Credit for Increasing Research Activities: Intra-Group Gross Receipts, 75905-75909 [2013-29539]

Agencies

• Internal Revenue Service
• Department of Treasury

[Federal Register Volume 78, Number 240 (Friday, December 13, 2013)]
[Proposed Rules]
[Pages 75905-75909]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-29539]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 78, No. 240 / Friday, December 13, 2013 / 
Proposed Rules

[[Page 75905]]



DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-159420-04]
RIN 1545-BE14


Credit for Increasing Research Activities: Intra-Group Gross 
Receipts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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

SUMMARY: This document contains proposed regulations under section 41 
of the Internal Revenue Code (Code) relating to the treatment of 
qualified research expenditures (QREs) and gross receipts resulting 
from transactions between members of a controlled group of corporations 
or a group of trades or businesses under common control (intra-group 
transactions) for purposes of determining the credit under section 41 
for increasing research activities (research credit). These proposed 
regulations will affect controlled groups of corporations or groups of 
trades or businesses under common control (controlled groups) that are 
engaged in research activities. This document also provides notice of a 
public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by March 13, 
2014. Outlines of topics to be discussed at the public hearing 
scheduled for April 23, 2014, at 10:00 a.m. must be received by March 
13, 2014.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-159420-04), Room 
5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions also may be hand delivered Monday 
through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR 
(REG-159420-04), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue NW., Washington, DC, or sent electronically via the 
Federal eRulemaking Portal at https://www.regulations.gov (IRS REG-
159420-04). The public hearing will be held in the IRS Auditorium, 
Internal Revenue Building, 1111 Constitution Avenue NW., Washington, 
DC.

FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations, 
David Selig, (202) 317-4137; concerning submission of comments, the 
hearing, and/or to be placed on the building access list to attend the 
hearing, Oluwafunmilayo (Funmi) Taylor, (202) 317-6901 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION: 

Background

    These proposed regulations address how the interaction of section 
41(f)(1) (relating to the treatment of controlled groups as a single 
taxpayer) and section 41(c)(7) (relating to the exclusion from gross 
receipts of amounts received by a foreign corporation that are not 
effectively connected to a United States trade or business) affects the 
computation of gross receipts resulting from intra-group transactions 
between domestic controlled group members (domestic members) and 
foreign corporate members of the controlled group (foreign corporate 
members). These proposed regulations apply to an intra-group 
transaction that is followed by a transaction between a foreign 
corporate member and a party outside of the controlled group involving 
the same or a modified version of tangible or intangible property or 
services that was the subject of the intra-group transaction, and the 
transaction with the party outside of the controlled group does not 
give rise to gross receipts that are effectively connected with a trade 
or business within the United States, the Commonwealth of Puerto Rico, 
or any possession of the United States.
    Section 41(f)(1) provides that in determining the amount of the 
research credit, all members of the same controlled group of 
corporations and all commonly controlled trades or businesses (whether 
or not incorporated) shall be treated as a single taxpayer. For this 
purpose, controlled group is defined by reference to section 1563(a), 
except that ``more than 50 percent'' is substituted for ``at least 80 
percent,'' and the determination is made without regard to subsections 
(a)(4) (regarding certain insurance companies) and (e)(3)(C) (regarding 
stock owned by an employees' trust). The statute provides no rules, 
however, regarding how the single taxpayer treatment is to be 
implemented. Commentators have noted the ambiguity associated with 
similar provisions of the Code. See, e.g., Prop. Reg. Sec.  1.199-1, 70 
FR 67220, 67236 (November 4, 2005) (``the single corporation language 
in section 199(d)(4)(A) has created confusion among commentators and 
the proposed regulations clarify the meaning of this language'').
    The IRS and the Treasury Department believe that the single 
taxpayer concept should be interpreted consistently with the purpose 
the statute is intended to advance. The single taxpayer concept as it 
relates to the computation of the research credit first appeared in 
1981 when Congress initially enacted the research credit. As originally 
enacted, the research credit was determined solely by reference to a 
taxpayer's QREs. Specifically, to ensure that the research credit was 
available only for actual increases in research expenditures, former 
section 44F(f)(1) provided that the QREs of a controlled group of 
corporations and all commonly controlled trades or businesses (whether 
or not incorporated) were aggregated and treated as those of a single 
taxpayer. H. Rept. No. 97-201, 1981-2 CB 364-365 (demonstrating that 
controlled groups are prevented from increasing research expenditures 
by shifting these expenditures from an entity that has a high baseline 
of research expenditures to one that does not).
    In 1989, Congress modified the computation of the research credit 
(now section 41 of the Code) by adding the base amount concept embodied 
in section 41(a)(1)(B), which included gross receipts in the 
calculation of the research credit for the first time. See the Omnibus 
Budget Reconciliation Act of 1989 (Pub. L. 101-239, Sec.  7110) (the 
``1989 Act''). The legislative history of the 1989 Act explains that 
gross receipts were included in the computation of the research credit 
to address concerns with the existing rules and incentivize spending on 
research activities. In particular, Congress wished to modify the pre-
existing incremental credit structure in order to maximize the research 
credit's efficiency by not allowing (to the extent possible) credits 
for research that would have been undertaken in any event. Congress

