On March 27, 2018, the Department of the Treasury (Treasury) and the IRS issued final regulations (TD 9832) on the allocation of the research credit to corporations and trades or businesses under common control (controlled groups), the allocation of the railroad track maintenance credit (RTMC), and the election for a reduced research credit under Section 280C, respectively. The final regulations are effective April 2, 2018, and apply to tax years beginning on or after April 2, 2018. For tax years ending before April, 2, 2018 and beginning on or after January 1, 2012, however, the final regulations provide that the temporary regulations described below will still apply.

Background

Treasury and the IRS published Temp. Reg. Sections 1.41-6T, 1.45G-1T, and 1.280C-4T in TD 9717 on April 3, 2015, in the Federal Register (80 FR 18096) and a notice of proposed rulemaking by cross-reference to the temporary regulations in the Federal Register (80 FR 18171). The temporary regulations updated the Section 41 rules in a manner that is consistent with the amendments made to Section 41(f)(1)(A)(ii) and 41(f)(1)(B)(ii) by the American Taxpayer Relief Act of 2012 (ATRA) and also updated Treas. Reg. Sections 1.45-1(f) and 1.280C-4(b)(2) because they were based on the rules of Section 41(f) in effect before the ATRA amendments.

Temp. Reg. Section 1.41-6T provided that all members of a controlled group are treated as a single taxpayer for purposes of computing the research credit for the group (group credit), and the group credit is computed by applying all of the Section 41 computational rules on an aggregate basis. It also provided a method of allocating a group research credit among the members of the controlled group based on each member's proportionate share of the controlled group's aggregate qualified research expenses (QREs).

Similar to Temp. Reg. Section 1.41-6T, Temp. Reg. Section 1.45G-1T provided guidance on determining the amount of the RTMC under Section 45G if a taxpayer is a member of a controlled group. Temp. Reg. Section 1.45G-1T provided a method of allocating the group credit to each member of the controlled group based on a proportionate basis to each group member's share of the aggregate of the qualified railroad track maintenance expenditures (QRTMEs) taken into account for the tax year by such controlled group.

Temp. Reg. Section 1.280C-4T updated an example in Treas. Reg. Section 1.280C-4(b)(2) relating to the 280C(c)(3) election available for a member of a controlled group because the example in the former regulation described the allocation methodology for a controlled group credit under Section 41(f) in effect before the ATRA amendments.

TD 9832 amends Treas. Reg. Sections 1.41-6, 1.45G-1, and 1.280C-4 and removes Temp. Reg. Sections 1.41-6T, 1.45G-1T and 1.280C-4T as of April 2, 2018. One written comment responding to the proposed regulations was received, but the proposed regulations were adopted without change by TD 9832.

Implications

The temporary regulations provided in TD 9717 are obsolete for tax years beginning on or after April 2, 2018 and are replaced by the final regulations provided in TD 9832. Since there were no changes from the temporary regulations in TD 9717 to the final regulations provided in TD 9832, there are no significant implications for taxpayers.

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