R&D Tax Credit Administrative Decisions & Rulings
Research Tax Credit
Chief Counsel Advice 201650012 – This advice addresses whether a taxpayer can apply parts of the pre-2015 internal use software regulations.
Chief Counsel Advice 201423023 – This emailed advice addresses what legal standard applies to internal use software following the FedEx case.
Administrative Memorandum 201034017 – This Memorandum explains when a taxpayer must include the QREs for an acquired business in computing its research tax credit.
Administrative Memorandum 200802 – This Memorandum explains that taxpayers can make a protective I.R.C. § 280C(c)(3) election to take a reduced research tax credit by either by (1) noting “section 280C” next to the line on which the current year reduced credit could be claimed or (2) claiming a nominal credit amount along with the “section 280C” notation.
Technical Advice Memorandum 200811020 – This Memorandum concludes that the business of licensing research results is qualified for the research tax credit.
Private Letter Ruling 200822007 – This Ruling is a request to revoke an AIRC election, which the IRS denied.
Technical Advisory Memorandum 13457207 – This Memorandum explains that contract research expenses incurred by a taxpayer can constitute qualified research expenses, even if the taxpayer?s only business was performing research to license to others to manufacture and market the inventions. The IRS focused on the fact that the taxpayer retained ownership of all production and marketing rights for the inventions, which presumably would allow the taxpayer to continue that the taxpayer’s licensing business constituted a trade or business.
Administrative Memorandum 20071702F – This Memorandum explains when “commercial production” begins for purposes of the federal research tax credit. The IRS examines a multi-phase design and manufacturing process and concludes that two of the phases are either tooling up for or part of the manufacturing process.
Administrative Memorandum 20055203F – This Memorandum explains that contract research expenses incurred by a taxpayer can constitute qualified research expenses, even though the taxpayer’s research was performed by employees that it leased from its owners and where it licensed the results of its research to to its owners. The IRS deemed the taxpayer’s licensing business to constitute a trade or business.
Technical Advisory Memorandum 200330001 – This Memorandum says that the “acquiring company” in a statutory merger into a subsidiary corporation that is part of a consolidated group is the entity into which the company merged, not the parent company as set out in the consolidated tax return rules.
Administrative Memorandum 200234063 – This Memorandum explains that the parent corporation must include the taxpayer’s base year qualified research expenses, base year gross receipts, and average annual gross receipts for the four taxable years preceding Taxpayer?s credit year in computing its base amount where the parent acquired 100 percent of the taxpayer’s stock, becuase the acquisition constituted an acquisition of a major portion of a trade or business.
Field Service Advice 200018026 – This FSA explains that a down payment is not contingent on success of the research and therefore, the down payment amount is funded research. Thus, it was not qualified due to the funded research exclusion.
Research Tax Deduction
Private Letter Ruling 1324008, Private Letter Ruling 1236013, and Private Letter Ruling 1126021 – Research and experimental expenditures, 9100 relief request to extend time to file Sec. 59(e) election to take over 10 years.
Rev. Rul. 85-186, 1985-2 C.B. 84 – Research and experimental expenditures. Research or experimental costs previously deducted pursuant to section 174(a) of the Code are not subject to recapture upon the subsequent sale of the resulting technology. Rev. Rul. 72-528 revoked.
Rev. Rul. 83-138, 1983-2 C.B. 50 – Research or experimental expenditures; accounting methods change. A taxpayer may not change without the consent of the Commissioner its treatment of research or experimental expenditures from the deferred expense method to the expense method of accounting by filing an amended federal income tax return.
Rev. Rul. 80-245, 1980-2 C.B. 72 – Research and experimental expenses; environmental impact studies. A public utility company conducted, and paid another organization to conduct, environmental impact studies to support its application to state regulatory agencies to expand its generating facilities. The expenses are not research and experimental expenditures within the meaning of section 174 of the Code. However, if not chargeable to a capital account, the expenses are deductible business expenses.
Rev. Rul. 77-27, 1977-1 C.B. 23 – Industrial development bonds; exempt small issue; capital expenditures. Expenditures incurred by a nonexempt corporation for research and experimental activities with respect to a proposed facility to be financed by the industrial development bonds of a political subdivision of a state are capital expenditures within the meaning of section 103(b)(6)(D) of the Code, even though the corporation elects to treat such expenditures as deductible expenses under section 174.
Rev. Rul. 76-324, 1976-2 C.B. 77 – Election to defer research and experimental expenditures . For taxable years ending after August 29, 1976, the claim on a tax return of a deduction for a portion of research and experimental expenses incurred, without a written election statement, will not be treated as an election to defer and amortize such expenses; Rev. Rul. 71-136 revoked.
Rev. Rul. 75-122, 1975-1 C.B. 87 – Mining; research and experimental expenditures . A domestic mining corporation’s expenditures incurred directly in the development of prototype mining equipment and in perfecting a new metallurgical process, including the cost of shipping mineral samples to the research laboratory, are research and experimental expenditures deductible under section 174(a) of the Code. However, the expenses for driving shafts, drifts, cross-cuts, and for other production facilities that are not limited to the research activities are mine development expenses within the meaning of section 616.
Rev. Rul. 74-67, 1974-1 C.B. 63 – Research and experiments; mining exploration; core and noncore drill holes . Expenditures paid or incurred before January 1, 1970, by a domestic corporation under a mining lease agreement involving the drilling of core and noncore holes in connection with the production of minerals are mining exploration expenditures subject to the provisions of either section 615 or 617 of the Code. Additional expenditures required to use the drill holes for designing and testing a new mining method are research and experimental expenditures and are subject to the provisions of section 174.
