TD 9205 – Background
On July 29, 2003, the Treasury Department and the IRS published in the Federal Register (68 FR 44499) proposed amendments to the regulations under section 41(f) (REG–133791–02) (the 2003 proposed regulations) relating to the computation and allocation of the credit for increasing research activities (research credit) under section 41 for members of a controlled group of corporations or a group of trades or businesses under common control (controlled groups). The 2003 proposed regulations withdrew the proposed regulations published in the Federal Register on January 4, 2000 (65 FR 258) (REG–105606–99) (the 2000 proposed regulations). In general, the 2000 proposed regulations required controlled groups to compute a group credit and then to allocate that group credit among the members of the controlled group. The allocation of the group credit under the 2000 proposed regulations was based on the relative increases of each member’s qualified research expenses (QREs) over a base amount that was computed by multiplying that member’s most recent average annual gross receipts by the controlled group’s fixed-base percentage.
Although the 2003 proposed regulations did not modify the rules relating to the computation of the group credit, the 2003 proposed regulations did modify the rules relating to the allocation of the group credit among the members of the controlled group. In particular, the 2003 proposed regulations allocated the group credit in proportion to the credit, if any, that a member of a controlled group would be entitled to claim if it were not a member of a controlled group (the stand-alone entity credit). In addition, based on the comments to the 2000 proposed regulations, the 2003 proposed regulations did not propose special rules that would apply to consolidated groups that were members of a controlled group. A public hearing on the 2003 proposed regulations was held on November 13, 2003. After considering the written comments and the statements at the public hearing, the Treasury Department and the IRS are withdrawing the 2003 proposed regulations and are issuing temporary regulations and proposed regulations cross-referencing the temporary regulations. In substantial part, the temporary regulations retain the rules contained in the 2003 proposed regulations with certain modifications discussed below.
