2003 R&E tax credit regulations: opportunities and pitfalls.

During 2003, the U.S. Department of the Treasury and Internal Revenue Service issued proposed and final regulations affecting the manner in which taxpayers will calculate and document their research and experimentation (R&E) tax credit claims. These regulations create opportunities and pitfalls for taxpayers. Following a general explanation of section 41 of the Internal Revenue Code, (1) this article addresses the major changes made or proposed by the regulations, together with a description of the opportunities and pitfalls.

On July 28, 2003, new proposed regulations (the "2003 Proposed Regulations") were released addressing the allocation method to be utilized by members of a controlled group (2) in determining each member's R&E tax credit. (3) The proposed regulations primarily address Treas. Reg. [section] 1.41-6 and replace proposed regulations that were released in 2000. (4)

On December 23, 2003, the IRS released final regulations ("T.D. 9104" or the "2003 Final Regulations") (5) on the definition of qualified research under section 41(d). At that same time, the Treasury and IRS published an advance notice of proposed rulemaking (6) seeking comments on the definition of internal-use software under section 41(d)(4)(E). T.D. 9104 did not contain final rules relating to such software.

General Explanation of Section 41

Section 41 of the Code provides a non-refundable tax credit for incremental research expenses paid or incurred in a trade or business. The research credit is the sum of (1) 20 percent of the amount by which the taxpayer's qualified research expenses ("QREs") for the current year exceed the base amount (7) for that year, and (2) 20 percent of university basic research payments. (8) The base amount is computed under section 41(c) by multiplying the taxpayer's fixed-base percentage by the taxpayer's average annual gross receipts for the four proceeding tax years, provided that in no event shall the base amount be less than 50 percent of the QREs for the research credit tax year. (9) A taxpayer's fixed-based percentage is the percentage that the aggregate QREs for the taxable years beginning after December 31, 1983, and before January 1, 1989, is of the aggregate annual gross receipts for such taxable years. (10) A start-up company, (12) however, is assigned an initial fixed-based percentage of 3 percent for its first five taxable years (with adjustments thereafter). The fixed-base percentage is subject to a maximum ratio of 16 percent. (11) Once a taxpayer determines its total QREs and its base amount, it multiples the incremental QREs times 20 percent to determine its credit. Section 280(C)(c) reduces the actual benefit the taxpayer receives by requiring the taxpayer to reduce its expenses by the amount of the credit or by electing a reduced credit of 13 percent (as opposed to 20 percent). Assuming a 35-percent tax rate, the net effect of the calculations in section 280(C) provides a taxpayer with a reduced benefit that should not exceed 6 1/2 percent of the QREs incurred during the tax year. (See Exhibit 1.)

   Avoid the Pitfall ... and Seek Out
   the Possible Opportunity. Taxpayers
   should determine whether the alternative
   incremental research credit (AIRC) provided
   for in section 41(c)(4)
   will provide a larger benefit
   than the general method.
   Often, the AIRC provides
   a greater benefit, especially
   in situations where the
   taxpayer has a high fixed
   base amount, decreasing
   research spending, or
   where sales growth significantly
   outpaces research
   spending. The election to
   use the AIRC method, however, applies to
   succeeding years and may not be revoked
   without the consent of the IRS. (13)

New Regulations on Allocation Method for Controlled Groups

Section 41(f) addresses special calculation and allocation issues when taxpayers are members of a controlled group of corporations or part of trades or businesses under common control. Section 41(f)(1) provides that, in determining the amount of R&E tax credit, "(i) all members of the same controlled group of corporations shall be treated as a single taxpayer, and (ii) the credit (if any) allowable by this section to each such member shall be its proportionate shares of the qualified research expenses and basic research payments giving rise to the credit." (14) A similar rule is provided for a group of trades or businesses under common control. (15) Depending upon the ownership percentages and the types of entities involved, a controlled group may include entities that are not members of the same consolidated tax return group and there may be multiple consolidated tax return groups.

