PLR 200313005: Acquired company may switch to standard research credit method

Plain-English summary

A corporation had used the alternative incremental research credit before it was acquired by a taxpayer whose controlled group used the standard method. The acquired corporation also changed its tax year to match the parent. The IRS ruled that the corporation could use the standard method under section 41(a) for its stated short tax year and later years, provided neither it nor the parent made a new alternative election. The IRS did not decide whether the claimed expenses were qualified research expenses.

Ruling snapshot

• Question: May the acquired corporation calculate its research credit under the standard method after joining the parent's group?
• Outcome: Approved, subject to no new alternative election
• Key authorities: IRC §§ 41(a), 41(c)(4), 41(f), 1563(a)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200313005
Washington, DC 20224
Release Date: 3/28/2003
Index Number: 41.00-00 Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:7-PLR-154819-01
Date:
December 16, 2002

LEGEND:

Taxpayer:

Corporation: s: t: u: v: w: x: y: z:

Dear :

We received a letter from your authorized representative requesting a ruling that Corporation may determine the credit for increasing research activities under the standard method of § 41(a) of the Internal Revenue Code for Corporation’s short taxable year ending on z and all subsequent taxable years. This letter responds to that request.

The facts and representations submitted are as follows:

Taxpayer is an accrual basis taxpayer with an s taxable year end. For all taxable years prior to its acquisition of Corporation, Taxpayer and all members of its § 41(f)(5) controlled group calculated their credit for increasing research activities under § 41(a).

In t, Taxpayer acquired Corporation. Prior to its acquisition by Taxpayer, Corporation had a u taxable year end; after the acquisition, Corporation changed its

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taxable year to s to conform with Taxpayer’s taxable year end. Corporation had elected for the taxable year ending v to determine its credit for increasing research activities under the alternative incremental research credit (AIRC) rules of § 41(c)(4). Corporation determined its research credit using § 41(c)(4) for the taxable years ending v, w, x, and the short taxable year ending y.

Section 41(f)(1)(A) provides that in determining the amount of the credit under § 41—

(i) all members of the same controlled group of corporations shall be treated as a single taxpayer, and

(ii) the credit (if any) allowable by § 41 to each member shall be its proportionate shares of the qualified research expenses and basic research payments giving rise to the credit.

Section 41(f)(5) provides that the term “controlled group of corporations” has the same meaning given to such term by § 1563(a), except that—

(A) “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in § 1563(a)(1), and

(B) the determination shall be made without regard to § 1563(a)(4) and (e)(3)(C).

Based solely on the facts submitted and representations made, Corporation may determine its credit for increasing research activities under the standard method of § 41(a), without regard to the AIRC method of § 41(c), for qualified research expenses paid or incurred during the taxable year ending on z and all succeeding years, provided that neither Taxpayer nor Corporation makes a new election to determine its credit for increasing research activities under the alternative incremental research credit rules of § 41(c)(4) in a later year.

Except as expressly provided herein, we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Further, we express or imply no opinion concerning expenditures Taxpayer or Corporation treated as qualified research expenses.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. A copy of this letter must be attached to any income tax return to which it is relevant.

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The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

Sincerely,

/s/
Brenda M. Stewart
Senior Counsel, Branch 7
Associate Chief Counsel
(Passthroughs and Special Industries)