Use of Delegation Order 4-25 on Appeals Settlement Position for the I.R.C. § 41 Research Credit – Intra-Group Receipts from Foreign Affiliates


Impacted IRM

May 13, 2010


FROM: Cheryl P. Claybough /s/ Cheryl P. Claybough, Director, Pre-Filing and Technical Guidance

SUBJECT: Use of Delegation Order (DO) 4-25 on Appeals Settlement Position (ASP) for the I.R.C. § 41 Research Credit – Intra-Group Receipts from Foreign Affiliates (IRM

This memorandum provides guidance to LMSB managers on the appropriate use of DO 4-25 in resolving I.R.C. § 41 research credit issues where the sole unagreed issue is the amount of foreign intra-group gross receipts to be included in the research credit computation in accordance with the recent ASP issued on March 12, 2010.


On March 12, 2010, Appeals issued an ASP titled “I.R.C. § 41 Research Credit – Intra-Group Receipts from Foreign Affiliates”.  LMSB management has reviewed this ASP and believes that these guidelines provide the Field with an examination tool which can be used to settle appropriate issues at the team manager level.  Since this issue is an Appeals Coordinated Issue (ACI), any settlement of this issue must be in compliance with DO 4-25 and the referenced ASP.


Whether a domestic corporation and its majority-owned subsidiaries must include receipts from foreign affiliates in determining the controlled group’s aggregate gross receipts for purposes of computing the research credit “base amount” under I.R.C. 2
§41(c).  LMSB’s position is that a taxpayer may not exclude receipts from its controlled foreign subsidiaries when computing gross receipts for purposes of determining the base amount under I.R.C. § 41(c) and cite to the definition of “gross receipts” provided in I.R.C. § 41(c)(7) and Treas. Reg. 1.41-3(c).  Taxpayers take the position that the gross receipts component of the research credit computation for a controlled group under I.R.C. § 41(f) excludes gross receipts from transactions between group members, and thus foreign intra-group receipts should be excluded from the computation.  This intra-group gross receipts issue is on the current Guidance Priority List (GPL).  Until final guidance is issued, LMSB should follow this ASP under the requirements provided below.

ASP is Limited to the Following Issues

Settlement authority under DO 4-25 applies to the following items:

  • original return positions and claims for refund
  • foreign intra-group gross receipts only
  • foreign intra-group gross receipts under Treas. Reg. § 1.41-3(c) include, but are not limited to, sales to foreign affiliates, dividends, dividend gross-up, interest, royalties, buy-in payments, and subpart F income received from foreign affiliates.

Items Excluded from this ASP

Foreign branch gross receipts are not subject to this ASP.  Foreign branch receipts must be included in full in determining gross receipts for purposes of the research credit computation.  See Deere & Company v. Commissioner, 133 T.C. 11 (2009).  Foreign disregarded entities should be treated the same as a foreign branch.

Issues Not Appropriate for Settlement

Settlement of the foreign intra-group gross receipts issue under DO 4-25 is not appropriate in the following instances:

  • For taxpayers utilizing the regular computation method of I.R.C. § 41(a) who do not have adequate records to support that foreign intra-group gross receipts have been excluded in a consistent manner in computing both the fixed base percentage pursuant to I.R.C. § 41(c)(3)(A) and in computing the average annual gross receipts pursuant to I.R.C. § 41(c)(1)(B).
  • Where there are other unagreed research credit issues that will affect the research credit computation.

Requirements to use ASP (IRM

DO 4-25 requires that the proposed settlement offer and any closing agreement must be pre-approved by both the Research Credit Technical Advisor and by the Appeals Technical Guidance Coordinator for the Research Credit.

Approval Process (IRM

Approval from the Research Credit Technical Advisor will require:

  • That the issue be fully developed and written up using Form 5701-S.
  • Reconciliation of gross receipts used in computing gross receipts for the research credit computation (Form 6765) to all tax returns of all members of the group, including a list of the gross receipts being excluded by dollar amounts.
  • Discussion with and confirmation from the Research Credit Technical Advisor that foreign branch gross receipts, disregarded entities and domestic intra-group gross receipts have been properly treated.
  • Copy of any closing agreement or Form 870-AD.

This document is not an official pronouncement of the law or the position of the Service and cannot be used, cited, or relied upon as such.

If you have any questions, please contact A. Lee Keenan, Research Credit Technical Advisor, at 508-357-7029.


Commissioner, LMSB
Deputy Commissioner, Operations, LMSB
Deputy Commissioner, International, LMSB
Division Counsel, LMSB
Commissioner, SBSE
Chief, Appeals
Director, Planning, Quality, Analysis and Support