The 2003 Proposed Regulations follow the computational rules in the 2000 Proposed Regulations in that the rules are applied on an aggregate basis to determine the group credit. In other words, the group credit is computed by first combining all the controlled group members' QREs and base amount information and applying the computational rules on an aggregate basis as if a single taxpayer. (16) The 2003 regulations, however, differ from their 2000 counterpart in the manner in which the group credit is allocated. Under the 2000 Proposed Regulations, in allocating the group credit, an individual member's base amount was determined by applying the controlled group's fixed base percentage to the member's average annual gross receipts for the four taxable years preceding the credit year. The group credit was allocated to those members having an excess amount of QREs on the basis of the ratio that its increase in QREs over its base amount bore to the aggregate increases in QREs over the base amount of all members of the controlled group. (17)

In contrast, the 2003 Proposed Regulations allocate the group credit by first computing each member's stand-alone entity credit and then multiplying the group credit by the ratio that the member's stand-alone entity credit bears to the sum of the stand-alone entity credits of all the member's of the group. (18) (See Exhibit 2.) The stand-alone entity credit is defined as the R&E tax credit (if any) that would be allowable to a member of a group if the credit were computed without regard to section 41(f) (i.e., calculating and using the base amount for the member based on its sole base period and average annual gross receipts), using the computation method used to compute the group credit. Therefore, a member generating QREs but that is not entitled to claim the credit on a stand-alone entity basis will not have any of the group credit allocated to it. Conversely, the group credit is only allocated to those members that would have been able to claim the credit on a stand-alone entity basis. While the 2003 Proposed Regulations set forth examples that neatly allocate the R&E tax credit on a basis similar to the amount of QREs incurred by each entity, such a pretty result will not always occur (such as in the situation involving a member generating a significant amount of QRE's but which is not entitled to claim a credit on a stand-alone entity basis).

The 2003 Proposed Regulations also addressed housekeeping issues such as members of a controlled group having different tax accounting periods and the effective date of the proposed regulations. With respect to members with different tax periods, the 2003 Prop. Reg. [section] 1.41-6(f) slightly modifies the 2000 rules and adds the following example:

   In computing the group credit for a group
   whose members have different taxable
   years, a member generally should treat
   the taxable year of another member that
   ends with or within the credit year of the
   computing member as the credit year of
   that other member. For example, M, N,
   and O are members of a controlled group of
   corporations. M and N file a calendar year
   consolidated return. O files a separate return
   using a fiscal year ending June 30.
   For purposes of computing the group credit
   at the end of M's and N's (the computing
   members') calendar year on December 31,
   O's fiscal year ending June 30, which ends
   within the M's and N's calendar year, is
   treated as O's credit year. (19)

The 2003 Proposed Regulations will not be effective until they are promulgated as final regulations in the Federal Register. Therefore, a taxpayer may use any reasonable method of computing and allocating the credit before final regulations are issued. Interestingly, the 2003 Proposed Regulations state that they will have retroactive application to tax years ending on or after December 29, 1999, if the members of a controlled group, as a whole, claimed more than 100 percent of the amount that would be allowable under the 2003 Proposed Regulations. (20)

   Avoid the Pitfall. Controlled group
   member's with different taxable years
   and using inconsistent methods of allocation
   shall be deemed to have, as a
   whole, claimed more than 100 percent
   of the amount that would be allowable
   under the 2003 Proposed Regulations.
   Therefore, the taxpayer will be subject to
   retroactive application.

   Opportunity. Taxpayers should test different
   reasonable methods of allocating
   the R&E tax credit before assuming that
   the method set forth in the 2003 Proposed
   Regulations is the best approach. As long
   as all members of the controlled group,
   especially those that have members with
   different tax periods, use a consistent and
   reasonable method to calculate and allocate
   the R&E tax credit, the opportunity
   exists to optimize the allocation of the
   R&E tax credit.

