Alternative Simplified Credit Under Section 41(c)(5), 33994-33997 [2011-14407]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 76, Number 112 (Friday, June 10, 2011)]
[Rules and Regulations]
[Pages 33994-33997]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-14407]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9528]
RIN 1545-BH32


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations relating to the 
election and calculation of the alternative simplified credit under 
section 41(c)(5) of the Internal Revenue Code (Code). The final 
regulations affect certain taxpayers claiming the credit under section 
41. These final regulations implement changes to the credit for 
increasing research activities under section 41 made by the Tax Relief 
and Health Care Act of 2006.

DATES: Effective Date: These regulations are effective on June 9, 2011.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.41-6(j)(3), 1.41-8(b)(5), and 1.41-9(d).

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

SUPPLEMENTARY INFORMATION:

Background

    On June 17, 2008, the Treasury Department and the IRS published 
final and temporary regulations (TD 9401) in the Federal Register (73 
FR 34185) relating to the election and calculation of the alternative 
simplified credit (ASC) under section 41(c)(5). The ASC was added by 
the Tax Relief and Health Care Act of 2006 (Public Law 109-432, 120 
Stat. 2922, December 20, 2006). A notice of proposed rulemaking cross-
referencing the temporary regulations was also published in the same 
issue of the Federal Register (73 FR 34237). Written and electronic 
comments responding to these regulations (collectively, the 2008 
regulations) were received and a public hearing was held on the 2008 
regulations on September 25, 2008. After consideration of the comments 
received and the statements made at the public hearing, the 2008 
regulations are adopted as revised by this Treasury decision.

Summary of Comments and Explanation of Changes

    The 2008 regulations were issued primarily to provide guidance on 
the election and calculation of the ASC. Section 1.41-9T(b) of the 2008 
regulations provide that an election to make or revoke the provisions 
of the ASC under section 41(c)(5) must be made on a timely filed 
(including extensions) original return for the taxable year and may not 
be made on an amended return. Before the issuance of the 2008 
regulations, identical election procedures existed for the alternative 
incremental research credit (AIRC) under Sec.  1.41-8. The 2008 
regulations extended these election procedures to the ASC under Sec.  
1.41-9T. The 2008 regulations also provided that extensions of time to 
make or revoke the election for both the AIRC and the ASC will not be 
granted under Sec.  301.9100-3. In the case of the AIRC, the 2008 
regulations are of limited duration as section 41(h)(2) provides that 
no election under section 41(c)(4) shall apply to taxable years 
beginning after December 31, 2008.
    Commenters stated that these provisions of the 2008 regulations are 
restrictive and asked that they be excluded from the final regulations.
    The Treasury Department and the IRS believe that both tax 
administration and fairness are best served by adopting the same 
election procedures for the ASC that are used for the AIRC under Sec.  
1.41-8. A taxpayer may make or revoke an election each taxable year by 
obtaining the consent of the Commissioner. A taxpayer is deemed to have 
requested, and to have been granted, the consent of the Commissioner to 
make or revoke an election if the taxpayer completes the portion of 
Form 6765, ``Credit for Increasing Research Activities,'' (or successor 
form) relating to the credit determined under section 41(a)(1), the 
AIRC, or the ASC, as appropriate, and attaches the completed form to 
the taxpayer's timely filed (including extensions) original return for 
the year to which it applies. As is the case with a revocation of an 
AIRC election under Sec.  1.41-8, an ASC election under section 
41(c)(5) may not be made or revoked on an amended return. Consistent 
with this position, the final regulations also provide that an 
extension of time to make or revoke an election under sections 41(c)(4) 
and 41(c)(5) will not be granted under Sec.  301.9100-3.
    One commenter suggested changing the ASC short taxable year rules 
in the 2008 regulations to prorate short years by the number of days in 
the year instead of the number of months in the year. The Treasury 
Department and the IRS agree that calculating the ASC for short taxable 
years on a daily rather than a monthly basis provides a more accurate 
calculation and removes uncertainty as to whether and how to include a 
partial month in making the monthly calculation. Accordingly, the final 
regulations generally require that short taxable years be prorated by 
the number of days in the year instead of the number of months in the 
year for taxable years ending after June 9, 2011. Recognizing that some 
taxpayers may have already filed returns using a monthly calculation 
for a short taxable year, the final regulations also provide that 
returns filed for taxable years ending within a specified time period 
may, at the taxpayer's option, be amended to reflect the daily 
calculation.

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. It is hereby 
certified that these regulations will not have a significant economic 
impact on a substantial number of small entities. Although a 
substantial number of small entities may make an election under these 
regulations, any economic impact is minimal. This certification is 
based upon the fact that the information required by these regulations 
is already required to be maintained under the statute and current 
regulations. These regulations add little or no new burden to the 
existing requirements. Additionally, an election under these 
regulations generally will simplify the calculation of the credit and 
may result

[[Page 33995]]

in a benefit to the taxpayer. Accordingly, a regulatory flexibility 
analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is 
not required. 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 its 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 the Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of 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 removing 
Sec.  1.41-0T to read in part as follows:

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

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


0
Par. 2. Section 1.41-0 is amended as follows:
0
1. Under Sec.  1.41-6, the entries for paragraphs (j) introductory text 
and (j)(3) are revised.
0
2. Under Sec.  1.41-8, the section heading is revised and entries for 
paragraphs (b)(4)(i) and (b)(4)(ii) are added.
0
3. Revising the entry for Sec.  1.41-9.
    The revisions and additions read as follows:


Sec.  1.41-0  Table of contents.