[[Page 75906]]

believed that businesses often determine their research budgets as a 
fixed percentage of gross receipts and determined that it was 
appropriate to compute the research credit, in part, based on the 
increase in a taxpayer's gross receipts. This approach also had the 
advantage of effectively indexing the research credit for inflation and 
preventing taxpayers from being rewarded for increases in research 
spending that are attributable solely to inflation. See H.R. Rep. No. 
101-247, 101st Cong., 1st Sess. 1199-1200 (1989).
    The 1989 Act also amended section 41 to provide certain parameters 
for measuring gross receipts. Specifically, section 41(c)(7) provides 
that gross receipts are reduced by returns and allowances made during 
the taxable year. Section 41(c)(7) also provides that in the case of a 
foreign corporation, only gross receipts effectively connected with the 
conduct of a trade or business within the United States, the 
Commonwealth of Puerto Rico, or any possession of the United States are 
taken into account in the computation of the research credit. See 
section 41(c)(7), as amended. The legislative history of the 1989 Act 
does not expressly address the purpose of the gross receipts provision 
relating to foreign corporations. The enactment of the controlled group 
aggregation rules in section 41(f)(1) (treating all members of a 
controlled group as a single taxpayer) preceded the enactment of the 
foreign corporation gross receipts rule in section 41(c)(7). Congress, 
however, did not make clear how the two provisions should interact and 
did not provide any additional indication regarding the consequences of 
being treated as a single taxpayer, including when the deemed single 
taxpayer is comprised of both domestic and foreign controlled group 
members.

Current Regulatory Scheme

    Section 1.41-3(c) defines gross receipts generally as the total 
amount, determined under the taxpayer's method of accounting, derived 
from all its activities and from all sources. Section 1.41-6(i) 
interprets the single taxpayer concept of section 41(f)(1) to provide 
that transfers between members of a controlled group of corporations 
are generally disregarded for purposes of determining the research 
credit under section 41 for both gross receipts and QREs. The IRS and 
the Treasury Department believe that, in most cases, the general rule 
that disregards intra-group transactions for both gross receipts and 
QREs furthers the statutory purpose of ensuring that the computation of 
the research credit is based upon an economic measure of gross receipts 
relative to QREs and not artificially increased by multiple intra-group 
transactions.
    The IRS and the Treasury Department believe, however, that an 
interpretation of section 41(f)(1) that completely excludes gross 
receipts associated with certain transactions is inconsistent with 
Congressional intent. For example, assume that a domestic corporation 
incurs research expenditures and sells a product that it produced to a 
foreign corporate member, and the foreign corporate member then sells 
the product to a customer in a transaction that does not give rise to 
gross receipts effectively connected with a trade or business within 
the United States, the Commonwealth of Puerto Rico, or any possession 
of the United States. If gross receipts from the sales transactions are 
excluded because the intra-group transaction is disregarded under Sec.  
1.41-6 and the foreign corporate member's gross receipts are excluded 
under section 41(c)(7) for the second transaction, the aggregate amount 
of gross receipts for purposes of determining the research credit is 
distorted. The distortion results because the QREs of the domestic 
member are included, but its gross receipts from the sale to the 
foreign corporate member are not. Accordingly, the IRS and the Treasury 
Department propose to revise the regulations to include gross receipts 
in this situation, including in cases where the property is modified 
prior to being transferred by the foreign corporate member, the gross 
receipts are in the form of royalties, interest, or other cash or non-
cash remuneration, or the gross receipts relate to services ultimately 
provided by the foreign corporate member to a third-party customer.
    However, the IRS and the Treasury Department believe that multiple 
inclusions of gross receipts associated with intra-group transactions 
involving the same or a modified version of tangible or intangible 
property or services would be inconsistent with Congressional intent. 
Thus, for example, it would not be appropriate to overstate gross 
receipts, and thereby reduce the research credit available to a 
controlled group, by taking into account the transfer of a single piece 
of property (including a modified form of the same property) more than 
one time (that is, first as a transfer between controlled group members 
and then as a transfer with a third party).