   Another Pitfall and Opportunity. Tax-sharing
   agreements should be reviewed to
   determine whether the computation and
   allocation issues are addressed for the
   controlled group. Be aware that conflicts
   can arise between members of the same
   controlled group on whether the alternative
   incremental credit should be elected,
   which computation method should be utilized,
   and which allocation method should
   be utilized. Also, be aware that if there
   are multiple consolidated return groups
   within the controlled group, there may be
   an incentive to incur QREs in certain entities
   to maximize the amount of R&E tax
   credit allocated to that consolidate group.

Final Regulations on the Definition of Qualified Research

Section 41(d) addresses the definition of qualified research through the use of a four-part test. "Qualified Research" is research (1) with respect to which expenditures may be treated as expenses under section 174, (2) which is undertaken for the purpose of discovering information that is technological in nature, (3) the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, and (4) substantially all of the activities of which constitute elements of a process of experimentation that relates to a qualified purpose. (21) The 2003 Final Regulations amend Treas. Reg. [section] 1.41-4, which addresses the definition of qualified research. Here are some of the major points that taxpayers need to take away from the 2003 Final Regulations: (22)

* The process-of-experimentation test is significantly modified;

* The "substantially all" test is explained;

* The "shrinking back" rule is not to be used to exclude QREs;

* The broad definition of "gross receipts" set forth in T.D. 8930 (final regulations issued in 2000) remains unmodified;

* There is no new record keeping requirements;

* The patent safe harbor remains;

* The limitations on qualified research after commercial production and for adapting or duplicating are addressed further;

* The effective date set forth for the 2003 Final Regulations allows a taxpayer some planning opportunities; and

* The internal-use software regulations are not finalized.

A. Process of Experimentation

The Tax Reform Act of 1986 amended the definition of qualified research by adding the process-of-experimentation requirement. The 2001 Proposed Regulations issued following the suspension of T.D. 8930 (which has been promulgated in 2000) added new language to Treas. Reg. [section] 1.41-4(a)(5), including the requirement that the capability, method, or design not be readily discernable and applicable as of the beginning of the taxpayer's research. Those regulations also listed three factors indicating a taxpayer has engaged in a process of experimentation:

(A) the taxpayer tests and analyzes numerous alternative hypotheses to develop a new or improved business component;

(B) the taxpayer engages in extensive, comprehensive, intricate, or complex scientific laboratory testing; or

(C) the taxpayer evaluates numerous or complex specifications related to the function, performance, reliability or quality of a new or improved business component. (23)

The overall effect of the new elements in the 2001 Proposed Regulations was to make it more difficult for taxpayers to satisfy the process-of-experimentation requirement. The 2003 Final Regulations move in the opposite direction, eliminating the "readily discernable and applicable" standard and discarding the three factors previously identified as indicative of a process of experimentation.

Under the 2003 Final Regulations, the taxpayer must identify uncertainties regarding the development or improvement of a business component, such as uncertainty concerning the capability or the method of achieving a result, or the appropriate design of that result. A process of experimentation must fundamentally rely on the principles of the hard sciences (physics, biology, engineering, or computer science). In addition, the taxpayer must identify and conduct a process of evaluating alternatives such as through modeling, simulation, or a systematic trial-and-error methodology. The process of experimentation must be an evaluative process and generally be capable of evaluating more than one alternative, although the evaluation of more than a single alternative is not required to satisfy the process-of-experimentation requirement. (24) Just as with the 2001 proposed regulations, the 2003 Final Regulations contain the qualified purpose requirement that a process of experimentation must relate to a new or improved function, performance, reliability, or quality of the business component. (25)

   Avoid the Pitfall. Taxpayers should revisit
   the process and standards they have
   in place to document the process of experimentation.
   The new factors set forth in
   the 2003 Final Regulations may create an
   opportunity to identify additional QREs.

