Alliantgroup Requests Modification of Research Credit Regs

We are writing to request the modification of Treas. Reg. 1.41-9 to allow election for the alternative simplified credit on amended returns. alliantgroup believes that the current regulation undermines efficient tax administration, and that a proper reading of the underlying statute allows an election on both amended and original returns.

As a provider of tax services to small and mid-size businesses seeking to benefit from the incentives provided by the R&D tax credit, alliantgroup sees first-hand the negative impact of this regulation. We are aware of thousands of companies that are performing activities that qualify for the R&D tax credit but are being prevented by this regulation from benefitting fully from this important tax incentive -- and at times are discouraged from even taking the ASC on their current return.

Section 41 of the Internal Revenue Code¹ provides a credit in the amount of 20% of the excess of qualified research expenses over the base amount.² Taxpayers may also elect to calculate the credit using a different method, known as the alternative simplified credit ("ASC").³ Congress created the ASC in Section 104 of the Tax Relief and Health Care Act of 2006.⁴ The ASC was intended to broaden the number of companies that would be eligible to take advantage of the incentives provided by the R&D tax credit.

The amount of the alternative simplified credit is 14% of the amount by which the current year's qualified research expenses (QREs) exceed 50% of the prior three years' average QREs.⁵ An election to claim the ASC "shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Secretary."⁶ The Treasury Department has issued regulations relating to the claiming of the ASC which state: "An election . . . may not be made on an amended return."⁷ The Treasury should allow taxpayers to elect the ASC on an amended return for the following reasons:

Election on an Amended Return is Supported by the Statute

Section 41 does not require that the ASC election be made on an original return. "An election under this paragraph shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Secretary."⁸ A reading of the statute consistent with basic principles of tax administration is that an election can be made on any open tax year. The statute says nothing limiting the ASC election to an original return.

The text of the statute actually contemplates the ASC being made on past returns. The second sentence of Section 41(c)(5)(C) reads as follows:

Nothing is evident from the congressional record to support the current interpretation of the department -- that the election is limited to original returns. Indeed, Congress has the ability to limit elections to original returns, and chose not to do so with the ASC.

Allowing the ASC election on both original and amended returns would be consistent with treatment under other sections of the code. Examples include:

• IRC § 585¹⁰ permits an election for "the disqualification year;"¹¹

• • Treas. Reg. § 1.585-8 permits an election on original returns and amended returns where an alternative election is made.¹²

• IRC § 613A¹³ permits an election "as such time and in such manner as the Secretary shall by regulations prescribe;"¹⁴

• • Treas. Reg. § 1.613A-5 permits the election on both original and amended returns.¹⁵

• IRC § 962¹⁶ permits an election for "any taxable year;"¹⁷

• • Treas. Reg. § 1.962-4 permits that election on both original and amended returns.¹⁸

The Regulation Undermines Efficient Tax Administration

alliantgroup has found, and it is widely recognized by practitioners and the IRS, that one of the greatest difficulties of the R&D tax credit is establishing the base period under the regular credit.¹⁹ The burden of substantiating expenditures and costs for 1984-1988 can be costly, time-consuming and difficult. The GAO, in its 2009 report on the R&D credit,²⁰ made similar observations: "all of the difficulties that taxpayers face in substantiating QREs are magnified when it comes to substantiating QREs for the historical base period (1984 through 1988) of the regular credit."²¹ The difficulty of establishing the 1984-1988 base period under the regular credit can likewise be costly and time-consuming for the IRS when auditing and examining the taxpayer's claims. In reviewing the issue of allowing an ASC election on an amended return, GAO found:

The Treasury Department has the Authority to Modify its Own Regulations

The Supreme Court, in National Cable & Telecommunications Assoc. v. Brand X Internet Svc., 545, U.S. 967 (2005), held that an agency's interpretation of a statute is still subject to Chevron deference, even if the agency has changed or modified the interpretation. The Treasury has previously changed its final regulations relating to the R&D credit. Specifically, the Treasury reversed its stance on whether research must be intended to discover information that exceeds, expands, or refines the common knowledge of skilled professionals in a field in order to constitute qualified research.²³ No new facts or circumstances prompted this modification. Rather, Treasury stated:

alliantgroup appreciates your willingness to review this matter. If you have any questions regarding the issues we have raised, please do not hesitate to contact us.

² § 41(a)(1).

³ § 41(c)(5).

⁴ P.L. 109-432.

⁵ § 41(c)(5)(A).

⁶ § 41(c)(5)(c).

⁷ § 1.41-9(b)(2).

⁸ § 41(c)(5)(C).

⁹ The 1980s and start-up calculations are not elections and cannot be chosen by the taxpayer. Rather, they are alternative base calculations methods available depending on the activity and existence of the taxpayer in the relevant time periods.

¹⁰ Elections regarding the treatment of bank losses and reserve methods.

¹¹ § 585(c)(4).

¹² Treas. Reg. § 1.585-8(a)(ii).

¹³ Election for daily depletable natural gas quantities for independent producers and royalty owners.

¹⁴ § 613A(c)(4).

¹⁵ Treas. Reg. § 1.613A-5.

¹⁶ Election by U.S. shareholders of foreign corporations to be subject to tax imposed at corporate rates on dividends and for purposes of the foreign tax credit.

¹⁷ § 962(b).

¹⁸ Treas. Reg. § 1.962-4(b).

¹⁹ See § 41(c)(1)-(3).

²⁰ GOVERNMENT ACCOUNTABILITY OFFICE,GAO-10-136, TAX POLICY -- THE RESEARCH TAX CREDIT'S DESIGN AND ADMINISTRATION CAN BE IMPROVED (2009) ("GAO Report").

²¹Id. At p. 34.

²²Id. At p. 39.

²³ REG-112991-01, 66 Fed. Reg. 66362 (Dec. 26, 2001).

²⁴ REG-112991-01, 66 Fed. Reg. 66362 (Dec. 26, 2001).