Par. 2. In § 1.41-0, the table of contents is amended by: 1. Revising the section heading for § 1.41-6 and the entries for § 1.41-6(i), (i)(1), (i)(2), (i)(3), (i)(4), and (i)(5). 2. Adding a new entry for § 1.41-6(i)(6). 3. Adding a new entry for § 1.41-6(j)(4). The addition reads as follows:
Par. 3. Section 1.41-6 is amended by: 1. Revising the section heading. 2. Revising paragraph (i)(1). 3. Removing paragraph (i)(4). 4. Redesignating paragraphs (i)(2) and (3) as paragraphs (i)(3) and (4), respectively. 5. Adding new paragraph (i)(2). 6. Adding new paragraph (i)(6). 7. Revising the first sentence of paragraph (j)(1). 8. Adding new paragraph (j)(4). The revisions and additions read as follows:
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(i) Transactions between controlled group members.
(1) In general.
(2) Exception for certain amounts received from foreign corporate controlled group members.
(3) In-house research expenses.
(4) Contract research expenses.
(5) Payment for supplies.
(6) Consistency requirement.
(j) * * *
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(4) Intra-group transactions.
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(i) Transactions between controlled group members —(1) In general — Treatment of transactions. Except as otherwise provided in this paragraph, all activities giving rise to amounts included in gross receipts under § 1.41-3(c) (transactions) between members of a controlled group as defined in paragraph (a)(3) of this section (intra-group transactions) are generally disregarded in determining the QREs and gross receipts of a member for purposes of the research credit.
(2) Exception for certain amounts received from foreign corporate controlled group members —(i) In general. Notwithstanding paragraph (i)(1) of this section, gross receipts (within the meaning of § 1.41-3(c)) from an intra-group transaction are taken into account if—
(A) A foreign corporate controlled group member engages in a transaction with a party outside of the group (an external transaction) involving the same or a modified version of tangible or intangible property or a service that was previously the subject of one or more intra-group transactions (an internal transaction); and
(B) The external transaction does not give rise to gross receipts that are effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States.
(ii) Timing of inclusion. The amount described as taken into account in computing gross receipts in paragraph (i)(2)(i) of this section is taken into account in the year a foreign corporate controlled group member engages in the external transaction described in paragraph (i)(2)(i)(B) of this section.
(iii) Multiple intra-group transactions. If there is more than one internal transaction, then only the last internal transaction giving rise to gross receipts (within the meaning of section 1.41-3(c)) is taken into account in the research credit computation pursuant to paragraph (i)(2)(i) of this section.
(iv) Examples. The following examples illustrate the principles of paragraph (i)(2) of this section.
Example 1.
Domestic Controlled Group Member Includes in Gross Receipts Proceeds From Intra-group Sale. D and F are members of the same controlled group. D is a domestic corporation. F is a foreign corporation that is organized under the laws of Country. F does not conduct a trade or business within the United States, Puerto Rico, or any U.S. possession. In Year 1, D sells Product to F for $8x. In Year 2, F sells Product to F's unrelated customer for $10x. Because the Product that F sells outside the group is the same Product that was the subject of an internal transaction (i.e., the sale from D to F), and the $10x that F receives upon sale of Product outside the group is not effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States, the $8x that D receives from F is included in D's gross receipts for purposes of computing the amount of the group credit. The $8x of gross receipts is taken into account in Year 2, the year of the external transaction. See paragraph (i)(2) of this section. The $10x that F receives from F's customer is excluded from gross receipts under section 41(c)(7) because it is not effectively connected with the conduct of a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States.
Example 2.
Domestic Controlled Group Member Includes in Gross Receipts Amounts Received For Intra-group Transfer of License. Assume the same facts as in Example 1, except in Year 1, D licenses intellectual property (license) to F for $8x. F owns similar intellectual property that it plans to license to a customer together with the license it received from D. In Year 2, F licenses its intellectual property and sublicenses D's intellectual property to F's unrelated customer for $20x. Because the intellectual property that F sublicenses outside the group is the same intellectual property that was the subject of an internal transaction (i.e., the license from D to F), and the $20x that F receives for the license and sublicense of intellectual property outside the group is not effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States, the $8x that D receives from F is included in D's gross receipts for purposes of computing the amount of the group credit. The $8x of gross receipts is taken into account in Year 2, the year of the external transaction. See paragraph (i)(2) of this section. The $20x that F receives from F's customer is excluded from gross receipts under section 41(c)(7) because it is not effectively connected with the conduct of a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States.