Explanation of Provisions

    The proposed regulations retain the current rule that generally 
disregards transactions among members of a controlled group for 
purposes of computing the research credit, but provide a narrow 
exception to this rule. Under the exception, gross receipts (within the 
meaning of Sec.  1.41-3(c)) from an intra-group transaction are taken 
into account if (1) a foreign corporate member engages in a transaction 
with a party outside of the group (external transaction) involving the 
same or a modified version of tangible or intangible property or a 
service that was previously the subject of one or more intra-group 
transactions (an internal transaction); and (2) the external 
transaction does not give rise to gross receipts that are effectively 
connected with a trade or business within the United States, the 
Commonwealth of Puerto Rico, or any possession of the United States. 
The exception harmonizes the application of sections 41(f)(1) and 
41(c)(7) and is consistent with the purposes of these provisions as 
well as the broader statutory changes that made gross receipts a 
central feature of the research credit computation.
    For example, if a domestic member transfers property to a foreign 
corporate member, and the foreign corporate member then transfers the 
property outside of the controlled group in a transaction that does not 
give rise to gross receipts that are effectively connected with a trade 
or business within the United States, the Commonwealth of Puerto Rico, 
or any possession of the United States, the proposed regulations 
provide that the domestic member includes in its gross receipts amounts 
received from the foreign corporate member for that transaction. The 
amounts are taken into account in computing gross receipts in the 
taxable year in which the foreign corporate member engages in the 
external transaction. The fact that the foreign corporate member that 
ultimately engages in a transaction involving the property outside of 
the controlled group is not the same foreign corporate member to which 
the domestic member directly transferred the property (for example, one 
foreign corporate member re-transfers the property to another foreign 
corporate member) is not material to the determination of the domestic 
member's gross receipts.
    To prevent multiple inclusions of gross receipts in cases in which 
transactions involving the same or a modified version of tangible or 
intangible property or services occur successively between domestic and 
foreign corporate members, the proposed regulations provide that only

[[Page 75907]]

the last internal transaction giving rise to gross receipts (within the 
meaning of section 1.41-3(c)) is taken into account in the research 
credit computation.
    These proposed regulations embody the statutory requirement of 
consistency in determining a taxpayer's base amount (generally, the 
product of the fixed-base percentage and 4-year average annual gross 
receipts preceding the credit year). See section 41(c)(6). Accordingly, 
in computing the research credit for taxable years beginning on or 
after the date of publication of these proposed regulations as final 
regulations, QREs and gross receipts taken into account in computing a 
taxpayer's fixed-base percentage and a taxpayer's base amount must be 
determined on a basis consistent with the definition of QREs and gross 
receipts for the credit year, without regard to the law in effect for 
the earlier taxable years that are taken into account in computing the 
fixed-base percentage or the base amount. However, the proposed 
regulations do not specify the manner in which a taxpayer must make the 
base amount adjustments. The IRS and the Treasury Department recognize 
that accounting for intra-group transactions in prior years presents a 
unique burden because taxpayers may not have records for the base years 
with sufficient information to satisfy the proposed regulations' 
requirement of consistency. These proposed regulations are intended to 
capture some measure of intra-group gross receipts for purposes of 
satisfying the requirement of consistency, but are not intended to 
preclude research credit claims for taxpayers that do not have adequate 
information in their books and records for the base years. Accordingly, 
the IRS and Treasury Department request comments regarding the need for 
a rule or safe harbor in applying the consistency rule for purposes of 
determining the base amount in accordance with these proposed 
regulations.

