Part III. Administrative, Procedural, and Miscellaneous

Allocation of Controlled Group Research Credit

Notice 2013–20

PURPOSE

This notice provides interim guidance relating to the allocation of the credit for increasing research activities (research credit) to corporations and trades or businesses under common control (controlled groups) for purposes of § 41(f)(1)(A)(ii) and § 41(f)(1)(B)(ii) of the Internal Revenue Code, as amended by section 301(c) of the American Taxpayer Relief Act of 2012, P.L. 112–240, H.R. 8 (the Act), for taxable years beginning after December 31, 2011.

BACKGROUND

Under § 41(f)(1) and § 1.41–6(b) of the Income Tax Regulations, all members of a controlled group are treated as a single taxpayer for purposes of computing the research credit. Section 1.41–6(b) provides that the group credit is computed by applying all of the § 41 computational rules on an aggregate basis.

Former § 41(f)(1)(A)(ii) and former § 41(f)(1)(B)(ii) provided that the research credit allowable to a controlled group member shall be its proportionate shares of the qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums (collectively, “QREs”) giving rise to the credit. Section 1.41–6(c)(1)(i) requires a controlled group to allocate the group credit in proportion to each member’s stand-alone entity credit, as defined in § 1.41–6(c)(2), in cases in which the group credit does not exceed the sum of the stand-alone entity credits of all of the members. If the group credit does exceed this sum, then the excess of the group credit over the sum of the stand-alone entity credits of all of the members is allocated in proportion to the QREs of the members of the controlled group. See § 1.41–6(c)(1)(ii).

Section 301(c) of the Act amended § 41(f)(1)(A)(ii) and § 41(f)(1)(B)(ii) by requiring the allocation of research

credits to each controlled group member “on a proportionate basis to its share of the aggregate of the qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums, taken into account by such controlled group for purposes of this section.’’ Thus, the amendments to § 41(f)(1)(A)(ii) and § 41(f)(1)(B)(ii) provide that the group credit is allocated to group members based on a member’s share of QREs, without regard to whether the member would have a stand-alone entity credit or what the amount of any such credit would be. Section 301(c) of the Act applies to taxable years beginning after December 31, 2011.

DISCUSSION

For taxable years beginning before January 1, 2012, the provisions of § 1.41–6 continue to apply in their entirety. For taxable years beginning after December 31, 2011, the provisions of § 1.41–6 continue to apply, subject to the following exceptions. First, § 1.41–6(c) shall not apply. In addition, references to § 1.41–6(c) regarding the allocation of the group credit, references to the stand-alone entity credit described in § 1.41–6(c)(2), and the examples in § 1.41–6(e) involving the allocation of the group credit among and computation of the stand-alone entity credits for controlled group members, shall not apply.

In lieu of § 1.41–6(c), controlled groups must allocate the group credit to each member of the controlled group in proportion to each member’s contribution of QREs to the controlled group’s total QREs for the taxable year. Such allocation methodology must also be applied to determine the portion of a group credit that is allocated to, and within, a consolidated group that is a member of a controlled group under § 1.41–6(d)(1) and (3). For example, X, a controlled group consisting of 3 members, B, C, and D, has a $100 credit for the taxable year. X’s total QREs for the taxable year is $1000. B paid $200 of the QREs, C paid $300 of the QREs, and D paid $500 of the QREs during the taxable year. Based on the proportion of each member’s contribution of QREs to the controlled group’s total QREs for the

taxable year, B is allocated a $20 credit, C is allocated a $30 credit, and D is allocated a $50 credit.

The Treasury Department and IRS intend to revise § 1.41–6 and the examples demonstrating the allocation of the controlled group credit consistent with the allocation methodology described in this notice.

EFFECT ON OTHER CODE SECTIONS

Rules similar to the rules under § 41(f)(1) apply for purposes of § 45C, Clinical Testing Expenses for Certain Drugs for Rare Diseases or Conditions; § 45G, Railroad Track Maintenance Credit; § 45O, Agricultural Chemicals Security Credit; and § 280C, Certain Expenses for Which Credits are Allowable. Therefore, an allocation method similar to the method required under this notice must be used for purposes of allocating credits to controlled group members under those Code sections. Specifically, see §§ 45C(d)(3), 45G(e)(2), 45O(g), and 280C(b)(3).

EFFECTIVE DATE

This notice is effective for taxable years beginning after December 31, 2011.

REQUEST FOR COMMENTS

The Treasury Department and IRS invite taxpayers to submit written comments on issues relating to this notice. Send comments to: CC:PA:LPD:RU (Notice 2013–20), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:RU (Notice 2013–20), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Submissions may also be sent electronically via the Internet to the following e-mail address: Notice.comments@irscounsel.treas.gov . Include the notice number (Notice 2013–20) in the subject line. Comments must be received on or before June 6, 2013. All comments will be available for public inspection and copying.

