Alternative Simplified Credit Under Section 41(c)(5), 34185-34190 [08-1362]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 73, Number 117 (Tuesday, June 17, 2008)]
[Rules and Regulations]
[Pages 34185-34190]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 08-1362]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9401]
RIN 1545-BH33


Alternative Simplified Credit Under Section 41(c)(5)

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 election and calculation of the alternative simplified 
credit under section 41(c)(5) of the Internal Revenue Code. The final 
and temporary regulations implement changes to the credit for 
increasing research activities under section 41 made by the Tax Relief 
and Health Care Act of 2006. The final and temporary regulations will 
affect certain taxpayers claiming credit under section 41. The text of 
these temporary regulations also serves as the text of the proposed 
regulations (REG-149405-07) published in the Proposed Rules section in 
this issue of the Federal Register.

DATES: Effective Date: These regulations are effective on June 17, 
2008.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.41-6T(j), 1.41-8T(b)(5), and 1.41-9T(d).

FOR FURTHER INFORMATION CONTACT: David A. Selig (202) 622-3040 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document amends 26 CFR part 1 to provide rules relating to the 
alternative simplified credit (ASC), which may be elected under section 
41(c)(5) of the Internal Revenue Code (Code).

General Overview

    Section 41(a) provides an incremental tax credit for increasing 
research activities (research credit), and is based on a percentage of 
a taxpayer's qualified research expenses (QREs) above a base amount. 
The Tax Relief and Health Care Act of 2006 (Pub. L. 109-432, 120 Stat. 
2922, December 20, 2006) (the Act) made certain changes to the research 
credit, including the addition of another method of computation that 
taxpayers may elect to use in computing the amount of the research 
credit. The relevant Act provisions are effective generally for tax 
years after December 31, 2006, but provide certain

[[Page 34186]]

transitional rules for fiscal year taxpayers.
    Prior to the Act changes, there were two ways a taxpayer could 
determine the research credit under section 41(a). One way, commonly 
referred to as the regular credit, is determined by following the rules 
and percentages stated under section 41(a)(1). Under the regular 
credit, the base amount is generally determined with reference to the 
gross receipts of the taxpayer for the four prior taxable years 
preceding the taxable year in which credit is being determined (credit 
year) and the QREs and gross receipts over the five-year base period 
from 1984-1988. The base amount cannot be less than 50 percent of the 
taxpayer's QREs for the credit year. Special rules are provided for 
certain start-up companies.
    The second way a taxpayer could compute the research credit prior 
to the Act was to elect, in lieu of the regular credit, the alternative 
incremental credit (AIRC) under section 41(c)(4). Under the AIRC, the 
base amount is determined with reference to the gross receipts of the 
taxpayer for the four prior taxable years.
    The Act added a third way, the ASC, under section 41(c)(5), which a 
taxpayer may elect to compute the research credit. Section 41(c)(5)(A) 
provides the general rule that, at the election of the taxpayer, the 
credit determined under section 41(a)(1) shall be equal to 12 percent 
of so much of the QREs for the taxable year as exceeds 50 percent of 
the average QREs for the three taxable years preceding the taxable year 
for which the credit is being determined. Section 41(c)(5)(B) provides 
a special rule that the credit shall be equal to 6 percent of the QREs 
for the taxable year if the taxpayer does not have QREs in each of the 
three taxable years preceding the year for which credit is being 
determined.
    Section 41(c)(5)(C) provides that an ASC election under section 
41(c)(5) shall apply to the taxable year for which made and all 
succeeding taxable years unless revoked with the consent of the 
Secretary. It further provides that an ASC election under section 
41(c)(5) may not be made for any taxable year to which an AIRC election 
under section 41(c)(4) applies.

