Excluding intercompany gross receipts from research credit calculations: IRS improves settlement offer

Pharma and Life Sciences Tax News: Vol 7, No. 13

Since 2005, the IRS Priority Guidance Plan (commonly known as the business plan) has included the following item: "Guidance under section 41 regarding whether the gross receipts component of the research credit computation for a controlled group under section 41(f) includes gross receipts from transactions between group members."

This important issue affects both taxpayers with research credit cases pending in IRS Appeals and the many taxpayers deciding whether to elect the new alternative simplified research credit (ASC) instead of the regular credit. Electing the ASC would provide certainty, but perhaps at the cost of reduced benefits. Whether intercompany payments are included in the gross receipts calculation is one of the key factors in deciding whether to elect the ASC.

The issue has been complicated by two chief counsel advice (CCA) memorandums issued by the IRS: one in 2002 concluding that such gross receipts should be excluded, and the other in 2006 concluding the exact opposite -- that they should be included.

We understand the IRS is in the process of issuing Appeals Settlement Guidelines under which taxpayers would concede 50 percent of the issue -- the IRS essentially would split the difference between the conflicting CCAs.

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