QREs

    These proposed regulations remove the rules in Sec.  1.41-6(i)(4) 
(relating to the treatment of lease payments as QREs) to reflect 
changes to section 41 by the Tax Reform Act of 1986, Public Law 99-514.
    These proposed regulations generally would not change the rules 
concerning whether payments between members of a controlled group 
constitute QREs. The IRS and the Treasury Department request comments 
concerning whether any revisions are necessary.

Proposed Effective Date

    The amendments to Sec.  1.41-6(i) are proposed to apply to taxable 
years beginning on or after the date that these regulations are 
published as final regulations in the Federal Register.

Special Analysis

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13563. It also has been 
determined that section 553(b) of the Administrative Procedures Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because 
these regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Therefore, a Regulatory Flexibility Analysis is not required. 
Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic or written comments (a 
signed original and eight (8) copies) that are submitted timely to the 
IRS. The IRS and the Treasury Department request comments on all 
aspects of the proposed rules.
    All comments will be available for public inspection and copying.
    A public hearing has been scheduled for April 23, 2014, beginning 
at 10:00 a.m. in the IRS Auditorium, Internal Revenue Building, 1111 
Constitution Avenue NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit electronic or 
written comments by March 13, 2014, and submit an outline of the topics 
to be discussed and the amount of time to be devoted to each topic (a 
signed original and eight (8) copies) by March 13, 2014. A period of 10 
minutes will be allotted to each person for making comments. An agenda 
showing the scheduling of the speakers will be prepared after the 
deadline for receiving outlines has passed. Copies of the agenda will 
be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed 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.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be 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. * * *

0
Par. 2. In Sec.  1.41-0, the table of contents is amended by:
0
1. Revising the section heading for Sec.  1.41-6 and the entries for 
Sec.  1.41-6(i), (i)(1), (i)(2), (i)(3), (i)(4), and (i)(5).
0
2. Adding a new entry for Sec.  1.41-6(i)(6).
0
3. Adding a new entry for Sec.  1.41-6(j)(4).
    The addition reads as follows:


Sec.  1.41-0  Table of contents.

* * * * *


Sec.  1.41-6  Controlled groups.

* * * * *
    (i) Transactions between controlled group members.
    (1) In general.
    (2) Exception for certain amounts received from foreign corporate 
controlled group members.
    (3) In-house research expenses.
    (4) Contract research expenses.
    (5) Payment for supplies.
    (6) Consistency requirement.
    (j) * * *
* * * * *
    (4) Intra-group transactions.
* * * * *
0
Par. 3. Section 1.41-6 is amended by:
0
1. Revising the section heading.
0
2. Revising paragraph (i)(1).
0
3. Removing paragraph (i)(4).
0
4. Redesignating paragraphs (i)(2) and (3) as paragraphs (i)(3) and 
(4), respectively.
0
5. Adding new paragraph (i)(2).
0
6. Adding new paragraph (i)(6).
0
7. Revising the first sentence of paragraph (j)(1).

[[Page 75908]]

0
8. Adding new paragraph (j)(4).
    The revisions and additions read as follows:


Sec.  1.41-6  Controlled groups.

* * * * *
    (i) Transactions between controlled group members--(1) In general--
Treatment of transactions. Except as otherwise provided in this 
paragraph, all activities giving rise to amounts included in gross 
receipts under Sec.  1.41-3(c) (transactions) between members of a 
controlled group as defined in paragraph (a)(3) of this section (intra-
group transactions) are generally disregarded in determining the QREs 
and gross receipts of a member for purposes of the research credit.
    (2) Exception for certain amounts received from foreign corporate 
controlled group members--(i) In general. Notwithstanding paragraph 
(i)(1) of this section, gross receipts (within the meaning of Sec.  
1.41-3(c)) from an intra-group transaction are taken into account if--
    (A) A foreign corporate controlled group member engages in a 
transaction with a party outside of the group (an external transaction) 
involving the same or a modified version of tangible or intangible 
property or a service that was previously the subject of one or more 
intra-group transactions (an internal transaction); and
    (B) The external transaction does not give rise to gross receipts 
that are effectively connected with a trade or business within the 
United States, the Commonwealth of Puerto Rico, or any possession of 
the United States.
    (ii) Timing of inclusion. The amount described as taken into 
account in computing gross receipts in paragraph (i)(2)(i) of this 
section is taken into account in the year a foreign corporate 
controlled group member engages in the external transaction described 
in paragraph (i)(2)(i)(B) of this section.
    (iii) Multiple intra-group transactions. If there is more than one 
internal transaction, then only the last internal transaction giving 
rise to gross receipts (within the meaning of section 1.41-3(c)) is 
taken into account in the research credit computation pursuant to 
paragraph (i)(2)(i) of this section.
    (iv) Examples. The following examples illustrate the principles of 
paragraph (i)(2) of this section.