Explanation of Provisions

    The primary objective of these temporary regulations is to provide 
guidance on the ASC under section 41(c)(5). The temporary regulations 
provide rules for the ASC similar to some of the rules relating to the 
AIRC as contained in Sec.  1.41-8 of the current regulations. However, 
because there are also differences, such as the formula calculation for 
the ASC, the ASC rules are provided in a new Sec.  1.41-9T. These final 
and temporary regulations also make conforming and clarifying changes 
to Sec. Sec.  1.41-1, 1.41-6, and 1.41-8.
    Section 1.41-9T provides that, at the election of the taxpayer, the 
credit determined under section 41(a)(1) equals the amount determined 
under the ASC under section 41(c)(5). Generally, a taxpayer may elect 
the ASC for any taxable year of the taxpayer ending after December 31, 
2006. However, for certain transitional rules, see Division A, section 
104(b)(3), (c)(2), and (c)(4) of the Act. Because the transitional 
rules are of limited duration and have already been described and 
implemented in the 2006 version of Form 6765, ``Credit for Increasing 
Research Activities,'' these regulations do not address the 
transitional rules.
    The temporary regulations generally provide the same rules related 
to elections and revocations as those provided for the AIRC in Sec.  
1.41-8 in the current regulations. If a taxpayer makes an ASC election 
under section 41(c)(5), the election applies to the taxable year for 
which made and all subsequent taxable years unless revoked. An ASC 
election under section 41(c)(5) is made by completing the portion of 
Form 6765, ``Credit for Increasing Research Activities,'' (or successor 
form) relating to the election of the ASC, and attaching the completed 
form to the taxpayer's timely filed (including extensions) original 
return for the taxable year to which the election applies. The election 
may not be revoked except with the consent of the Commissioner. A 
taxpayer is deemed to have requested, and to have been granted, the 
consent of the Commissioner to revoke the election if the taxpayer 
completes the portion of Form 6765 (or successor form) relating to the 
credit determined under section 41(a)(1) or the AIRC and attaches the 
completed form to the taxpayer's timely filed (including extensions) 
original return for the year to which the revocation applies. As is the 
case with a revocation of an AIRC election under Sec.  1.41-8, an 
election under section 41(c)(5) may not be made or revoked on an 
amended return. Accordingly, for purposes of further clarification, the 
temporary regulations also provide that an extension of time to make or 
revoke an election under section 41(c)(5) (and similarly, under section 
41(c)(4)) will not be granted under Sec.  301.9100-3.
    In the case of a controlled group of corporations, all the members 
of which are not included on a single consolidated return, an election 
or revocation must be made by the designated member by satisfying the 
requirements described above. The election or revocation by the 
designated member is binding on all the members of the group for the 
credit year to which the election or revocation relates. If the 
designated member fails to timely make or revoke an election, each 
member of the group must compute the group credit using the method used 
to compute the group credit for the immediately preceding credit year.
    The term designated member means that member of the group that is 
allocated the greatest amount of the group credit under Sec.  1.41-6(c) 
based on the amount of credit reported on the original timely-filed 
Federal income tax return (even if that member subsequently is 
determined not to be the designated member). If the members of a group 
compute the group credit using different methods (the method described 
in section 41(a), the AIRC method, or the ASC method) and at least two 
members of the group qualify as the designated member, then the term 
designated member means that member that computes the group credit 
using the method that yields the greatest group credit.
    The temporary regulations provide several special rules. Section 
1.41-9T(c) provides that unless a taxpayer has QREs in each of the 
three taxable years preceding the taxable year for which the credit is 
being determined, the credit equals the percentage of the QREs for the 
taxable year provided by section 41(c)(5)(B)(ii).
    The temporary regulations also provide special rules relating to 
consistency and short taxable years. The temporary regulations provide 
that in computing the credit, QREs for the three taxable years 
preceding the credit year must be determined on a basis consistent with 
the definition of QREs for the credit year, without regard to the law 
in effect for the three taxable years preceding the credit year. This 
consistency requirement applies even if the period for filing a claim 
for credit or refund has expired for any of the three taxable years 
preceding the credit year. The regulations also provide special rules 
similar to the rules in Sec.  1.41-3(b) of the existing regulations for 
taxpayers that have a short taxable year. If one or more of the three 
taxable years preceding the credit year is a short taxable year, then 
the QREs for such year are deemed to be equal to the QREs actually paid 
or incurred in that year multiplied by 12 and divided by the number of 
months in that year. Additionally, the temporary regulations provide 
that if a credit year is a short taxable year, then the average QREs 
for

[[Page 34187]]

the three taxable years preceding the credit year are modified by 
multiplying that amount by the number of months in the short taxable 
year and dividing the result by 12.
    The regulations also clarify that the average QREs for the three 
taxable years preceding the taxable year for which credit is being 
determined will be considered the base amount for purposes of the 
computation under section 41(h)(2). Therefore, if the research credit 
expires during the credit year, the average QREs for the three taxable 
years preceding the credit are multiplied by the ratio of the number of 
days for which the research credit is effective to the total number of 
days in the credit year.
    The Treasury Department and the IRS note that the rules generally 
applicable under section 6001 provide sufficient detail about required 
documentary substantiation for purposes of the research credit. Section 
1.6001-1 requires the keeping of records ``sufficient to establish the 
amount of * * * * * required to be shown* * *.'' The IRS may deny the 
credit for failure to provide sufficient records substantiating the 
claimed credit for any method used in determining the research credit.

