TEI comments on proposed research credit rules.

• Position: Tax Executives Institute

On March 18, 2014, TEI President Terilea J. Wielenga urged the IRS to withdraw proposed regulations creating an "exception" to the single taxpayer rule under section 41 (f)(1) excluding gross receipts received from a controlled foreign corporation for purposes of calculating the traditional incremental research credit. TEI's comments were prepared under the aegis of its Federal Tax Committee, whose chair is Gary P. Elickman of Oldcastle, Inc. Contributing substantially to the development of TEI's comments were Sandhya Edupuganty and Stuart Salchow of Texas Instruments. Jeffery P. Rasmussen of the Institute's legal staff coordinated the development of the comments.

On December 13, 2013, the Internal Revenue Service (IRS) and Treasury Department released proposed regulations on 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 (hereinafter "intra-group transactions") for purposes of determining the credit for increasing research activities under section 41 of the Internal Revenue Code. The proposed rules were published in the December 13, 2013, issue of the Federal Register (78 Fed. Reg. 75905), and the January 6, 2014, issue of the Internal Revenue Bulletin (2014-2 I.R.B. 374). A hearing is scheduled for April 23, 2014.

Tax Executives Institute

Tax Executives Institute is the preeminent association of business tax executives in North America. Our nearly 7,000 members represent approximately 3,000 of the leading corporations in the United States, Canada, Europe, and Asia. TEI represents a cross-section of the business community, and is dedicated to developing and effectively implementing sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply in a cost-efficient manner.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises, including the research credit provisions of the Internal Revenue Code. We believe that the diversity and professional training of our members enable us to bring a balanced and practical perspective to the issues raised by the proposed regulations under section 174 on the inclusion of intra-group gross receipts in calculating the traditional incremental research credit.

Background

1. Section 41

   Section 41(a) provides a credit equal to 20 percent of the excess of a taxpayer's qualified research expenditures (QREs) over a base amount (hereinafter "the credit"). The base amount is computed by multiplying the taxpayer's fixed-base percentage calculated during a fixed-base period of years by the taxpayer's average annual gross receipts for the four taxable years preceding the year for which the credit is being determined. The fixed-base percentage is computed by dividing the taxpayer's aggregate QREs by the taxpayer's aggregate gross receipts for the five taxable years beginning after December 31, 1983, and before January 1,1989. Section 41 does not define the term "gross receipts" for purposes of the credit calculation, but does provide that (i) gross receipts are reduced by returns and allowances, and (ii) 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 (hereinafter a "U.S. trade or business") are to be taken into account. For purposes of calculating the credit, including determining gross receipts, section 41(f)(1)(A) states that "[i]n determining the amount of the credit under this section--(i) all members of the same controlled group of corporations shall be treated as a single taxpayer" (hereinafter the "single taxpayer rule"). (1) Domestic and foreign controlled corporations are members of the same controlled group for purposes of section 41. (2)

2. The Proposed Regulations

   The...