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has determined that the postponement of one or more deadlines applies is referred to as a covered disaster area.

AFFECTED TAXPAYERS FOR WHICH THE SECTION 165(i) DEADLINE IS POSTPONED

Under the authority of § 7508A and §§ 301.7508A–1(c)(1)(vii) and 301.7508A–1(d)(1)(ix), the IRS has determined that the areas that FEMA has determined to be eligible for Public Assistance or Public Assistance and Individual Assistance pursuant to the major disaster and emergency declarations issued in response to Hurricane Sandy are covered disaster areas. A list of those areas is available at the Federal Emergency Management Agency (FEMA) website at www.fema.gov/disaster .

Under the authority of § 301.7508A–1(d)(1)(ix), a taxpayer is an affected taxpayer to which the postponement of the deadline for making the § 165(i) election applies if: (1) the taxpayer sustained a loss attributable to Hurricane Sandy; (2) the loss occurred in a covered disaster area for Hurricane Sandy (regardless of whether the taxpayer’s principal residence or principal place of business is in one of the covered disaster areas); and (3) the deadline for the taxpayer to make a § 165(i) election for that loss, but for this notice, would be before October 15, 2013.

Affected taxpayers for purposes of this notice are not affected taxpayers for purposes of other relief provided by the IRS unless the taxpayer separately qualifies as an affected taxpayer under other guidance issued by the IRS.

GRANT OF RELIEF

Under the authority of § 7508A, the IRS grants affected taxpayers, as defined above, a postponement to October 15, 2013, to make an election under § 165(i) for losses attributable to Hurricane Sandy.

To assist the IRS in identifying affected taxpayers to ensure that they receive this postponement of the deadline to make the § 165(i) election, affected taxpayers should include a reference to this notice, Notice 2013–21, with their return, amended return, or refund claim on which they are making a postponed § 165(i) election pursuant to this notice. The return or

DRAFTING INFORMATION

The principal author of this notice is David Selig, Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, please contact Mr. Selig at (202) 622–3040 (not a toll-free call).

Postponement of Deadline for Making an Election to Deduct for the Preceding Taxable Year Losses Attributable to Hurricane Sandy

Notice 2013–21

PURPOSE

This notice postpones until October 15, 2013, the deadline to make an election under § 165(i) of the Internal Revenue Code to deduct in the preceding taxable year losses attributable to Hurricane Sandy sustained in a federally declared disaster area in Connecticut, Delaware, District of Columbia, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Virginia, or West Virginia resulting from Hurricane Sandy. This postponement is granted under § 7508A.

BACKGROUND

In late October 2012, Hurricane Sandy struck the east coast causing severe damage in a number of states. The President of the United States issued major disaster and emergency declarations under the authority of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. §§ 5121–5206 (Stafford Act), for certain areas in Connecticut, Delaware, District of Columbia, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Virginia, and West Virginia. The Federal Emergency Management Agency (FEMA) determined certain areas within those states and the District of Columbia to be eligible for Public Assistance or Public Assistance and Individual Assistance under the Stafford Act.

Section 165(i) provides that if a taxpayer sustains a loss attributable to a

federally declared disaster occurring in a disaster area, the taxpayer may elect to deduct that loss on the taxpayer’s return for the taxable year immediately preceding the taxable year in which the disaster occurred. For purposes of § 165(i), a federally declared disaster is a disaster determined by the President to warrant assistance by the Federal Government under the Stafford Act (including a disaster for which the President issues a major disaster declaration or an emergency declaration), and a disaster area is the area so determined to be eligible for such assistance. See § 165(h)(3)(C) and 42 U.S.C. § 5122.

Section 1.165–11(e) of the Income Tax Regulations requires a taxpayer to make the § 165(i) election by filing a return, an amended return, or a refund claim on or before the later of: (1) the due date of the taxpayer’s income tax return (determined without regard to any extension of time for filing the return) for the taxable year in which the disaster actually occurred; or (2) the due date of the taxpayer’s income tax return (determined with regard to any extension of time for filing the return) for the immediately preceding taxable year. Section 1.165–11(e) provides that the return or claim should specify the date or dates of the disaster that gave rise to the loss, and the city, town, county, and State in which the property that was damaged or destroyed was located at the time of the disaster. The election is irrevocable 90 days after the taxpayer makes the election.

Section 7508A provides the Secretary of the Treasury with authority to postpone the time for performing certain acts under the internal revenue laws for up to one year for a taxpayer affected by a federally declared disaster. Section 301.7508A–1(c)(1) of the Regulations on Procedure and Administration lists several specific acts performed by taxpayers for which § 7508A relief may apply, and § 301.7508A–1(c)(1)(vii) authorizes the IRS and Treasury Department to specify additional acts. Section 301.7508A–1(d)(1) describes several types of affected taxpayers eligible for relief under § 7508A. Section 301.7508A–1(d)(1)(ix) authorizes the IRS to determine that any other person is affected by a federally declared disaster and therefore eligible for relief. Under § 301.7508A–1(d)(2), the area of a federally declared disaster for which the IRS

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the original 2013–2014 Guidance Priority List. The Treasury Department and the Service may update the 2013–2014 Guidance Priority List periodically to reflect additional guidance that the Treasury Department and the Service intend to publish during the plan year. The periodic updates allow the Treasury Department and the Service to respond to the need for additional guidance that may arise during the plan year. Recommendations for guidance received after May 1, 2013, will be reviewed for inclusion in the next periodic update.