Effective/Applicability Date

    Sections 1.41-6T(j), 1.41-8T(b)(5), and 1.41-9T(d) of these 
regulations apply to taxable years ending after December 31, 2006, the 
effective date of section 41(c)(5), and terminate on or before June 13, 
2011.
    For certain transitional rules under section 41, see Division A, 
sections 104(b)(3), (c)(2), (c)(4), and 123(a) of the Act.
    The IRS and Treasury Department are committed to providing 
appropriate relief to taxpayers that have used methodologies 
inconsistent with the short taxable year rules provided in these 
regulations on tax returns filed after the effective date of section 
41(c)(5) and prior to the publication of these regulations.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 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) does not apply to these regulations. For the 
applicability of the Regulatory Flexibility Act, 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 David Selig, 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

0
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 adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805* * *
    Section 1.41-8T also issued under 26 U.S.C. 41(c)(4)(B);
    Section 1.41-9T also issued under 26 U.S.C. 41(c)(5)(C); * * *


Sec.  1.41-0  [Amended]

0
Par. 2. Section 1.41-0 is amended by:
0
1. Revising the introductory text.


Sec.  1.41-6  [Amended]

0
2. Revising the paragraph heading for Sec.  1.41-6(j) and adding 
entries for paragraphs (j)(1), (j)(2), and (j)(3).


Sec.  1.41-8  [Amended]

0
3. Revising the section heading for Sec.  1.41-8 and entries for 
paragraphs (a) and (b)(5).
0
4. Adding Sec.  1.41-9.
    The additions and revisions read as follows:


Sec.  1.41-0  Table of contents.

    This section lists the table of contents for Sec. Sec.  1.41-1 
through 1.41-9.
* * * * *


Sec.  1.41-6  Aggregation of expenditures.

* * * * *
    (j) Effective/applicability date.
    (1) In general.
    (2) Consolidated group rule.
    (3) Taxable years ending on or before December 31, 2006.
* * * * *


Sec.  1.41-8  Alternative incremental credit.

    (a) Determination of credit.
    (b) * * *
    (5) Effective/applicability dates.


Sec.  1.41-9  Alternative simplified credit.

    [Reserved]. For further guidance, see the entries for Sec.  1.41-9T 
in Sec.  1.41-0T.

0
Par. 3. Section 1.41-0T is added to read as follows:


Sec.  1.41-0T  Table of contents (temporary).

    This section lists the table of contents for Sec. Sec.  1.41-6T, 
1.41-8T, and 1.41-9T.


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

    (a) [Reserved]. For further guidance, see the entry for Sec.  1.41-
6(a) in Sec.  1.41-0.
    (b) Computation of the group credit.
    (1) In general.
    (2) [Reserved]. For further guidance, see the entry for Sec.  1.41-
6(b)(2) in Sec.  1.41-0.
    (c) Allocation of the group credit.
    (1) [Reserved]. For further guidance, see the entry for Sec.  1.41-
6(c)(1) in Sec.  1.41-0.
    (2) Stand-alone entity credit.
    (d) [Reserved]. For further guidance, see the entry for Sec.  1.41-
6(d) in Sec.  1.41-0.
    (e) Example.
    (f) through (i) [Reserved]. For further guidance, see the entries 
for Sec.  1.41-6(f) through (i) in Sec.  1.41-0.
    (j) Effective/applicability dates.
* * * * *


Sec.  1.41-8T  Alternative incremental credit (temporary).

    (a) [Reserved]. For further guidance, see the entry for Sec.  1.41-
8(a) in Sec.  1.41-0.
    (b) Election.
    (1) In general.
    (2) Time and manner of election.
    (3) Revocation.
    (4) Special rules for controlled groups.
    (i) In general.
    (ii) Designated member.
    (5) Effective/applicability dates.


Sec.  1.41-9T  Alternative simplified credit (temporary).