B. Clarification of "Substantially All" Requirement

One additional requirement under the process-of-experimentation test is that substantially all of the activities must constitute elements of the process of experimentation related to a qualified purpose. (26) The substantially all requirement is satisfied if 80 percent or more of a taxpayers research activities constitute elements of a process of experimentation related to a new or improved function, performance, reliability, or quality. Additional benefit is available to a taxpayer with respect to the remaining 20 percent or less of activities that relate to style, taste, cosmetic, or seasonal design factors and are not otherwise disallowed activities (such as research after commercial production, duplication of an existing business component, foreign research, funded research, research in the social sciences, arts, or humanities, etc.). As explained in Example 4 of Treas. Reg. [section] 1.41-4(a)(8), once the taxpayer establishes that substantially all of the activities constitute elements of a process of experimentation for a qualified purpose, the taxpayer may also treat as qualified research those activities related to style, taste, cosmetic, or seasonal design factors.

   Opportunity. Taxpayers should reevaluate
   their application of the substantially
   all requirement because, to the extent they
   have been excluding the 20 percent or less
   of activities that are considered in applying
   the substantially all test, there may
   be an opportunity to increase the amount
   of QREs for items related to style, taste,
   cosmetic, or seasonal design factors.

C. Shrinking-Back Test Application

The requirements for qualified research must be applied separately to each business component (27) being developed. The "shrinking-back" rule states that if the qualified research requirements are not met at the level of the discrete business component, then the qualified research requirements are applied at the most significant subset of elements of the business component. This shrinking-back of the business component is to continue until either a subset of elements of the business component that satisfies the requirements is reached, or the most basic components of the business component is reached and such components do not satisfy the requirements for qualified research. The 2003 Final Regulations modify the shrinking-back rules in Treas. Reg. [section] 1A1-4(b)(2) by removing the sentence that stated "if the requirements for credit eligibility are met at the first level, then some or all of the taxpayer's qualified research expenses are eligible for the credit." (28) This revision was made to clarify that the shrinking-back test was not to be applied as a reason to exclude research activities from being eligible for the credit. (29)

   Avoid the Pitfall. Taxpayers should
   revisit their process and standards being
   utilized to determine qualified research
   expenses under the shrinking-back test.

D. Gross Receipts

T.D. 8930 introduced a broad definition of gross receipts. The only explanation of gross receipts provided in the Code states that gross receipts for any taxable year should be reduced by returns and allowances made during the taxable year, and, with respect to foreign corporations, that a taxpayer should only take into account 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. (30) The 2003 Final Regulations retain T.D. 8930's broad definition of a gross receipts, which includes all sources of income (not merely sales income) with very limited exceptions. This broad definition of gross receipts affects two aspects of the base amount calculation. First, it affects the gross receipts that are considered in determining the base percentage (the 1984 to 1988 tax years if the company is not a start-up company) and it affects the calculation of the prior four-year average gross receipts.

   Avoid the Pitfall. The consistency rule
   in section 41(c)(5) and Treas. Reg. [section] 1.413(d)
   requires a taxpayer to calculate gross
   receipts and QREs in the base period in a
   manner consistent with the current credit
   year. Taxpayers should locate and retain
   the necessary records so that they are
   capable of determining the appropriate
   amounts to be put on the return.

   Opportunity. Depending on the facts,
   the gross receipts rule may reduce a
   company's base amount and entitle it to a
   larger credit. Of course, it could create the
   opposite effect. Understandably, it may be
   difficult or impossible for many taxpayers
   to reconstruct gross receipt amounts for
   their base period.

E. Recordkeeping

The 2003 Final Regulations followed the requirement in the 2001 Proposed Regulations that a taxpayer only needs to meet the documentation requirements of section 6001 of the Code. In contrast, T.D. 8930 required taxpayers to prepare and retain written documentation before or during the early stages of a research project. Under the 2000 Proposed Regulations, the documentation had to describe the principle questions to be answered in the information being sought to obtain that would exceed, expand, or refine the common knowledge of skilled professionals in the fields being studied. (31)

Even though the special documentation requirement is not contained in the 2003 Final Regulations, audit experience reveals that taxpayers are being asked by agents to provide documentation highlighting the principle technical questions encountered in the development process. Accordingly, taxpayers should not rely on general project descriptions that have more of a focus toward determining the qualifying percentage of qualified activities.

