ALLOCATION OF RESEARCH AND EXPERIMENTAL EXPENDITURES.

SEC. 7111. ALLOCATION OF RESEARCH AND EXPERIMENTAL EXPENDITURES. Section 864 (relating to definitions and special rule) is amended by adding at the end thereof the following new subsection: “(f) Allocation of Research and Experimental Expenditures.— “(1) In general.—For purposes of sections 861(b), 862(b), and 863(b), qualified research and experimental expenditures shall be allocated and apportioned as follows: “(A) Any qualified research and experimental expenditures expended solely to meet legal requirements imposed by a political entity with respect to the improvement or marketing of specific products or processes for purposes not reasonably expected to generate gross income (beyond de minimis amounts) outside the jurisdiction of the political entity shall be allocated only to gross income from sources within such jurisdiction. “(B) In the case of any qualified research and experimental expenditures (not allocated under subparagraph (A)) to the extent— “(i) that such expenditures are attributable to activities conducted in the United States, 64 percent of such expenditures shall be allocated and apportioned to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States, and “(ii) that such expenditures are attributable to activities conducted outside the United States, 64 percent of such expenditures shall be allocated and apportioned to income from sources outside the United States and deducted from such income in determining the amount of taxable income from sources outside the United States. “(C) The remaining portion of qualified research and experimental expenditures (not allocated under subparagraphs (A) and (B)) shall be apportioned, at the annual election of the taxpayer, on the basis of gross sales or gross income, except that, if the taxpayer elects to apportion on the basis of gross income, the amount apportioned to income from sources outside the United States shall at least be 30 percent of the amount which would be so apportioned on the basis of gross sales. “(2) Qualified research and experimental expenditures.—For purposes of this section, the term ‘qualified research and experimental expenditures’ means amounts which are research and experimental expenditures within the meaning of section 174. For purposes of this paragraph, rules similar to the rules of subsection (c) of section 174 shall apply. Any qualified research and experimental expenditures treated as deferred expenses under subsection (b) of section 174 shall be taken into account under this subsection for the taxable year for which such expenditures are allowed as a deduction under such subsection. 103 STAT. 2327 “(3) Special rules for expenditures attributable to activities conducted in space, etc.— “(A) In general.—Any qualified research and experimental expenditures described in subparagraph (B)— “(i) if incurred by a United States person, shall be allocated and apportioned under this section in the same manner as if they were attributable to activities conducted in the United States, and “(ii) if incurred by a person other than a United States person, shall be allocated and apportioned under this section in the same manner as if they were attributable to activities conducted outside the United States. “(B) Description of expenditures.—For purposes of subparagraph (A), qualified research and experimental expenditures are described in this subparagraph if such expenditures are attributable to activities conducted— “(i) in space, “(ii) on or under water not within the jurisdiction (as recognized by the United States) of a foreign country, possession of the United States, or the United States, or “(iii) in Antarctica. “(4) Affiliated group.— “(A) Except as provided in subparagraph (B), the allocation and apportionment required by paragraph (1) shall be determined as if all members of the affiliated group (as defined in subsection (e)(5)) were a single corporation. “(B) For purposes of the allocation and apportionment required by paragraph (1)— “(i) 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 “(ii) dividends from an electing corporation, shall not be taken into account, except that this subparagraph 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. “(C) The qualified research and experimental expenditures taken into account for purposes of paragraph (1) 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)). “(D) The Secretary may prescribe such regulations as may be necessary to carry out the purposes of this paragraph, including regulations providing for the source of gross income and the allocation and apportionment of deductions to take into account the adjustments required by subparagraph (C). “(E) Paragraph (6) of subsection (e) shall not apply to qualified research and experimental expenditures. “(5) Year to which rule applies.— “(A) In general.—Except as provided in this paragraph, this subsection shall apply to the taxpayer’s first taxable year beginning after August 1, 1989, and before August 2, 1990. “(B) Reduction.—Notwithstanding subparagraph (A) this subsection shall only apply to that portion of the 103 STAT. 2328qualified research and experimental expenditures for the taxable year referred to in subparagraph (A) which bears the same ratio to the total amount of such expenditures 88— “(i) the lesser of 9 months or the number of months in the taxable year, bears to “(ii) the number of months in the taxable year.”