    Example 1. Domestic Controlled Group Member Includes in Gross 
Receipts Proceeds From Intra-group Sale. D and F are members of the 
same controlled group. D is a domestic corporation. F is a foreign 
corporation that is organized under the laws of Country. F does not 
conduct a trade or business within the United States, Puerto Rico, 
or any U.S. possession. In Year 1, D sells Product to F for $8x. In 
Year 2, F sells Product to F's unrelated customer for $10x. Because 
the Product that F sells outside the group is the same Product that 
was the subject of an internal transaction (i.e., the sale from D to 
F), and the $10x that F receives upon sale of Product outside the 
group is not effectively connected with a trade or business within 
the United States, the Commonwealth of Puerto Rico, or any 
possession of the United States, the $8x that D receives from F is 
included in D's gross receipts for purposes of computing the amount 
of the group credit. The $8x of gross receipts is taken into account 
in Year 2, the year of the external transaction. See paragraph 
(i)(2) of this section. The $10x that F receives from F's customer 
is excluded from gross receipts under section 41(c)(7) because it is 
not effectively connected with the conduct of a trade or business 
within the United States, the Commonwealth of Puerto Rico, or any 
possession of the United States.
    Example 2. Domestic Controlled Group Member Includes in Gross 
Receipts Amounts Received For Intra-group Transfer of License. 
Assume the same facts as in Example 1, except in Year 1, D licenses 
intellectual property (license) to F for $8x. F owns similar 
intellectual property that it plans to license to a customer 
together with the license it received from D. In Year 2, F licenses 
its intellectual property and sublicenses D's intellectual property 
to F's unrelated customer for $20x. Because the intellectual 
property that F sublicenses outside the group is the same 
intellectual property that was the subject of an internal 
transaction (i.e., the license from D to F), and the $20x that F 
receives for the license and sublicense of intellectual property 
outside the group is not effectively connected with a trade or 
business within the United States, the Commonwealth of Puerto Rico, 
or any possession of the United States, the $8x that D receives from 
F is included in D's gross receipts for purposes of computing the 
amount of the group credit. The $8x of gross receipts is taken into 
account in Year 2, the year of the external transaction. See 
paragraph (i)(2) of this section. The $20x that F receives from F's 
customer is excluded from gross receipts under section 41(c)(7) 
because it is not effectively connected with the conduct of a trade 
or business within the United States, the Commonwealth of Puerto 
Rico, or any possession of the United States.
    Example 3. Domestic Controlled Group Member Includes in Gross 
Receipts Proceeds From Intra-group Sale Following Multiple Internal 
Transactions. D, F1, and F2 are members of the same controlled 
group. D is a domestic corporation. F1 and F2 are foreign 
corporations that are organized under the laws of Country. F1 and F2 
do not conduct a trade or business within the United States, Puerto 
Rico, or any U.S. possession. In Year 1, D sells Product to F1 for 
$8x. In Year 2, F1 sells Product to F2 for $9x, and F2 sells Product 
to F2's unrelated customer for $10x. Both D's sale to F1 and F1's 
sale to F2 are internal transactions involving Product that precede 
F2's external transaction involving Product. The $10x that F2 
receives upon sale of Product outside the group is not effectively 
connected with a trade or business within the United States, the 
Commonwealth of Puerto Rico, or any possession of the United States. 
Accordingly, the group will include gross receipts from an internal 
transaction in its research credit computation pursuant to paragraph 
(i)(2)(i) of this section. Because F1's sale of Product to F2 does 
not produce gross receipts that are effectively connected with the 
conduct of a trade or business within the United States, the 
Commonwealth of Puerto Rico, or any possession of the United States, 
those gross receipts are not taken into account even though that 
sale is the most recent internal transaction preceding the external 
transaction. See section 41(c)(7) and paragraph (i)(2)(i) of this 
section. Therefore, D will include $8x of gross receipts in its 
research credit computation in Year 2, the year of the external 
transaction, because the transfer from D to F1 is the last internal 
transaction giving rise to includible gross receipts. See paragraph 
(i)(2)(iii) of this section.
    Example 4. Foreign Partnership Controlled Group Member Includes 
in Gross Receipts Proceeds From Intra-group Sale. Assume the same 
facts as in Example 3, except that F1 is a foreign partnership for 
federal income tax purposes and is part of the controlled group 
(within the meaning of Sec.  1.41-6(a)(3)(ii)) that includes D and 
F2. Both D's sale to F1 and F1's sale to F2 are internal 
transactions involving Product that precede F2's external 
transaction involving Product. The $10x that F2 receives upon sale 
of Product outside the group is not effectively connected with a 
trade or business within the United States, the Commonwealth of 
Puerto Rico, or any possession of the United States. Accordingly, 
the group will include gross receipts from an internal transaction 
in its research credit computation pursuant to paragraph (i)(2)(i) 
of this section. F1's sale to F2 is the most recent internal 
transaction preceding the external transaction giving rise to gross 
receipts (see paragraph (i)(2)(iii)). The gross receipts from F1's 
sale to F2 are not excluded under section 41(c)(7) and paragraph 
(i)(2)(i) of this section because F1 is a partnership. Therefore, F1 
will include $9x of gross receipts in its research credit 
computation in Year 2 because the transfer from F1 to F2 is the last 
internal transaction giving rise to gross receipts. See paragraph 
(i)(2)(iii) of this section.
    Example 5. Domestic Controlled Group Member Includes in Gross 
Receipts Proceeds From Intra-group Sale Following Multiple Internal 
Transactions that Include a Section 721 Exchange.
    Assume the same facts as Example 3, except that in an exchange 
meeting the requirements of section 721(a), F2 transfers Product to 
PRS, a partnership that is not part of the controlled group within 
the meaning of Sec.  1.41-6(a)(3)(ii). Both D's sale to F1 and F1's 
sale to F2 are internal transactions involving Product that precede 
F2's transfer of Product to PRS. The exchange engaged in by F2 does 
not give rise to gross receipts that are effectively connected with 
a trade or business within the United States, the Commonwealth of 
Puerto Rico, or any possession of the United States. Because F1's 
sale of Product to F2 does not produce gross receipts that are 
effectively connected with