    (a) Determination of credit.
    (b) Election.
    (1) In general.
    (2) Time and manner of election.
    (3) Revocation.
    (4) Special rules for controlled groups.
    (i) In general.
    (ii) Designated member.
    (c) Special rules.
    (d) Effective/applicability dates.
    (e) Expiration date.

0
Par. 4. Section 1.41-1 is amended by adding a sentence to the end of 
paragraph (a) to read as follows:


Sec.  1.41-1  Credit for increasing research activities.

    (a) * * * For taxable years ending after December 31, 2006, and at 
the

[[Page 34188]]

election of the taxpayer, the portion of the credit determined under 
section 41(a)(1) may be calculated using either the alternative 
incremental credit set forth in section 41(c)(4), or the alternative 
simplified credit set forth in section 41(c)(5).
* * * * *

0
Par. 5. Section 1.41-6 is amended by:
0
1. Revising paragraph (e) introductory text and the paragraph heading 
for paragraph (j).
0
2. Adding paragraph (j)(3).
    The revision and addition reads as follows:


Sec.  1.41-6  Aggregation of expenditures.

* * * * *
    (e) Examples. The following examples illustrate the provisions of 
this section. Unless otherwise stated, no members of a controlled group 
are members of a consolidated group, no member of the group made any 
basic research payments or paid or incurred any amounts to an energy 
research consortium, and the group has not made an AIRC election 
(except as provided in Example 6) or an ASC election. For an example 
illustrating the calculation of the alternative simplified credit under 
section 41(c)(5), which is applicable for taxable years ending after 
December 31, 2006, see Sec.  1.41-6T(e).
* * * * *
    (j) Effective/applicability dates. * * *
    (3) Taxable years ending on or before December 31, 2006. Paragraphs 
(b)(1) and (c)(2) of this section are applicable for taxable years 
ending on or before December 31, 2006. For taxable years ending after 
December 31, 2006, see Sec.  1.41-6T.

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


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

    (a) [Reserved]. For further guidance, see Sec.  1.41-6(a).
    (b) Computation of the group credit--(1) In general. All members of 
a controlled group are treated as a single taxpayer for purposes of 
computing the research credit. The group credit is computed by applying 
all of the section 41 computational rules on an aggregate basis. All 
members of a controlled group must use the same method of computation, 
either the method described in section 41(a)(1), the alternative 
incremental credit (AIRC) method described in section 41(c)(4), or the 
alternative simplified credit (ASC) method described in section 
41(c)(5), in computing the group credit for a credit year.
    (2) [Reserved]. For further guidance, see Sec.  1.41-6(b)(2).
    (c) Allocation of the group credit. (1) [Reserved]. For further 
guidance, see Sec.  1.41-6(c)(1).
    (2) Stand-alone entity credit. The term stand-alone entity credit 
means the research credit (if any) that would be allowable to a member 
of a controlled group if the credit were computed as if section 
41(f)(1) did not apply, except that the member must apply the rules 
provided in Sec.  1.41-6(d)(1) (relating to consolidated groups) and 
Sec.  1.41-6(i) (relating to intra-group transactions). Each member's 
stand-alone entity credit for any credit year must be computed under 
whichever method (the method described in section 41(a), the method 
described in section 41(c)(4), or the method described in section 
41(c)(5)) results in the greatest stand-alone entity credit for that 
member, without regard to the method used to compute the group credit.
    (d) [Reserved]. For further guidance see Sec.  1.41-6(d).

    (e) Example. Group alternative simplified credit. The following 
example illustrates a group computation in a year for which the ASC 
method under section 41(c)(5) is in effect. No members of the 
controlled group are members of a consolidated group and no member 
of the group made any basic research payments or paid or incurred 
any amounts to an energy research consortium.
    Example. (i) Facts. Q, R, and S, all of which are calendar-year 
taxpayers, are members of a controlled group. The research credit 
under section 41(a)(1) is not allowable to the group for the 2008 
taxable year (the credit year) because the group's aggregate QREs 
for the credit year are less than the group's base amount. The group 
does not use the AIRC method of section 41(c)(4) because its 
aggregate QREs for the credit year do not exceed 1 percent of the 
average annual gross receipts for the four years preceding the 
credit year. The group credit is computed using the ASC rules of 
section 41(c)(5).
    Assume that each member of the group had QREs in each of the three 
years preceding the credit year. For purposes of computing the group 
credit for the credit year, Q, R, and S had the following:

