PLR 200526016: Research credit group may return to standard calculation

Plain-English summary

A corporation and its controlled group had switched from the standard method for calculating the research credit to the alternative incremental method. Before the filing deadline for a later tax year, the corporation requested consent to revoke that election. The IRS ruled that the group could calculate the credit under the standard method for that year and succeeding years, provided it did not make a later election to use the alternative method again. The ruling did not determine whether any of the group's expenses qualified for the credit.

Ruling snapshot

• Question: May the corporation and its controlled group revoke their alternative incremental research credit election?
• Outcome: Approved, subject to no later election of the alternative method.
• Key authorities: IRC §§ 41(a), 41(c)(4), 41(f).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200526016
Third Party Communication: None
Release Date: 7/1/2005
Date of Communication: Not Applicable
Index Number: 41.00-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:B07
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PLR-165644-04
Date: March 23, 2005

LEGEND:
Corporation = -------------------------------------
------------------------
x = ----------
y = -------------------
z = -------------------

Dear ----------------:

This letter responds to your letter, dated December 17, 2004, requesting a ruling under
§ 41 of the Internal Revenue Code.

The represented facts are as follows:

Corporation is an accrual method taxpayer that utilizes an x taxable year. Taxpayer is the common parent of a § 41(f) controlled group. From the inception of the credit for increasing research activities (“research credit”), Corporation and its controlled group utilized the standard method of § 41(a) to calculate the research credit. For the taxable year ending on y, Corporation elected, on behalf of itself and the members of its § 41(f) controlled group, to utilize the alternative incremental research credit (“AIRC”) rules under § 41(c)(4) to calculate its research credit. Corporation has continued to use the AIRC. Before the due date for its return (including extensions) for the taxable year ending on z, Corporation submitted a request to revoke its election to determine its research credit under the AIRC rules of § 41(c)(4) for qualified research expenses paid or incurred on or after the taxable year ending on z and all subsequent years.

For taxable years beginning after June 30, 1996, taxpayers may elect to determine their research credit under the alternative incremental research credit rules of ' 41(c)(4). Section 41(c)(4)(B) provides that any election under ' 41(c)(4)(A) shall apply for the taxable year in which made and all succeeding taxable years unless revoked with the consent of the Secretary.

PLR-165644-04
2

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.

Based solely on the facts and representations made, we conclude that Corporation and its § 41(f) controlled group may calculate the research credit for the taxable year ending on z, and all succeeding years, under the standard method of § 41(a), without regard to
§ 41(c)(4), provided that Corporation does not make an election to determine its research credit under the AIRC 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 Corporation, or any member of its § 41(f) controlled group, treated as qualified research expenses.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) 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.

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
Office of Associate Chief Counsel
(Passthroughs & Special Industries)

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