« iepriekšējāTurpināt »
$400,000 abroad by subsidiary Y. X also acquires a 60 percent (by value) ownership interest in foreign corporation Z and a 100 percent ownership interest in foreign corporation C. X transfers its engine technology to Z for a royalty equal to 5 percent of sales, and X enters into an arm's length cost-sharing arrangement with C to share the funding of all of X's research activity. In 1997, corporation Z has sales in country Z equal to $1,000,000. X incurs expense of $80,000 on research and experimentation in 1997, and in addition, X performs $15,000 of research on gasoline engines which was funded by the cost-sharing arrangement with C. All of Z's sales are from the product category, Engines and Turbines (SIC Industry Group 351). X performs all of its research in the United States and $20,000 of its expenditure of $80,000 is made solely to meet pollution standards mandated by law. X establishes, to the satisfaction of the Commissioner, that the expenditure in response to pollution standards is not expected to generate gross income (beyond de minimis amounts) outside the United States.
(ii) Allocation. The $20,000 of research expense which X incurred in connection with pollution standards is definitely related and thus allocable to the residual grouping, gross income from sources within the United States. The remaining $60,000 in research and experimental expenditure incurred by X is definitely related to all gasoline engines and is therefore allocable to the class of gross income to which the engines give rise, gross income from sales of gasoline engines in the United States, royalties from country Y, and royalties from country Z. No part of the $60,000 research expense is allocable to dividends from country C, because corporation C has already paid, through its cost-sharing arrangement, for research activity performed by X which may benefit C.
(iii) Apportionment. For purposes of applying the foreign tax credit limitation, the statutory grouping is general limitation gross income from sources without the United States, and the residual grouping is gross income from sources within the United States. X's deduction of $60,000 for its research and experimental expenditure must be apportioned between these groupings. Because more than 50 percent of the research and experimentation was performed in the United States, 50 percent of the $60,000 deduction can be apportioned exclusively to the residual grouping. The remaining 50 percent of the deduction can then be apportioned between the residual and the statutory grouping on the basis of sales of gasoline engines by X, Y, and Z. (If X utilized the optional gross income methods in 1996, then its use of such methods constituted a binding election to use the optional gross income methods in 1996 and for four taxable years thereafter. If X utilized the sales method in
1996, then its use of such method constituted a binding election to use the sales method in 1996 and for four taxable years thereafter.) The optional gross income methods are not illustrated in this Erample 3 (see instead Eramples 1 and 2). Since X has only a 60 percent ownership interest in corporation Z, only 60 percent of Z's sales (60% of $1,000,000, or $600,000) are included for purposes of apportionment. The allocation and apportionment for 1997 is as follows: (A) X's total research expense:
$80,000 (B) Less: Legally mandated
research directly allocated to the residual grouping of gross income:
$20,000 (C) Tentative apportionment
on the basis of sales. (1)
Research and experimental expense to be apportioned between residual and statutory groupings of gross income:
$60,000 (2) Less: Exclusive apportion
ment of research and experimental expense to the residual grouping of gross in
come ($60,000x50 percent): $30,000 (3) Research and
experimental expense to be apportioned between the residual and the statutory groupings on the basis of sales:
$30,000 (4) Apportionment of research
and experimental expense to gross income from sources within the United States (residual grouping) ($30,000x$600,000/
($600,000+$400,000+$600,000)): $11,250 (5) Apportionment of research
and experimental expense to general limitation gross income from countries Y and Z (statutory grouping) ($30,000x$400,000+$600,000/
($600,000+$400,000+$600,000)): $18,750 (6) Total apportioned deduc
tion for research and ex-
$60,000 (7) Amount apportioned to
the residual grouping ($30,000+$11,250):
$41,250 (8) Amount apportioned to
the statutory grouping of gross income from sources within countries Y and Z: ... $18,750 Example 4 - Research and Experimentation, (i) Facts. X, a domestic corporation, manufactures and sells forklift trucks and other types of materials handling equipment in the United States. The manufacture and sale of forklift trucks and other materials handling equipment belongs to the product category, Construction, Mining, and Materials Handling Machinery and Equipment (SIC Industry Group 353). X also sells its forklift trucks to a wholesaling subsidiary located in foreign country Y (but title passes in the United States), and X manufactures forklift trucks in foreign country Z. The wholesaling of forklift trucks to country Y also belongs to X's product category Transportation equipment and, therefore, may not belong to the product category, Wholesale trade (SIC Major Group 50 and 51). In 1997, X sold $7,000,000 of forklift trucks to purchasers in the United States, $3,000,000 of forklift trucks to the wholesaling subsidiary in Y, and transferred forklift truck components with an FOB export value of $2,000,000 to its branch in Z. The branch's sales of finished forklift trucks were $5,000,000. In response to legally mandated emission control requirements, X's United States research department has been engaged in a research project to improve the performance and quality of engine exhaust systems used on its products in the United States. It incurs expenses of $100,000 for this purpose in 1997. In the past, X has customarily adapted the product improvements developed originally for the domestic market to its forklift trucks manufactured abroad. During the taxable year 1997, development of an improved engine exhaust system is completed and X begins installing the new system during the latter part of the taxable year in products manufactured and sold in the United States. X continues to manufacture and sell forklift trucks in foreign countries without the improved engine exhaust systems.