   Opportunity. Taxpayers may save significant
   time in calculating their credit each
   year if they build a process that documents
   credit eligibility factors at the outset of
   a research project. Taxpayers can make
   pre-project documentation a part of the
   project approval process by making the
   documentation a requirement for assigning
   a job cost number.

   Opportunity. The IRS recently announced
   in Notice 2004-11 a pilot program
   for LMSB taxpayers to satisfy section
   6001's record-keeping requirements for
   claiming research credit by entering a
   research credit recordkeeping agreement
   with the IRS. Applications must be made
   by May 10, 2004.

   Avoid the Pitfall. IRS agents continue to
   request documentation that supports the
   core elements of qualified research (uncertainty,
   a process of experimentation,
   technological in nature, and new or improved
   functionality). Although this type
   of documentation is not required to have
   been produced at the outset of a project,
   taxpayers should seek such documentation
   in documenting their R&E tax credit
   claim. Agents do not want to see documents
   that merely arrive at a qualifying
   percentage, so taxpayers should capture
   information related to technical questions
   encountered. A short explanation addressing
   each of the elements of qualified research
   will typically not suffice. In such
   an instance, a taxpayer should request
   that its tax professionals incorporate by
   reference the documentation related to
   experimentation that is generated by the
   taxpayer's scientists and engineers.

F. Discovery Test and Patent Safe Harbor

T.D. 8930 and the courts have demandingly applied the "discovery test." This discovery test requires that research be "undertaken to obtain knowledge that exceeds, expands, or refines the common knowledge of skilled professionals in a particular field of science or engineering." (32) The 2001 Proposed Regulations removed the requirement of exceeding, expanding, or refining the common knowledge of skilled professionals in a particular field of science or engineering. Following the 2001 rules, the 2003 Final Regulations restate the discovery of technological information requirement as research intended to eliminate uncertainty concerning the development or improvement of a business component. "Uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving the business component, or the appropriate design of the business component." (33) Moreover, the 2003 Final Regulations state that a taxpayer may employ existing technologies and may rely on existing principles to satisfy the technological in nature requirement. (34)

The 2003 Final Regulations retained the patent safe harbor contained in T.D. 8930. In other words, the issuance of certain patents is conclusive evidence that a taxpayer has discovered information that is technological in nature that is intended to eliminate uncertainty concerning the development or improvement of a business component, but the issuance of a patent is not a pre-requisite to credit availability. (35)

   Avoid the Pitfall. Taxpayer should not
   assume that a patent proves they have
   met all the requirements of credit eligibility.
   For example, the taxpayer must
   still prove it has conducted a process of
   experimentation and that the activity is
   not otherwise disqualified.

   Opportunity. Taxpayers should run a
   patent search on their company. Not
   only will the taxpayer uncover information
   that will assist in documenting the
   requirements of qualified research, they
   may uncover other product or process development
   activities that qualify for the
   R&E tax credit.

G. Exclusions for Research after Commercial Production, Adaptation, and Duplication

The preamble to the 2003 Final Regulations addresses the exclusions for research after commercial production, adaptation of existing business components, and duplication of existing business components, (36) contending that the three exclusions do not cover otherwise qualified research activities. In other words, the Treasury and IRS believe that section 41(d)(4) will not apply to those three types of activities when those activities otherwise constitute qualified research under section 41(d). The preamble explains this concept a little further by addressing clinical testing of pharmaceutical products, specifically stating that Treas. Reg [section] 1.41-4(c)(2)(iv) does not set forth a rule of exclusion, and that the research after commercial-production, adaptation, and duplication exclusions do not operate to exclude clinical trials and other research activities that otherwise satisfy the requirements for qualified research. (37) Treas. Reg. [section] 1.41-4(c)(2)(iv) states that testing prior to commercial production in the United States is not treated as after commercial production even if the product is available in other countries, and also states that when testing is after FDA approval, activities can still be qualified if they are being performed to establish new functional uses which must be approved by the FDA.