Rev. Rul. 73-395, 1973-2 C.B. 87 – Textbooks and visual aids; development and publication costs . Costs incurred by an accrual basis taxpayer in writing, editing, design and art work directly attributable to the development of textbooks and visual aids are capital expenditures under section 263 of the Code that are depreciable under section 167(a). Costs incurred in the printing and publishing of such material should be inventoried with aliquot apportionment to the books and visual aids on hand at the end of the taxable year. Expenditures for manuscripts or visual aids that are abandoned may be deductible as losses under section 165. Further, the Service will not follow the decision in Stern holding that a taxpayer, in the business of writing books, may deduct traveling expenses incurred while researching, writing, and arranging material for a book.
Rev. Rul. 73-324, 1973-2 C.B. 72 – Synthetic gas research and experimental costs . A natural gas company’s payments to an industry association of which it is a member to help fund, under an agreement with the Department of Interior, an organization to develop a coal gasification program for the production of synthetic gas are research and experimental expenditures for the purposes of section 174 of the Code.
Rev. Rul. 73-275, 1973-1 C.B. 134 – Development costs; specially-built manufacturing systems. The taxpayer’s costs to develop and design a specially-built automated manufacturing system for a customer’s specific order at the taxpayer’s risk are deductible as research and experimental expenditures, even though each product design results in the production of only one machine system.
Rev. Rul. 73-20, 1973-1 C.B. 133 – Payments made directly or indirectly by a utility corporation to a non-profit research and development organization formed to develop a model that will benefit the utility field are deductible as research and experimental expenditures.
Rev. Rul. 71-363, 1971-2 C.B. 156 – Expenditures by an advertising agency for investigative projects to develop new advertising concepts to be published in booklets issued to prospective clients are not research and experimental expenditures within the meaning of section 174 of the Code.
Rev. Rul. 71-162, 1971-1 C.B. 97 – Research and experimental expenses that are unrelated to the current product lines or manufacturing processes of a trade or business are, nevertheless, research and experimental expenditures within the meaning of section 174 of the Code.
Rev. Rul. 71-136, 1971-1 C.B. 97 – An election to treat research and experimental expenses as deferred expenses is made where a deduction for a portion of such expenses is claimed on a tax return even though an election statement was not filed with the return; the election also applies to subsequent expenditures.
Rev. Rul. 70-637, 1970-2 C.B. 64 – An election to expense research and experimental expenditures under section 174 of the Code may not be made on a timely filed claim for refund.
Rev. Rul. 69-484, 1968-2 C.B. 109 – Contributions made by an airline to an aircraft manufacturer to help defray the cost of designing, developing, fabricating, and testing a supersonic transport prototype aircraft are research and experimental expenditures under section 174 of the Code.
Rev. Rul. 68-471, 1968-2 C.B. 109 – Attorneys’ fees paid or incurred by the taxpayer in obtaining foreign patents on its previously developed inventions, on which it either owns or has applied for the United States patents, are includible within the meaning of the term “research and experimental expenditures” as defined in section 1.174-2(a)(1) of the Income Tax Regulations and, as such, are deductible under section 174 (a) of the Code.
Rev. Rul. 68-144, 1968-1 C.B. 85 – Where a taxpayer had elected to currently expense all research and experimental expenditures with the exception of those on particular projects to which the deferred expense method was elected, it cannot in a later taxable year elect the deferred expense method on new projects unless permission is granted by the Commissioner.
Rev. Rul. 67-401, 1967-2 C.B. 123 – The expenses for legal and accounting work incurred by a taxpayer in applying for a Federal income tax ruling in connection with a research and development project and a determination of a regulatory commission with respect to the effect of the project on the taxpayer’s rate structure are not deductible as research and experimental expenditures under section 174(a) of the Internal Revenue Code of 1954. Whether such expenses are capital expenditures will depend upon the facts of the particular case. The expenses, if not chargeable to capital account, are ordinary and necessary business expenses deductible under section 162(a) of the Code.
Rev. Rul. 66-30, 1966-1 C.B. 55 – Expenses paid or incurred by a taxpayer in obtaining foreign patents on inventions covered by United States patents and patent applications developed and owned by other persons are not deductible under section 174(a) of the Internal Revenue Code of 1954 as research or experimental expenditures.
Rev. Rul. 58-356, 1958-2 C.B. 104 – The deduction of research and experimental expenditures in an income tax return filed for the first taxable year beginning after December 31, 1953, and ending after August 16, 1954, although such deduction is not separately shown as such in the return, effectuates the adoption of the expense method provided by section 174(a) of the Internal Revenue Code of 1954.
Rev. Rul. 58-78, 1958-1 C.B. 148 – Research and experimental expenditures which are otherwise properly deductible currently for Federal income tax purposes, under section 174(a) of the Internal Revenue Code of 1954, may be so deducted regardless of the manner in which such expenditures are recorded by the taxpayer on its books and financial statements.
Rev. Rul. 58-74, 1958-1 C.B. 148 – The deduction by a taxpayer of research or experimental expenditures on his income tax return for his first taxable year beginning after December 31, 1953, and ending after August 16, 1954, in which he pays or incurs research or experimental expenditures constitutes the adoption of the expense method provided by section 174(a) of the Internal Revenue Code of 1954, pursuant to the provisions of section 1.174(b)(1) of the Income Tax Regulations. The expense method of treating research or experimental expenditures so adopted is binding and is inclusive of all such expenditures as to the project or projects involved for the taxable year adopted and for all subsequent taxable years, until a change to another method is properly effected. Section 1.174-3(a) of the Income Tax Regulations.
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