(ii) Allocation. X's deduction for its research expense is definitely related to the income to which it gives rise, namely income from the manufacture and sale of forklift trucks within the United States and in country Z. Although the research is undertaken in response to a legal mandate, it can reasonably be expected to generate gross income from the manufacture and sale of trucks by the branch in Z. Therefore, the deduction is not allocable solely to income from X's domestic sales of forklift trucks. It is allocable to income from such sales and income from the sales of X's branch in Z.
(iii) Apportionment. For the method of apportionment on the basis of either sales or gross income, see Example 3. However, in determining the amount of research apportioned to income from foreign and domestic sources, the net sales of the branch in Z are $3,000,000 ($5,000,000 less $2,000,000) and the sales within the United States are $12,000,000
($7,000,000 plus $3,000,000 plus $2,000,000). See $1.861–17(c)(3)(iii).
Example 5 –(i) Facts. X, a domestic corporation, is a drug company that manufactures a wide variety of pharmaceutical products for sale in the United States. Pharmaceutical products belong to the product category, Drugs (SIC Industry Group 283). X exports its pharmaceutical products through a foreign sales corporation (FSC). X's wholly owned foreign subsidiary Y also manufactures pharmaceutical products. In 1997, X has domestic sales of pharmaceutical products of $10,000,000, the FSC has sales of pharmaceutical products of $3,000,000, and Y has sales of pharmaceutical products of $5,000,000. In that same year, 1997, X incurs expense of $200,000 on research to test a product in response to requirements imposed by the United States Food and Drug Administration (FDA). X is able to show that, even though country Y imposes certain testing requirements on pharmaceutical products, the research performed in the United States is not accepted by country Y for purposes of its own licensing requirements, and the research has minimal use abroad. X is further able to show that FSC sells goods to countries that do not accept or do not require research performed in the United States for purposes of their own licensing standards.
(ii) Allocation. Since X's research expense of $200,000 is undertaken to meet the requirements of the United States Food and Drug Administration, and since it is reasonable to expect that the expenditure will not generate gross income (beyond de minimis amounts) outside the United States, the deduction is definitely related and thus allocable to the residual grouping.
(iii) Apportionment. No apportionment is necessary since the entire expense is allocated to the residual grouping, gross income from sales within the United States.
Example 6 (i) Facts. X, a domestic corporation, is engaged in continuous research and experimentation to improve the quality of the products that it manufactures and sells, which are floodlights, flashlights, fuse boxes, and solderless connectors. X incurs and deducts $100,000 of expenditure for research and experimentation in 1997 that was performed exclusively in the United States. As a result of this research activity, X acquires patents that it uses in its own manufacturing activity. X licenses its floodlight patent to Y and Z, uncontrolled foreign corporations, for use in their own territories, countries Y and Z, respectively. Corporation Y pays X an arm's length royalty of $3,000 plus $0.20 for each floodlight sold. Sales of floodlights by Y for the taxable year are $135,000 (at $4.50 per unit) or 30,000 units, and the royalty is $9,000 ($3.000 + $0.20 x 30,000). Y has sales of other products of $500,000. Z pays X an arm's length royalty of $3,000 plus $0.30 for each unit sold. Z manufactures 30,000 this section. The apportionment is as follows:
floodlights in the taxable year, and the royalty is $12,000 ($3,000 + $0.30 x 30,000). The dollar value of Z's floodlight sales is not known and cannot be reasonably estimated because, in this case, the floodlights are not sold separately by Z but are instead used as a component in Z's manufacture of lighting equipment for theaters. The sales of all Z's products, including the lighting equipment for theaters, are $1,000,000. Y and Z each sell the floodlights exclusively within their respective countries. X's sales of floodlights for the taxable year are $500,000 and its sales of its other products, flashlights, fuse boxes, and solderless connectors, are $400,000. X has gross income of $500,000, consisting of gross income from domestic sources from sales of floodlights, flashlights, fuse boxes, and solderless connectors of $479,000, and royalty income of $9,000 and $12,000 from foreign corporations Y and Z respectively. X utilized the optional gross income methods of apportionment for its return filed for its first taxable year to which this section applies.