------------------------------------------------------------------------
                                                                 Group
                                  Q          R          S      aggregate
------------------------------------------------------------------------
Credit Year QREs............        $0x       $20x       $30x       $50x
Average QREs for 3 Years            10x        20x        10x        40x
 Preceding the Credit Year..
------------------------------------------------------------------------

    (ii) Computation of the group credit. The research credit allowable 
to the group is computed as if Q, R, and S are one taxpayer. The group 
credit is equal to 12 percent of so much of the QREs for the credit 
year as exceeds 50 percent of the average QREs for the three taxable 
years preceding the credit year. The group credit is 0.12 x ($50x-(0.5 
x $40x)), which equals $3.6x.
    (iii) Allocation of the group credit. Under paragraph (c)(2) of 
this section, the stand-alone entity credit for each member of the 
group must be computed using the method that results in the greatest 
stand-alone entity credit for that member. The stand-alone entity 
credit for Q is zero under all three methods. Assume that the stand-
alone entity credit for each of R ($1.2x) and S ($3x) is greatest using 
the ASC method. Therefore, the stand-alone entity credits for each of R 
and S must be computed using the ASC method. The sum of the stand-alone 
entity credits of the members of the group is $4.2x. Because the group 
credit of $3.6x is less than the sum of the stand-alone entity credits 
of all the members of the group ($4.2x), the group credit is allocated 
among the members of the group based on the ratio that each member's 
stand-alone entity credit bears to the sum of the stand-alone entity 
credits of all the members of the group. The $3.6x group credit is 
allocated as follows:

------------------------------------------------------------------------
                                  Q          R          S        Total
------------------------------------------------------------------------
Stand-Alone Entity Credit...        $0x      $1.2x        $3x      $4.2x
Allocation Ratio (Stand-          0/4.2    1.2/4.2      3/4.2
 Alone Entity Credit/Sum of
 Stand-Alone Entity Credits)
Multiplied by: Group Credit.      $3.6x      $3.6x      $3.6x
Equals: Credit Allocated to         $0x     $1.03x     $2.57x      $3.6x
 Member.....................
------------------------------------------------------------------------


[[Page 34189]]

    (f) through (i) [Reserved]. For further guidance see Sec.  1.41-
6(f) through (i).
    (j) Effective/applicability dates. This section is applicable for 
taxable years ending after December 31, 2006. For taxable years ending 
on or before December 31, 2006, see Sec.  1.41-6.
    (k) Expiration date. The applicability of this section will expire 
on or before June 13, 2011.
0
Par. 7. Section 1.41-8 is amended by:
0
1. Revising the section heading and the heading of paragraph (a).
0
2. Removing the language ``paragraph (c) of this section'' from the 
first sentence of paragraph (b)(4)(ii) and adding ``Sec.  1.41-6(c)'' 
in its place.
0
3. Revising the paragraph heading and adding two sentences at the end 
of paragraph (b)(5).
    The revisions and additions read as follows:


Sec.  1.41-8  Alternative incremental credit.

    (a) Determination of credit. * * *
    (b) * * *
    (5) Effective/applicability dates. * * * Paragraphs (b)(3) and 
(b)(4)(ii) of this section are applicable for taxable years ending on 
or before December 31, 2006. For taxable years ending after December 
31, 2006, see Sec.  1.41-8T.

0
Par. 8. Section 1.41-8T is added to read as follows:


Sec.  1.41-8T  Alternative incremental credit (temporary).

