Par. 2. Section 1.861-8 is amended by: 1. Revising paragraph (e)(3). 2. Revising paragraph (g), Examples (3) through (8). 3. Removing and reserving paragraph (g), Examples (9) through (16) and (23).
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(3) Research and experimental expenditures--(i) Allocation--(A) In general. The methods of allocation and apportionment of research and experimental expenditures set forth in this paragraph (e)(3) recognize that research and experimentation is an inherently speculative activity, that findings may contribute unexpected benefits, and that the gross income derived from successful research and experimentation must bear the cost of unsuccessful research and experimentation. Expenditures for research and experimentation which a taxpayer deducts under section 174 ordinarily shall be considered deductions which are definitely related to all income reasonably connected with the relevant broad product category (or categories) of the taxpayer and therefore allocable to all items of gross income as a class (including income from sales, royalties, and dividends) related to such product category (or categories). For purposes of this allocation, the product category (or categories) which a taxpayer may be considered to have shall be determined in accordance with the provisions of paragraph (e)(3)(i)(B) of this section.
(B) Determination of product categories. Ordinarily, a taxpayer's research and experimental expenditures may be divided between the relevant product categories. Where research and experimentation is conducted with respect to more than one product category, the taxpayer may aggregate the categories for purposes of allocation and apportionment; however, the taxpayer may not subdivide the categories. Where research and experimentation is not clearly identified with any product category (or categories), it will be considered conducted with respect to all the taxpayer's product categories. A taxpayer shall determine the relevant product categories by reference to the three digit classification of the Standard Industrial Classification Manual (SIC code). A copy may be purchased from the Superintendent of Documents, United States Government Printing Office, Washington, DC