[[Page 75909]]

the conduct of a trade or business within the United States, the 
Commonwealth of Puerto Rico, or any possession of the United States, 
those gross receipts are not taken into account even though that 
sale is the most recent internal transaction preceding the external 
transaction. See section 41(c)(7) and paragraph (i)(2)(i) of this 
section. Therefore, D will include $8x of gross receipts in its 
research credit computation in Year 2, the year of the external 
transaction, because the transfer from D to F1 is the last internal 
transaction giving rise to includible gross receipts. See paragraphs 
(i)(2)(i) and (i)(2)(iii) of this section.
* * * * *
    (6) Consistency requirement. In computing the research credit for 
taxable years beginning on or after the date of publication of these 
regulations as final regulations in the Federal Register, QREs and 
gross receipts taken into account in computing a taxpayer's fixed-base 
percentage and a taxpayer's base amount must be determined on a basis 
consistent with the definition of QREs and gross receipts for the 
credit year, without regard to the law in effect for the taxable years 
taken into account in computing the fixed-base percentage or the base 
amount. This consistency requirement applies even if the period for 
filing a claim for credit or refund has expired for any taxable year 
taken into account in computing the fixed-base percentage or the base 
amount.
    (j) Effective/applicability dates--(1) In general. Except as 
otherwise provided in this paragraph (j), these regulations apply to 
taxable years ending on or after May 24, 2005.
* * * * *
    (4) Intra-group transactions. Paragraphs (i)(1) and (2) of this 
section apply to taxable years beginning on or after the date of 
publication of these regulations as final regulations in the Federal 
Register.

Beth Tucker,
Deputy Commissioner for Operations Support.
[FR Doc. 2013-29539 Filed 12-12-13; 8:45 am]
BILLING CODE 4830-01-P