    (a) [Reserved]. For further guidance, see Sec.  1.41-8(a).
    (b) Election--(1) [Reserved]. For further guidance, see Sec.  1.41-
8(b)(1).
    (2) Time and manner of election. An election under section 41(c)(4) 
is made by completing the portion of Form 6765, ``Credit for Increasing 
Research Activities,'' (or successor form) relating to the election of 
the AIRC, and attaching the completed form to the taxpayer's timely 
filed (including extensions) original return for the taxable year to 
which the election applies. An election under section 41(c)(4) may not 
be made on an amended return. An extension of time to make an election 
under section 41(c)(4) will not be granted under Sec.  301.9100-3 of 
this chapter.
    (3) Revocation. An election under this section may not be revoked 
except with the consent of the Commissioner. A taxpayer is deemed to 
have requested, and to have been granted, the consent of the 
Commissioner to revoke an election under section 41(c)(4) if the 
taxpayer completes the portion of Form 6765, ``Credit For Increasing 
Research Activities,'' (or successor form) relating to the amount 
determined under section 41(a)(1) (the regular credit) or the 
alternative simplified credit (ASC) and attaches the completed form to 
the taxpayer's timely filed (including extensions) original return for 
the year to which the revocation applies. An election under section 
41(c)(4) may not be revoked on an amended return. An extension of time 
to revoke an election under section 41(c)(4) will not be granted under 
Sec.  301.9100-3 of this chapter.
    (4) Special rules for controlled groups--(i) [Reserved]. For 
further guidance, see Sec.  1.41-8(b)(4)(i).
    (ii) Designated member. For purposes of this paragraph (b)(4), for 
any credit year, the term designated member means that member of the 
group that is allocated the greatest amount of the group credit under 
Sec.  1.41-6(c) based on the amount of credit reported on the original 
timely-filed Federal income tax return (even if that member 
subsequently is determined not to be the designated member). If the 
members of a group compute the group credit using different methods 
(the method described in section 41(a)(1), the AIRC method of section 
41(c)(4), or the ASC method of section 41(c)(5)) and at least two 
members of the group qualify as the designated member, then the term 
designated member means that member that computes the group credit 
using the method that yields the greatest group credit. For example, A, 
B, C, and D are members of a controlled group but are not members of a 
consolidated group. For the 2008 taxable year (the credit year), the 
group credit using the method described in section 41(a)(1) is $10x. 
Under this method, A would be allocated $5x of the group credit, which 
would be the largest share of the group credit under this method. For 
the credit year, the group credit using the AIRC method is $15x. Under 
the AIRC method, B would be allocated $5x of the group credit, which is 
the largest share of the group credit computed using the AIRC method. 
For the credit year, the group credit using the ASC method is $10x. 
Under the ASC method, C would be allocated $5x of the group credit, 
which is the largest share of the group credit computed using the ASC 
method. Because the group credit is greatest using the AIRC method and 
B is allocated the greatest amount of credit under that method, B is 
the designated member. Therefore, if B makes a section 41(c)(4) 
election on its original timely-filed return for the credit year, that 
election is binding on all members of the group for the credit year.
    (5) Effective/applicability dates. This section is applicable for 
taxable years ending after December 31, 2006. For taxable years ending 
on or before December 31, 2006, see Sec.  1.41-8.
    (6) Expiration date. This applicability of this section expires on 
or before June 13, 2011.

0
Par. 9. Sections 1.41-9 and 1.41-9T are added to read as follows:


Sec.  1.41-9  Alternative simplified credit.

    [Reserved]. For further guidance, see Sec.  1.41-9T.


Sec.  1.41-9T  Alternative simplified credit (temporary).

    (a) Determination of credit. At the election of the taxpayer, the 
credit determined under section 41(a)(1) equals the amount determined 
under section 41(c)(5).
    (b) Election--(1) In general. A taxpayer may elect to apply the 
provisions of the alternative simplified credit (ASC) in section 
41(c)(5) for any taxable year of the taxpayer ending after December 31, 
2006. If a taxpayer makes an election under section 41(c)(5), the 
election applies to the taxable year for which made and all subsequent 
taxable years unless revoked in the manner prescribed in paragraph 
(b)(3) of this section.
    (2) Time and manner of election. An election under section 41(c)(5) 
is made by completing the portion of Form 6765, ``Credit for Increasing 
Research Activities,'' (or successor form) relating to the election of 
the ASC, and attaching the completed form to the taxpayer's timely 
filed (including extensions) original return for the taxable year to 
which the election applies. An election under section 41(c)(5) may not 
be made on an amended return. An extension of time to make an election 
under section 41(c)(5) will not be granted under Sec.  301.9100-3 of 
this chapter.
    (3) Revocation. An election under this section may not be revoked 
except with the consent of the Commissioner. A taxpayer is deemed to 
have requested, and to have been granted, the consent of the 
Commissioner to revoke an election under section 41(c)(5) if the 
taxpayer completes the portion of Form 6765 (or successor form) 
relating to the credit determined under section 41(a)(1) (the regular 
credit) or the alternative incremental credit (AIRC) and attaches the 
completed form to the taxpayer's timely filed (including extensions) 
original return for the year to which the revocation applies. An 
election under section 41(c)(5) may not be revoked on an amended 
return. An extension of time to revoke an election under section 
41(c)(5) will not be granted under Sec.  301.9100-3 of this chapter.
    (4) Special rules for controlled groups--(i) In general. In the 
case of a

