IRS PROVIDES R&D ALLOCATION OPTION RULES FOR POSSESSION CORPORATIONS.

Rev. Proc. 92-69

SECTION 1. PURPOSE

This revenue procedure provides guidance regarding the allocation and apportionment of research and development expenditures incurred during the last six months of a taxpayer's first taxable year beginning after August 1, 1991 and during the immediately succeeding taxable year.

SEC. 2. BACKGROUND

Section 1.861-8(e)(3) of the Income Tax Regulations provides rules for the allocation and apportionment of deductions for research and development expenditures for purposes of sections 861(b), 862(b) and 863(a) of the Internal Revenue Code. Section 864(f) of the Internal Revenue Code, enacted in 1989 and amended in 1990 and 1991, suspended the application of section 1.861-8(e)(3) and provided a set of statutory rules to govern the allocation and apportionment to geographic sources of deductions for qualified research and development expenditures incurred during a taxpayer's first two taxable years beginning after August 1, 1989 and during the first six months of a taxpayer's first taxable year beginning after August 1, 1991.

On June 24, 1992, the Internal Revenue Service released Revenue Procedure 92-56, 1992-28 I.R.B. 7 (July 13, 1992). Revenue Procedure 92-56 provides that, upon the expiration of section 864(f), the allocation and apportionment rules of section 1.861-8(e)(3) are applicable with respect to research and development expenditures incurred during the last six months of a taxpayer's first taxable year beginning after August 1, 1991 and during subsequent taxable years. Revenue Procedure 92-56 also provides that, in light of the ongoing review of section 1.861-8(e)(3) by the Internal Revenue Service and Treasury described therein, the Internal Revenue Service will not require that taxpayers apply the rules of section 1.861- 8(e)(3) with respect to allocation and apportionment to geographic sources of deductions for research and development expenditures incurred during the last six months of the taxpayer's first taxable year beginning after August 1, 1991 and during the immediately succeeding taxable year, provided that such deductions are allocated and apportioned in accordance with the transition method provided in section 3.02 through 3.05 of Rev. Proc. 92-56.

The transition method did not include specific guidance with respect to corporations electing the application of section 936. The Internal Revenue Service and the Treasury Department have concluded that it is advisable to include specific guidance with respect to such corporations in the transition method.

SEC. 3 ALLOCATION AND APPORTIONMENT

01 IN GENERAL. A taxpayer will not be required to apply the rules of section 1.861-8(e)(3) with respect to allocation and apportionment to geographic sources of deductions for research and development expenditures incurred during the last six months of a taxpayer's first taxable year beginning after August 1, 1991 and during the immediately succeeding taxable year, provided that deductions for such expenses are allocated and apportioned in accordance with the transition method set forth in section 3 of Rev. Proc. 92-56 and paragraph 02 of this section.

02 SECTION 936 CORPORATIONS. For purposes of the allocation and apportionment of deductions for research and development expenditures under section 3 of Rev. Proc. 92-56, and notwithstanding the affiliated group rule of section 3.05 of Rev. Proc. 92-56, sales and gross income from products produced in whole or in part in a possession by an electing corporation (within the meaning of section 936(h)(5)(E)), and dividends from an electing corporation, shall not be taken into account, except that this rule shall not apply to sales of (and gross income and dividends attributable to sales of) products with respect to which an election under section 936(h)(5)(F) is not in effect. The research and development expenditures taken into account for purposes of section 3 of Rev. Proc. 92-56 shall be adjusted to reflect the amount of such expenditures included in computing the cost-sharing amount (determined under section 936(h)(5)(C)(i)(I)).

SEC. 4. EFFECT ON OTHER DOCUMENTS

Revenue Procedure 92-56 is amplified.

SEC. 5. EFFECTIVE DATE

This revenue procedure is effective on June 23, 1992, for the period specified in section 3.01.

SEC. 6. ADDRESS FOR COMMENTS

Taxpayer comments submitted in connection with the review of section 1.861-8(e)(3) of the regulations announced in Rev. Proc. 92- 56 must be received by December 31, 1992. Send comments to: Internal Revenue Service, Associate Chief Counsel (International), 1111 Constitution Ave, N.W., Washington, D.C. 20224, Attention: Carl Cooper.

DRAFTING INFORMATION

The principal author of this revenue procedure is Carl Cooper of the Office of Associate Chief Counsel (International). For further information regarding this revenue procedure, contact Mr. Cooper on (202) 622-3840 (not a toll-free call).