Taxpayers are not required to submit recommendations for guidance in any particular format. Taxpayers should, however, briefly describe the recommended guidance and explain the need for the guidance. In addition, taxpayers may include an analysis of how the issue should be resolved. It would be helpful if taxpayers suggesting more than one guidance project prioritize the projects by order of importance. If a large number of projects are being suggested, it also would be helpful if the projects were grouped in terms of high, medium, or low priority.

Taxpayers should send written comments to:

Internal Revenue Service Attn: CC:PA:LPD:PR

(Notice 2013–22) Room 5203 P. O. Box 7604 Ben Franklin Station Washington, DC 20044

or hand deliver comments Monday through Friday between the hours of 8 a.m. and 4 p.m. to:

Courier’s Desk Internal Revenue Service Attn: CC:PA:LPD:PR

(Notice 2013–22) 1111 Constitution Avenue, N.W. Washington, DC 20224

Alternatively, taxpayers may submit comments electronically via e-mail to the following address: Notice.Comments@irscounsel.treas.gov . Taxpayers should include “Notice 2013–22” in the subject line. All comments submitted by the public will be available for public inspection and copying in their entirety.

claim should also include the other information requested in § 1.165–11(e).

This notice is limited to making an election under § 165(i) and does not affect the application of any other section of the Code or the regulations.

DRAFTING INFORMATION

The principal author of this notice is Grace H. Kim of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this notice, contact Ms. Kim on (202) 622–7900 (not a toll-free call).

Public Comment Invited on Recommendations for 2013–2014 Guidance Priority List

Notice 2013–22

The Department of Treasury and Internal Revenue Service (Service) invite public comment on recommendations for items that should be included on the 2013–2014 Guidance Priority List. The Treasury Department’s Office of Tax Policy and the Service use the Guidance Priority List each year to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. The 2013–2014 Guidance Priority List will establish the guidance that the Treasury Department and the Service intend to prioritize for purposes of allocating resources from July 1, 2013, through June 30, 2014. The Treasury Department and the Service recognize the importance of public input to formulate a Guidance Priority List that focuses resources on guidance items that are most important to taxpayers and tax administration. Published guidance plays an important role in increasing voluntary compliance by helping to clarify ambiguous areas of the tax law.

As is the case whenever significant legislation is enacted, the Treasury Department and the Service have continued to dedicate substantial resources during the current plan year to published guidance projects necessary to implement the provisions of the multitude of tax acts that have been enacted over the past several years

including, but not limited to, the American Recovery and Reinvestment Tax Act of 2009, Pub. L. No. 111–5, 123 Stat. 115, which was enacted on February 17, 2009; the Hiring Incentives to Restore Employment Act, Pub. L. No. 111–147, 124 Stat. 71, which was enacted on March 18, 2010; the Patient Protection and Affordable Care Act, Pub. L. No. 111–148, 124 Stat. 119, which was enacted on March 23, 2010; the Health Care and Education Reconciliation Act, Pub. L. No. 111–152, 124 Stat. 1029, which was enacted on March 30, 2010; the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111–312, 124 Stat. 3296, which was enacted on December 17, 2010; and the American Taxpayer Relief Act of 2012, Pub. L. No. 112–240, which was enacted on January 2, 2013. The Treasury Department and the Service will continue to evaluate the priority of each guidance project in light of the above-mentioned tax legislation and other developments occurring during the 2013–2014 plan year. In reviewing recommendations and selecting projects for inclusion on the 2013–2014 Guidance Priority List, the Treasury Department and the Service will consider the following:

1. Whether the recommended guidance resolves significant issues relevant to many taxpayers;
2. Whether the recommended guidance promotes sound tax administration;
3. Whether the recommended guidance can be drafted in a manner that will enable taxpayers to easily understand and apply the guidance;
4. Whether the recommended guidance involves regulations that are outmoded, ineffective, insufficient, or excessively burdensome and that should be modified, streamlined, expanded, or repealed;
5. Whether the Service can administer the recommended guidance on a uniform basis; and
6. Whether the recommended guidance reduces controversy and lessens the burden on taxpayers or the Service.

Taxpayers may submit recommendations for guidance at any time during the year. Please submit recommendations by May 1, 2013, for possible inclusion on

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For further information regarding this notice, contact Henry Schneiderman of

the Office of Associate Chief Counsel (Procedure and Administration) at (202) 622–3400 (not a toll-free call).

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