[[Page 34190]]

controlled group of corporations, all the members of which are not 
included on a single consolidated return, an election (or revocation) 
must be made by the designated member by satisfying the requirements of 
paragraph (b)(2) or (b)(3) of this section (whichever applies), and 
such election (or revocation) by the designated member shall be binding 
on all the members of the group for the credit year to which the 
election (or revocation) relates. If the designated member fails to 
timely make (or revoke) an election, each member of the group must 
compute the group credit using the method used to compute the group 
credit for the immediately preceding credit year.
    (ii) Designated member. For purposes of this paragraph (b)(4), for 
any credit year, the term designated member means that member of the 
group that is allocated the greatest amount of the group credit under 
Sec.  1.41-6(c) based on the amount of credit reported on the original 
timely-filed Federal income tax return (even if that member 
subsequently is determined not to be the designated member). If the 
members of a group compute the group credit using different methods 
(the method described in section 41(a), the AIRC method of section 
41(c)(4), or the ASC method of section 41(c)(5)) and at least two 
members of the group qualify as the designated member, then the term 
designated member means that member that computes the group credit 
using the method that yields the greatest group credit. For example, A, 
B, C, and D are members of a controlled group but are not members of a 
consolidated group. For the 2008 taxable year (the credit year), the 
group credit using the method described in section 41(a)(1) is $10x. 
Under this method, A would be allocated $5x of the group credit, which 
would be the largest share of the group credit under this method. For 
the credit year, the group credit using the AIRC method is $10x. Under 
the AIRC method, B would be allocated $5x of the group credit, which is 
the largest share of the group credit computed using the AIRC method. 
For the credit year, the group credit using the ASC method is $15x. 
Under the ASC method, C would be allocated $5x of the group credit, 
which is the largest share of the group credit computed using the ASC 
method. Because the group credit is greatest using the ASC method and C 
is allocated the greatest amount of credit under that method, C is the 
designated member. Therefore, if C makes a section 41(c)(5) election on 
its original timely-filed return for the credit year, that election is 
binding on all members of the group for the credit year.
    (c) Special rules--(1) Qualified research expenses (QREs) required 
in all years. Unless a taxpayer has QREs in each of the three taxable 
years preceding the taxable year for which the credit is being 
determined, the credit equals that percentage of the QREs for the 
taxable year provided by section 41(c)(5)(B)(ii).
    (2) Section 41(c)(6) applicability. QREs for the three taxable 
years preceding the credit year must be determined on a basis 
consistent with the definition of QREs for the credit year, without 
regard to the law in effect for the three taxable years preceding the 
credit year. This consistency requirement applies even if the period 
for filing a claim for credit or refund has expired for any of the 
three taxable years preceding the credit year.
    (3) Section 41(h)(2) applicability. Solely for purposes of the 
computation under section 41(h)(2), the average QREs for the three 
taxable years preceding the taxable year for which the credit is being 
determined shall be treated as the base amount.
    (4) Short taxable years. If one or more of the three taxable years 
preceding the credit year is a short taxable year, then the QREs for 
such year are deemed to be equal to the QREs actually paid or incurred 
in that year multiplied by 12 and divided by the number of months in 
that year. If a credit year is a short taxable year, then the average 
QREs for the three taxable years preceding the credit year are modified 
by multiplying that amount by the number of months in the short taxable 
year and dividing the result by 12.
    (5) Controlled groups. For purposes of computing the group credit 
under Sec.  1.41-6, a controlled group must apply the rules of this 
paragraph (c) on an aggregate basis. For example, if the controlled 
group has QREs in each of the three taxable years preceding the taxable 
year for which the credit is being determined, the controlled group 
applies the credit computation provided by section 41(c)(5)(A) rather 
than section 41(c)(5)(B)(ii).
    (d) Effective/applicability dates. This section is applicable for 
taxable years ending after December 31, 2006. For certain transitional 
rules, see Division A, section 104(b)(3), (c)(2), and (c)(4) of the Tax 
Relief and Health Care Act of 2006 (Pub. L. 109-432, 120 Stat. 2922).
    (e) Expiration date. The applicability of this section expires on 
or before June 13, 2011.

    Dated: June 6, 2008.
Steven T. Miller,
Acting Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 08-1362 Filed 6-13-08; 11:51am]
BILLING CODE 4830-01-P