Reg. § 1.41-5A Basic research for taxable years beginning before January 1, 1987.
(a) In general The amount expended for basic research within the meaning of section (before amended by the Tax Reform Act of 1986) equals the sum of money plus the taxpayer's basis in tangible property (other than land) transferred for use in the performance of basic research.
(b) Trade or business requirement Any amount treated as a contract research expense under section (before amendment by the Tax Reform Act of 1986) shall be deemed to have been paid or incurred in carrying on a trade or business, if the corporation that paid or incurred the expenses is actually engaged in carrying on some trade or business.
(c) Prepaid amounts
(1) In general If any basic research expense paid or incurred during any taxable year is attributable to research to be conducted after the close of such taxable year, the expense so attributable shall be treated for purposes of section (before amendment by the Tax Reform Act of 1986) as paid or incurred during the period in which the basic research is conducted.
(2) Transfers of property In the case of transfers of property to be used in the performance of basic research, the research in which that property is to be used shall be considered to be conducted ratably over a period beginning on the day the property is first so used and continuing for the number of years provided with respect to property of that class under section (before amendment by the Tax Reform Act of 1986). For example, if an item of property which is 3-year property under section is transferred to a university for basic research on January 12, 1983, and is first so used by the university on March 1, 1983, then the research in which that property is used is considered to be conducted ratably from March 1, 1983, through February 28, 1986.
(d) Written research agreement
(1) In general A written research agreement must be entered into prior to the performance of the basic research.
(2) Agreement between a corporation and a qualified organization after June 30, 1983
(i) In general A written research agreement between a corporation and a qualified organization (including a qualified fund) entered into after June 30, 1983, shall provide that the organization shall inform the corporation within 60 days after the close of each taxable year of the corporation what amount of funds provided by the corporation pursuant to the agreement was expended on basic research during the taxable year of the corporation. In determining amounts expended on basic research, the qualified organization shall take into account the exclusions specified in section (before amendment by the Tax Reform Act of 1986) and in of this section.
(ii) Transfers of property In the case of transfers of property to be used in basic research, the agreement shall provide that substantially all use of the property is to be for basic research, as defined in section (before amendment by the Tax Reform Act of 1986).
(3) Agreement between a qualified fund and a qualified educational organization after June 30, 1983 A written research agreement between a qualified fund and a qualified educational organization (see section (before amendment by the Tax Reform Act of 1986)) entered into after June 30, 1983, shall provide that the qualified educational organization shall furnish sufficient information to the qualified fund to enable the qualified fund to comply with the written research agreements it has entered into with grantor corporations, including the requirement set forth in of this section.
(e) Exclusions
(1) Research conducted outside the United States If a taxpayer pays or incurs an amount for basic research to be performed partly within the United States and partly without, only 65 percent of the portion of the amount attributable to research performed within the United States can be treated as a contract research expense (even if 80 percent or more of the contract amount was for basic research performed in the United States).
(2) Research in the social sciences or humanities Basic research does not include research in the social sciences or humanities, within the meaning of .
(f) Procedure for making an election to be treated as a qualified fund In order to make an election to be treated as a qualified fund within the meaning of section (before amendment by the Tax Reform Act of 1986) or as an organization described in section , the organization shall file with the Internal Revenue Service center with which it files its annual return a statement that—
(1) Sets out the name, address, and taxpayer identification number of the electing organization (the “taxpayer”) and of the organization that established and maintains the electing organization (the “controlling organization”),
(2) Identifies the election as an election under section 41(e)(6)(D) of the Code,
(3) Affirms that the controlling organization and the taxpayer are section organizations,
(4) Provides that the taxpayer elects to be treated as a private foundation for all Code purposes other than section ,
(5) Affirms that the taxpayer satisfies the requirement of section , and
(6) Specifies the date on which the election is to become effective.
If an election to be treated as a qualified fund is filed before February 1, 1982, the election may be made effective as of any date after June 30, 1981, and before January 1, 1986. If an election is filed on or after February 1, 1982, the election may be made effective as of any date on or after the date on which the election is filed.
[T.D. 8251, 54 FR 21204, May 17, 1989. Redesignated and amended by T.D. 8930, 66 FR 295, Jan. 3, 2001]