   Avoid the Pitfall. Taxpayers performing
   pharmaceutical research should not
   assume that Phase 4 clinical trials do not
   qualify. If they relate to new functional
   uses, even if ultimate FDA approval is
   not sought, the activities should not be
   excluded by the after commercial production
   provision.

   Opportunity. Taxpayers performing
   pharmaceutical research should inquire
   internally with appropriate personnel
   knowledgeable of the Phase 4 and other
   clinical trial activities to ensure they capture
   all QREs.

The illustrations in Treas. Reg. [section] 1.41-4(c)(10) clarify the discussion in the preamble.

H. Effective Date Issues

The 2003 Final Regulations state that Treas, Reg. [section] 1.41-4 is applicable for taxable years ending on or after December 31, 2003, (38) but the preamble states that the IRS will not challenge return positions for prior tax years that are consistent with T.D. 9104. (39) Taxpayers therefore have the option of utilizing a definition of qualified research set forth in the prior Proposed or Final Regulations as best suit their needs in prior tax periods.

   Opportunity. For tax years ending
   prior to December 31, 2003, taxpayers
   should consider the prior Proposed and
   Final Regulations available to be applied
   to ensure the most favorable position is
   documented and applied.

I. Internal Use Software Rules Not Finalized

T.D. 9104 does not contain final rules for research respecting internal use software; (40) rather, on the same date the 2003 Final Regulations were released, an advance notice of proposed rule making (ANPRM) (41) was issued inviting comments on the rules and standards relating to internal use software under section 41(d)(4)(E). The IRS stated in the ANPRM that the final IUS regulations will be effective for taxable years beginning after December 31, 1985. It also stated that taxpayers may continue to rely on the IUS rules in the 2001 Proposed Regulations or, alternatively, on the provisions relating to IUS contained in 2000 Final Regulations (T.D. 8930). The caveat is that if taxpayers rely on T.D. 8930, they must also apply the restrictive discovery test set forth in those regulations.

The requirement that the election to use T.D. 8930 mandates the application of the more stringent discovery test is interesting. Before the issuance of the ANPRN, there had been debate between taxpayers and the IRS about taxpayer's utilizing the IUS rules in T.D. 8930 while using the less restrictive discovery test set forth in the 2001 Proposed Regulations. This debate arose because the effective date discussion in the preamble to the 2001 Proposed Regulations allowed a taxpayer to continue relying on the rules of T.D. 8930 in determining the qualification of its IUS activities, whereas a separate section in the preamble allows the taxpayer to follow the Proposed Regulations in qualifying its activities.

   Opportunity. This opportunity to utilize
   T.D. 8930 and the 2001 Proposed Regulations
   with respect to IUS research activities
   may be helpful to taxpayers currently
   under audit for prior years.

Conclusion

The developments discussed in this article should prompt taxpayers to review their current and past policies to assess whether the regulations create unintended results or potential opportunities. In certain cases, the proposed regulations regarding the allocation method can and do shift the R&E credit to particular corporations in a controlled group and, depending on the specific tax attributes, utilizing the proposed regulations may give a better result than the previous method. With respect to the final regulations, there is an opportunity to include certain projects that may have been excluded in the past. A taxpayer should review the past and assess whether the net overall effect is a positive increment to the credit and its utilization.

EXHIBIT 1

QRE's Claimed                                                  $100.00
  Fixed Base Amount                                   $43.00
  Minimum Base Amount        (50% of QRE's claimed)   $50.00
Base Amount Utilized                                            $50.00

Incremental QRE's                                               $50.00

Gross Credit Utilizing 20%                                      $10.00

Net Credit Benefit (using 13% under [section]                    $6.50
280(C)(c)(3) or assuming a 35% tax rate and
disallowing expenses equal to the amount of the
credit pursuant to [section] 280(C)(c)(1)

EXHIBIT 2

Group Credit x   Member's Stand-alone entity credit/
                 Sum of all the members' stand-alone entity credits

(1) Unless otherwise stated, hereinafter, all section or "[section]" references are to the Internal Revenue Code of 1986, as amended, or to related Treasury Regulations.