Example 3.
Domestic Controlled Group Member Includes in Gross Receipts Proceeds From Intra-group Sale Following Multiple Internal Transactions. D, F1, and F2 are members of the same controlled group. D is a domestic corporation. F1 and F2 are foreign corporations that are organized under the laws of Country. F1 and F2 do not conduct a trade or business within the United States, Puerto Rico, or any U.S. possession. In Year 1, D sells Product to F1 for $8x. In Year 2, F1 sells Product to F2 for $9x, and F2 sells Product to F2's unrelated customer for $10x. Both D's sale to F1 and F1's sale to F2 are internal transactions involving Product that precede F2's external transaction involving Product. The $10x that F2 receives upon sale of Product outside the group is not effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States. Accordingly, the group will include gross receipts from an internal transaction in its research credit computation pursuant to paragraph (i)(2)(i) of this section. Because F1's sale of Product to F2 does not produce gross receipts that are effectively connected with the conduct of a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States, those gross receipts are not taken into account even though that sale is the most recent internal transaction preceding the external transaction. See section 41(c)(7) and paragraph (i)(2)(i) of this section. Therefore, D will include $8x of gross receipts in its research credit computation in Year 2, the year of the external transaction, because the transfer from D to F1 is the last internal transaction giving rise to includible gross receipts. See paragraph (i)(2)(iii) of this section.
Example 4.
Foreign Partnership Controlled Group Member Includes in Gross Receipts Proceeds From Intra-group Sale. Assume the same facts as in Example 3, except that F1 is a foreign partnership for federal income tax purposes and is part of the controlled group (within the meaning of § 1.41-6(a)(3)(ii)) that includes D and F2. Both D's sale to F1 and F1's sale to F2 are internal transactions involving Product that precede F2's external transaction involving Product. The $10x that F2 receives upon sale of Product outside the group is not effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States. Accordingly, the group will include gross receipts from an internal transaction in its research credit computation pursuant to paragraph (i)(2)(i) of this section. F1's sale to F2 is the most recent internal transaction preceding the external transaction giving rise to gross receipts (see paragraph (i)(2)(iii)). The gross receipts from F1's sale to F2 are not excluded under section 41(c)(7) and paragraph (i)(2)(i) of this section because F1 is a partnership. Therefore, F1 will include $9x of gross receipts in its research credit computation in Year 2 because the transfer from F1 to F2 is the last internal transaction giving rise to gross receipts. See paragraph (i)(2)(iii) of this section.
Example 5.
Domestic Controlled Group Member Includes in Gross Receipts Proceeds From Intra-group Sale Following Multiple Internal Transactions that Include a Section 721 Exchange.
Assume the same facts as Example 3, except that in an exchange meeting the requirements of section 721(a), F2 transfers Product to PRS, a partnership that is not part of the controlled group within the meaning of § 1.41-6(a)(3)(ii). Both D's sale to F1 and F1's sale to F2 are internal transactions involving Product that precede F2's transfer of Product to PRS. The exchange engaged in by F2 does not give rise to gross receipts that are effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States. Because F1's sale of Product to F2 does not produce gross receipts that are effectively connected with the conduct of a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States, those gross receipts are not taken into account even though that sale is the most recent internal transaction preceding the external transaction. See section 41(c)(7) and paragraph (i)(2)(i) of this section. Therefore, D will include $8x of gross receipts in its research credit computation in Year 2, the year of the external transaction, because the transfer from D to F1 is the last internal transaction giving rise to includible gross receipts. See paragraphs (i)(2)(i) and (i)(2)(iii) of this section.
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(6) Consistency requirement. In computing the research credit for taxable years beginning on or after the date of publication of these regulations as final regulations in the Federal Register , QREs and gross receipts taken into account in computing a taxpayer's fixed-base percentage and a taxpayer's base amount must be determined on a basis consistent with the definition of QREs and gross receipts for the credit year, without regard to the law in effect for the taxable years taken into account in computing the fixed-base percentage or the base amount. This consistency requirement applies even if the period for filing a claim for credit or refund has expired for any taxable year taken into account in computing the fixed-base percentage or the base amount.
(j) Effective/applicability dates —(1) In general. Except as otherwise provided in this paragraph (j), these regulations apply to taxable years ending on or after May 24, 2005.
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(4) Intra-group transactions. Paragraphs (i)(1) and (2) of this section apply to taxable years beginning on or after the date of publication of these regulations as final regulations in the Federal Register .