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. 70-637

Advice has been requested whether, under the circumstances described be­low, a taxpayer is entitled to treat certain research and experimental ex­penditures as expenses under section 174(a) of the Internal Revenue Code of 1954.

The taxpayer, an individual, in­curred certain research and experi­mental expenditures in 1964 through 1969. The expenditures were paid on the taxpayer’s behalf by a corporation that was 100 percent owned by the taxpayer and were charged to an ac­count receivable by the corporation. Beginning in 1968, the taxpayer gave notes to the corporation for the balance due from him as of December 31, 1967, and for such amounts that the corpo­ration paid thereafter. The taxpayer repaid 30x dollars to the corporation in 1967, 10x dollars in 1968, and 15x dollars in 1969 with respect to his in­debtedness for the research and experi­mental expenditures.

The taxpayer did not elect to claim a deduction for the research and ex­perimental expenditures on his original returns for 1964, 1965, or 1956. How­ever, such expenditures incurred in 1967, 1968, and 1969 were claimed as expenses on his returns when filed for such years even though he did not ob­tain the consent of the Commissioner to deduct such expenses.

In 1968 the taxpayer filed a timely claim on Form 843 claiming the benefits of section 174(a) of the Code and section 1.174-3 of the Income Tax Regulations with respect to research and experimental expenses incurred in 1964. Subsequently, timely claims were filed for such benefits in 1965 and 1966 with respect to such expenses incurred by him in those years.

The question presented is whether the taxpayer may claim a deduction tinder section 174 of the Code for ex­penses attributable to research and experimental expenses on a timely filed claim when the expense deduction was not claimed on an original return for the first taxable year in which the ex­penses were incurred.

Section 174(a) of the Code pro­vides that a taxpayer may treat re­search or experimental expenditures which are paid or incurred by him dur­ing the taxable year in connection with his trade or business as a deductible expense. This method of deducting such expenditures may be adopted without the consent of the Commis­sioner for the first taxable year for which the expenditures are paid or incurred.

Section 1.174-3(b)(1) of the regu­lations provides that a taxpayer may adopt such method by claiming in his income tax return for the first taxable year in which he pays or incurs research or experimental expenses a deduction for such expenditures. If the taxpayer fails to adopt the method for the first taxable year in which he pays or incurs such expenditures, he cannot do so in subsequent taxable years unless he ob­tains the consent of the Commissioner.

The date on which the cash pay­ments were made to the corporation does not determine when the taxpayer first incurred the research and experi­mental expenses. The payments made in 1967, 1968, and 1969 were repay­ments of funds that the corporation expended on behalf of the taxpayer and were not research and experi­mental expenditures within the mean­ing of section 174 of the Code.

Under these circumstances it is held that the filing of the claim for refund (or an amended return if such were the case) after the due date of the original return does not satisfy the pro­visions of section 174(a) of the Code and the regulations thereunder provid­ing for the adoption of the expense method on the original return for the first year in which the expenditures were made.

Accordingly, the taxpayer in the in­stant case is not entitled to treat the research and experimental expendi­tures as expenses under section 174(a) of the Code, even though he filed timely claims on Form 843 claiming the bene­fits of section 174(a) of the Code with respect to such expenditures.