(ii) Allocation. X's research and experimental expenses are definitely related to all of the products that it produces, which are floodlights, flashlights, fuse boxes, and solderless connectors. All of these products are in the same three digit SIC Code category, Electric Lighting and Wiring Equipment (SIC Industry Group 364). Thus, X's research and experimental expenses are allocable to all items of income attributable to this product category, domestic sales income and royalty income from the foreign countries in which corporations Y and Z operate.
(iii) Apportionment. (A) 'The statutory grouping of gross income is general limitation income from sources without the United States. The residual grouping is gross income from sources within the United States. X's deduction of $100,000 for its research expenditures must be apportioned between the groupings. For apportionment on the basis of sales in accordance with paragraph (c) of this section, X is entitled to an exclusive apportionment of 50 percent of its research and experimental expense to the residual grouping, gross income from sources within the United States, since more than 50 percent of the research activity was performed in the United States. The remaining 50 percent of the deduction can then be apportioned between the residual and statutory groupings on the basis of sales. Since Y and Z are unrelated licensees of X, only their sales of the licensed product, floodlights, are included for purposes of apportionment. Floodlight sales of Z are unknown, but are estimated at ten times royalties from Z, or $120,000. All of X's sales from the entire product category are included for purposes of apportionment on the basis of sales. Alternatively, X may apportion its deduction on the basis of gross income, in accordance with paragraph (d) of
(1) Tentative Apportionment on the Basis of
Sales (i) Research and experimental
expense to be apportioned between statutory and residual groupings of gross income:
$100,000 (ii) Less: Exclusive apportion
ment of research and experimental expense to the residual groupings of gross income ($100,000x50
$50,000 (iii) Research and experi
mental expense to be apportioned between the statutory and residual groupings of gross income on the basis of sales: ...
$50,000 (iv) Apportionment of re
search and experimental expense to the residual groupings of gross income ($50,000x$900,000/
($900,000+$135,000+$120,000)): $38,961 (v) Apportionment of re
search and experimental expense to the statutory grouping, royalty income from countries Y and Z ($50,000x$135,000+$120,000/
($900,000+$135,000+$120,000)): $11,039 (vi) Total apportioned deduc
tion for research and experimentation:
$100,000 (vii) Amount apportioned to
the residual grouping ($50,000+$38,961):
$88,961 (viii) Amount apportioned to
the statutory grouping of sources within countries Y and Z:
(2) Tentative Apportionment on Gross Income
Basis (i) Exclusive apportionment
of research and experimental expense to the residual grouping of gross in
come ($100,000x25 percent): .. $25,000 (ii) Apportionment of re
search and experimental expense to the residual grouping of gross
income ($75,000x$479,000/$500,000): .... $71,850
(iii) Apportionment of re
puter in order to bring about a certain search and experimental ex
result. For purposes of this paragraph pense to the statutory
(a)(3), a computer program includes grouping of gross income
any media, user manuals, documents. ($75,000x$9,000+$12,000/
tion, data base or similar item if the $500,000):
$3,150 media, user manuals, documentation. (iv) Amount apportioned to
data base or similar item is incidental the residual grouping:
$96,850 to the operation of the computer pro(0) Amount apportioned to
gram. the statutory grouping of
(b) Categories of transactions—(1) Gengeneral limitation income
eral. Except as provided in paragraph from sources without the
(b)(2) of this section, a transaction inUnited States:
$3,150 volving the transfer of a computer pro(B) Since X has elected to use the optional
gram, or the provision of services or of gross income methods of apportionment and
know-how with respect to a computer its apportionment on the basis of gross in
program (collectively, a transfer of a come to the statutory grouping, $3,150, is less
computer program) is treated as being than 50 percent of its apportionment on the
solely one of the followingbasis of sales to the statutory grouping, (i) A transfer of a copyright right in $11,039, it must use Option two of paragraph the computer program; (d)(3) of this section and apportion $5,520 (50 (ii) A transfer of a copy of the compercent of $11,039) to the statutory grouping.
puter program (a copyrighted article); (T.D. 8646, 60 FR 66503, Dec. 22, 1995)
(iii) The provision of services for the
development or modification of the 8 1.861-18 Classification
of trans- computer program; or actions involving computer pro- (iv) The provision of know-how relatgrams.
ing to computer programming tech(a) General-(1) Scope. This section niques.
vides rules for classifying trans- (2) Transactions consisting of more than actions relating to computer programs one category. Any transaction involving for purposes of subchapter N of chapter computer programs which consists of 1 of the Internal Revenue Code, sec- more than one of the transactions detions 367, 404A, 482, 551, 679, 1059A, chap- scribed in paragraph (b)(1) of this secter 3, chapter 5, sections 842 and 845 (to tion shall be treated as separate transthe extent involving a foreign person), actions, with the appropriate proviand transfers to foreign trusts not cov- sions of this section being applied to ered by section 679.
