Continuing uncertainty on research credit definition of "gross receipts".

• Author: Wiles, Dan

The definition of "gross receipts" for Sec. 41 research credit purposes in the affiliated group context remains uncertain. This definition is important in calculating a taxpayer's "base amount," to which current-year qualified research expenditures are compared in computing the research credit.

Background

Chief Counsel Advice (CCA) 200233011 concluded that a taxpayer (a domestic corporation) and its majority owned foreign subsidiaries would be treated as a single taxpayer for Secs. 41(f) and 1563(a) purposes. Thus, product sales between the tax payer and its affiliated foreign subsidiaries would be disregarded in computing the taxpayer's gross receipts for research credit purposes. In light of Sec. 41(f)(5), which refers to the meaning of controlled group in Sec. 1563(a), CCA 200233011 concluded that the "single taxpayer" concept applies to an affiliated group, even if that group includes a foreign corporation not consolidated for domestic return purposes.

Although CCA 200233011 seems to offer a degree of certainty in the computation of gross receipts by large corporations with foreign subsidiaries, it is not precedent under Sec. 6110(k)(3). Further, its conclusion, although based on a straightforward reading of the statute, may have raised questions as to its general applicability to other taxpayers; the final paragraph reads:

We have determined that given the particular facts and circumstances of this case that Taxpayer may exclude the sales to its foreign subsidiaries for purposes of determining its base amount under section 41(c). For the years at issue, Taxpayer should consistently exclude such sales from gross receipts for purposes of both the fixed-base percentage and the average annual gross receipts for the four taxable years preceding the credit year. CCA 200233011 did not set forth the "particular facts and circumstances" that the Chief Counsel's office found significant; thus, its general applicability may be unclear. On the one hand, its analysis appeared to rely on a technical reading of the statute that would seem to apply regardless of factual context; however, it referred to the taxpayer's "particular facts and circumstances." Given the uncertainty, it is not surprising that the IRS Office of Examinations (Examinations) and some taxpayers have taken different positions; as of yet, no definitive resolution on the issue exists.

IRS Position

Currently, Examinations has been raising the computation of gross receipts as an issue...