(1)(B)(ii) contained in Section 301(c) 
of the American Taxpayer Relief Act of 2012, Public Law 112-240, H.R. 8 
(ATRA). The temporary regulations also updated the regulations under 
Sec.  1.45G-1(f) and an example under Sec.  1.280C-4(b)(2) because they 
are based on the rules of section 41(f) in effect before the ATRA 
amendments.
    One written comment responding to the proposed regulations was 
received. No requests for a public hearing were made and no public 
hearing was held. After consideration of the comment, the proposed 
regulations are adopted without change by this Treasury decision.

Summary of Comment and Explanation of Provisions

    No comments were received related to the proposed regulations under 
section 41 or section 280C. One commenter requested the regulations 
under Sec.  1.45G-1(f)(8) be amended to explicitly provide that 
qualified railroad track maintenance expenditures (QRTMEs) associated 
with a track assignment reside with the assignee (and not with the 
track owner) when there has been an intra-group track assignment. 
Revising those rules is beyond the scope of these regulations. 
Therefore, the Treasury Department and IRS decline to adopt the 
comment.

Effect on Other Documents

    The temporary regulations are obsolete for taxable years beginning 
on or after April 2, 2018.

Special Analyses

    Certain IRS regulations, including these, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. Because the final regulations do not impose a collection 
of information on small entities, the Regulatory Flexibility Act (5 
U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the 
Code, the notice of proposed rulemaking that preceded the final 
regulations was submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their impact on small 
business. No comments were received on the proposed regulations.
    These final regulations provide necessary guidance for corporations 
that file a consolidated return regarding the allocation of the group 
credit to members of certain controlled groups of corporations and 
trades or businesses under common control. It is necessary to provide 
this administrative relief for these controlled groups as of April 2, 
2018, the expiration date of the temporary regulations, to remove 
impediments to claiming the research and railroad track maintenance 
credits and making the election for a reduced research credit. 
Accordingly, good cause is found for dispensing with a delayed 
effective date pursuant to 5 U.S.C. 553(d).

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 Treasury Department and the IRS 
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 is amended by revising 
the sectional authority entires for Sec. Sec.  1.41-6 and 1.280C-4 and 
adding a sectional authority for Sec.  1.45G-1 in numerical order to 
read in part as follows:

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

Section 1.41-6 also issued under 26 U.S.C. 41(f)(1) and 1502.

* * * * *

Section 1.45G-1 also issued under 26 U.S.C. 45G(e)(2).

* * * * *

Section 1.280C-4 also issued under 26 U.S.C. 280C(c)(4).

* * * * *

0
Par. 2. Section 1.41-6 is amended by revising paragraphs (c), (d)(1) 
and (3), (e), and (j)(4) and (5) to read as follows:


Sec.  1.41-6  Aggregation of expenditures.

* * * * *
    (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 taken into account for the taxable year by such controlled 
group for purposes of the credit. For purposes of paragraphs (c), (d), 
and (e) of this section, qualified research expenses, basic research 
payments, and amounts paid or incurred to energy research consortiums 
are collectively referred to as QREs.
    (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.
* * * * *
    (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.
* * * * *
    (j) * * *
    (4) Taxable years beginning after December 31, 2011. Paragraphs 
(c), (d)(1) and (3), (e), and (j)(4) and (5) of this section apply to 
taxable years beginning on or after April 2, 2018. For taxable years 
ending before April 2, 2018, see Sec.  1.41-6T as contained in 26 CFR 
part 1, as revised April 1, 2017.

[[Page 13185]]

    (5) Taxable years beginning before January 1, 2012. See Sec.  1.41-
6 as contained in 26 CFR part 1, revised April 1, 2014.


Sec.  1.41-6T  [Removed]

0
Par. 3. Section 1.41-6T is removed.

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


Sec.  1.45G-1  Railroad track maintenance credit.

* * * * *
    (f) * * *
    (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.
* * * * *
    (g) * * *
    (4) Taxable years beginning after December 31, 2011. Paragraphs 
(f)(4) and (5) and (g)(4) and (5) of this section apply to taxable 
years beginning on or after April 2, 2018. For taxable years ending 
before April 2, 2018, see Sec.  1.45G-1T as contained in 26 CFR part 1, 
as revised April 1, 2017.
    (5) Taxable years beginning before January 1, 2012. See Sec.  1.45-
1 as contained in 26 CFR part 1, revised April 1, 2014.


Sec.  1.45G-1T  [Removed]

0
Par. 5. Section 1.45G-1T is removed.

0
Par. 6. Section 1.280C-4 is amended by revising paragraphs (b)(2) and 
(c)(2) and (3) to read as follows:


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

* * * * *
    (b) * * *

    (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 paragraph (a) of this 
section, A and B, but not C, each make an election for the reduced 
credit under section 280C(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 280C(c)(3)(B) because C did not make an 
election for the reduced credit with its original return.

    (c) * * *
    (2) Taxable years beginning after December 31, 2011. Paragraphs 
(b)(2) and (c)(2) and (3) of this section apply to taxable years 
beginning on or after April 2, 2018. For taxable years ending before 
April 2, 2018, see Sec.  1.280C-4T as contained in 26 CFR part 1, as 
revised April 1, 2017.
    (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.


Sec.  1.280C-4T   [Removed]

0
Par. 7. Section 1.280C-4T is removed.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
    Approved: March 7, 2018.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2018-06241 Filed 3-27-18; 8:45 am]
 BILLING CODE 4830-01-P