each such transaction. However, any (2) Categories of transactions. This sec- transaction that is de minimis, taking tion generally requires that such trans- into account the overall transaction actions be treated as being solely with- and the surrounding facts and cirin one of four categories (described in cumstances, shall not be treated as a paragraph (b)(1) of this section) and separate transaction, but as part of anprovides certain rules for categorizing
other transaction. such transactions. In the case of a (c) Transfers involving copyright rights transfer of a copyright right, this sec- and copyrighted articles—(1) Classification provides rules for determining tion—(i) Transfers treated as transfers of whether the transaction should be clas- copyright rights. A transfer of a comsified as either a sale or exchange, or a puter program is classified as a translicense generating royalty income. In fer of a copyright right if, as a result of the case of a transfer of a copyrighted the transaction, a person acquires any article, this section provides rules for one or more of the rights described in determining whether the transaction paragraphs (c)(2)(i) through (iv) of this should be classified as either a sale or section. Whether the transaction is exchange, or a lease generating rental treated as being solely the transfer of a income.
copyright right or is treated as sepa(3) Computer program. For purposes of
rate transactions is determined pursuthis section, a computer program is a ant to paragraph (b)(1) and (b)(2) of this set of statements or instructions to be section. For example, if a person reused directly or indirectly in a com
ceives a disk containing a copy of a computer program which enables it to transaction described in paragraph exercise, in relation to that program, a (b)(1) of this section is based on all the non-de minimis right described in para- facts and circumstances of the transgraphs (c)(2)(i) through (iv) of this sec- action, including, as appropriate, the tion (and the transaction does not in- intent of the parties (as evidenced by volve, or involves only a de minimis their agreement and conduct) as to provision of services as described in which party is to own the copyright paragraph (d) of this section or of rights in the computer program and know-how as described in paragraph (e) how the risks of loss are allocated beof this section), then, under paragraph tween the parties. (b)(2) of this section, the transfer is (e) Provision of know-how. The proviclassified solely as a transfer of a copy- sion of information with respect to a right right.
computer program will be treated as (ii) Transfers treated solely as transfers the provision of know-how for purposes of copyrighted articles. If a person ac- of this section only if the information quires a copy of a computer program isbut does not acquire any of the rights
(1) Information relating to computer described in paragraphs (c)(2)(i)
programming techniques; through (iv) of this section (or only ac
(2) Furnished under conditions prequires a de minimis grant of such rights), and the transaction does not
venting unauthorized disclosure, spe
cifically contracted for between the involve, or involves only a de minimis,
parties; and provision of services as described in
(3) Considered property subject to paragraph (d) of this section or of know-how as described in paragraph (e)
trade secret protection. of this section, the transfer of the copy
(f) Further classification of transfers inof the computer program is classified
volving copyright rights and copyrighted solely as a transfer of a copyrighted ar
articles -(1) Transfers of copyright ticle.
rights. The determination of whether a (2) Copyright rights. The copyright
transfer of a copyright right is a sale rights referred to in paragraph (c)(1) of
or exchange of property is made on the this section are as follows
basis of whether, taking into account (i) The right to make copies of the all facts and circumstances, there has computer program for purposes of dis
been a transfer of all substantial rights tribution to the public by sale or other
in the copyright. A transaction that transfer of ownership, or by rental,
does not constitute a sale or exchange lease or lending;
because not all substantial rights have (ii) The right to prepare derivative
been transferred will be classified as a computer programs based upon the license generating royalty income. For copyrighted computer program;
this purpose, the principles of sections (iii) The right to make a public per
1222 and 1235 may be applied. Income formance of the computer program; or
derived from the sale or exchange of a (iv) The right to publicly display the copyright right will be sourced under computer program.
section 865(a), (c), (d), (e), or (h), as ap(3) Copyrighted article. A copyrighted propriate. Income derived from the liarticle includes a copy of a computer
censing of a copyright right will be program from which the work can be sourced
under section 861(a)(4) or perceived, reproduced, otherwise 862(a)(4), as appropriate. communicated, either directly or with (2) Transfers of copyrighted articles. the aid of a machine or device. The The determination of whether a transcopy of the program may be fixed in fer of a copyrighted article is a sale or the magnetic medium of a floppy disk, exchange is made on the basis of or in the main memory or hard drive of whether, taking into account all facts a computer, or in any other medium. and circumstances, the benefits and
(d) Provision of services. The deter- burdens of ownership have been transmination of whether a transaction in- ferred. A transaction that does not volving a newly developed or modified constitute a sale or exchange because computer program is treated as either insufficient benefits and burdens of the provision of services or another ownership of the copyrighted article