The government recently issued Technical Advice Memorandum 201006027, applying the R&D tax credit rules for acquiring and disposing of business assets in the context of the I.R.C. § 963 possessions tax credit. This now defunct possession tax credit rewarded taxpayer’s for operating businesses in U.S. possessions, such as Puerto Rico. It incorporates the R&D tax credit rules for acquiring and disposing of business assets. Generally, these rules require the taxpayer to increase or decrease the gross receipts it uses to compute its R&D tax credit if it acquires or disposes of certain assets or businesses.
With the facts in the TAM, the taxpayer, a domestic corporation, transferred its assets to a wholly-owned controlled foreign corporation. The taxpayer filed a tax return that, applying the R&D tax credit rules, reduced the amount of its income due to the transfer of its assets to its foreign corporation. The taxpayer then filed a refund claim asserting that it did not have to reduce the income it used to compute its possession tax credit due to the transfer of assets to its foreign corporation. In examining the R&D tax credit rules on this issue, the government noted that, with respect to the R&D tax credit rules, (1) for the acquiring person, the acquiring person may not have to adjust its gross receipts if it is not a taxpayer as defined in the Tax Code (which a wholly-owned controlled foreign corporation is not) and (2) for the disposing person, the disposing person may not have to adjust its gross receipts if the assets are transferred in tact and to a single party as a whole as opposed to being discontinued or transferred piecemeal.