(2) I.R.C. [section] 41(f) addresses a controlled group of corporations and trades or businesses under common control, each of which are referred to as a "controlled group."

(3) 2003 TNT 145-13 (REG-133791-02); a correction to notice of proposed rule making was issued on October 21, 2003 (see 2003 TNT 204-11) and published in the Federal Register on July 29, 2003 (68 F.R.44499-44506).

(4) REG-105606-99 (December 29, 1999) (65 F.R.258-263).

(5) 2003 TNT 247-3 (T.D.9104).

(6) REG-153656-03 (December 23, 2003) (69 F.R. 43-47).

(7) I.R.C. [section] 41(c).

(8) I.R.C. [section] 41(a).

(9) A base amount of 50 percent of the qualified research expenses for a credit year is referred to as the "minimum base amount."

(10) I.R.C. [section] 41(c)(3).

(11) I.R.C. [section] 41(c)(3)(C).

(12) I.R.C. [section] 41(c)(3)(B) A start-up company is a company for which the first taxable year in which it had gross receipts in qualified research expenses begins after December 31, 1983, or a company with fewer than three taxable years from 1984 to 1988 in which the taxpayer had both gross receipts and qualified research expenses.

(13) I.R.C. [section] 41(c)(4)(B).

(14) I.R.C. [section] 41(f)(1)(A).

(15) Under section 41(f)(1)(B), (as discussed in note 2), the term "controlled group" refers interchangeably to a controlled group of corporation and trades or business under common control.

(16) 2003 Prop. Reg. [section] 1.41-6(b)

(17) 2000 Prop. Reg. [section] 1.41-8(a)(1).

(18) 2003 Prop Reg. [section] 1.41-6(c)(1).

(19) 2003 Prop. Reg. [section] 1.41-6(f).

(20) 2003 Proposed Reg. [section] 1.41-6(i).

(21) I.R.C. [section] 41(d) and Treas. Reg. [section] 1.41-4(a)(2) (T.D. 9104). Unless otherwise indicated, all Regulation 1.41-4 references are to the regulations set forth in T.D. 9104.

(22) Preamble to T.D. 9104.

(23) REG-112991-01 (December 14, 2001) (66 F.R.66362-66375), 2001 Prop. Reg. [section] 1.41-4(a)(5).

(24) Preamble to T.D. 9104.

(25) Reg. [section] 1.41-4(a)(5)(iii).

(26) Reg. [section] 1.41-4(a)(6).

(27) See I.R.C. [section] 41(d)(2)(B) (definition of business component).

(28) 2001 Prop. Reg. [section] 1.41-4(b)(2) (emphasis added).

(29) Preamble to T.D. 9104.

(30) I.R.C. [section] 41(c)(6).

(31) T.D. 8930, Treas. Reg. [section] 1.41-4(d).

(32) T.D. 8930, Treas. Reg. [section] 1.41-4(a)(3)(i).

(33) Treas. Reg. [section] 1.41-4(a)(3).

(34) Treas. Reg. [section] 1.41-4(a)(4).

(35) Treas. Reg. [section] 1.41-4(a)(3)(iii).

(36) Treas. Reg. [section] 1.41-4(c)(2)(4).

(37) Preamble to T.D. 9104.

(38) Treas. Reg. [section] 1.41-4(e).

(39) Preamble to T.D. 9104.

(40) Preamble to T.D. 9104.

(41) REG-153656-03 (December 23, 2003).

BRIAN E. ANDREOLI and MARK K. LEWIS are attorneys with the law firm of Duane Morris LLP, as well as certified public accountants. They have a combined 30 years experience calculating, documenting, and defending research and experimentation tax credit claims.