* * * * *


Sec.  1.41-6  Aggregation of expenditures.

* * * * *
    (j) Effective/applicability dates.
* * * * *
    (3) Taxable years ending after June 9, 2011.
* * * * *


Sec.  1.41-8  Alternative incremental credit applicable for taxable 
years beginning on or before December 31, 2008.

* * * * *
    (b) * * *
    (4) * * *
    (i) In general.
    (ii) Designated member.
* * * * *


Sec.  1.41-9  Alternative simplified credit.

    (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.
    (1) Qualified research expenditures (QREs) required in all years.
    (2) Section 41(c)(6) applicability.
    (3) Short taxable years.
    (i) General rule.
    (ii) Limited exception.
    (4) Controlled groups.
    (d) Effective/applicability dates.


Sec.  1.41-0T  [Removed]

0
Par. 3. Section 1.41-0T is removed.
0
Par. 4. Section 1.41-6 is amended as follows:
0
1. Paragraphs (b)(1), (c)(2), (e) introductory text, paragraph (j) 
introductory text heading, and (j)(3) are revised.
0
2. Adding new Example 7 to paragraph (e).
    The revisions and addition read as follows:


Sec.  1.41-6  Aggregation of expenditures.

* * * * *
    (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: 
The method described in section 41(a)(1), the alternative incremental 
credit (AIRC) method described in section 41(c)(4) (available for years 
beginning on or before December 31, 2008), or the alternative 
simplified credit (ASC) method described in section 41(c)(5), in 
computing the group credit for a credit year.
* * * * *
    (c) * * *
    (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 available method (the method described in section 41(a)(1), 
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.
* * * * *
    (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 (except as 
provided in Example 7).
* * * * *
    Example 7. 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.
    (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 2011 
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 it is 
unavailable for taxable years beginning after December 31, 2008. 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 Preceding the Credit Year..........         $10x         $20x         $10x         $40x
----------------------------------------------------------------------------------------------------------------


[[Page 33996]]

    (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 14 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 0.14 x ($50x - (0.5 x $40x)), which equals $4.2x.
    (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 the regular or ASC methods. Assume that 
the stand-alone entity credit for each of R ($1.4x) and S ($3.5x) 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 $4.9x. Because the group credit of $4.2x is less than the 
sum of the stand-alone entity credits of all the members of the 
group ($4.9x), 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 $4.2x group credit is allocated as 
follows:

----------------------------------------------------------------------------------------------------------------
                                                                   Q            R            S          Total
----------------------------------------------------------------------------------------------------------------
Stand-Alone Entity Credit...................................          $0x        $1.4x        $3.5x        $4.9x
Allocation Ratio (Stand-Alone Entity Credit/Sum of Stand-           0/4.9      1.4/4.9      3.5/4.9
 Alone Entity Credits)......................................
Multiplied by: Group Credit.................................        $4.2x        $4.2x        $4.2x
Equals: Credit Allocated to Member..........................          $0x        $1.2x          $3x        $4.2x
----------------------------------------------------------------------------------------------------------------

* * * * *

    (j) Effective/applicability dates. * * *
* * * * *
    (3) Taxable years ending after June 9, 2011. Paragraphs (b)(1), 
(c)(2), and (e) of this section are applicable for taxable years ending 
after June 9, 2011. For taxable years ending on or before June 9, 2011, 
see Sec. Sec.  1.41-6T and 1.41-6 as contained in 26 CFR part 1, 
revised April 1, 2011.


Sec.  1.41-6T  [Removed]


0
Par. 5. Section 1.41-6T is removed.
0
Par. 6. In Sec.  1.41-8, the section heading and paragraphs (b)(2), 
(b)(3), (b)(4)(ii), and (b)(5) are revised to read as follows:


Sec.  1.41-8  Alternative incremental credit applicable for taxable 
years beginning on or before December 31, 2008.

* * * * *
    (b) * * *
    (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) * * *
    (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 
taxpayer's timely filed (including extensions) original 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) (available for years 
beginning on or before December 31, 2008), 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 June 9, 2011. For taxable years ending on or 
before June 9, 2011, see Sec. Sec.  1.41-8 and 1.41-8T, as contained in 
26 CFR part 1, revised April 1, 2011.


Sec.  1.41-8T  [Removed]


0
Par. 7. Section 1.41-8T is removed.
0
Par. 8. Section 1.41-9 is revised to read as follows:


Sec.  1.41-9  Alternative simplified credit.

    (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

[[Page 33997]]

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 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 paragraphs (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 
taxpayer's timely filed (including extensions) original 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 
2011 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 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 timely filed (including 
extensions) original 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) Short taxable years--(i) General rule. 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 365 and divided by the 
number of days 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 days in 
the short taxable year and dividing the result by 365.
    (ii) Limited exception. Returns filed for taxable years ending 
after December 31, 2006, and before June 9, 2011, and for which the 
period of limitations has not expired, may be amended to apply the 
daily calculation for short taxable years provided in paragraph (3)(i) 
of this section in lieu of the monthly calculation for short taxable 
years provided in Sec.  1.41-9T(c)(4).
    (4) 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 June 9, 2011. For taxable years ending on or 
before June 9, 2011, see Sec.  1.41-9T as contained in 26 CFR part 1, 
revised April 1, 2011.

Sec.  1.41-9T  [Removed]

0
Par. 9. Section 1.41-9T is removed.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: June 2, 2011
Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-14407 Filed 6-9-11; 8:45 am]
BILLING CODE 4830-01-P