ALLOCATION OF RESEARCH AND EXPERIMENTAL EXPENDITURES.

SEC. 4009. ALLOCATION OF RESEARCH AND EXPERIMENTAL EXPENDITURES. (a) General Rule.— For purposes of sections 861(b), 862(b), and 863(b) of the 1986 Code, qualified research and experimental expenditures shall be allocated and apportioned as follows: (1) 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. (2) In the case of any qualified research and experimental expenditures (not allocated under paragraph (1)) to the extent— (A) 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 (B) 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 from102 STAT. 3654 such income in determining the amount of taxable income from sources outside the United States. (3) The remaining portion of qualified research and experimental expenditures (not allocated under paragraphs (1) and (2)) 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 be at least 30 percent of the amount which would be so apportioned on the basis of gross sales. (b) 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 of the 1986 Code. For purposes of this subsection, rules similar to the rules of subsection (c) of section 174 of the 1986 Code shall apply. (c) Special Rules for Expenditures Attributable to Activities Conducted in Space, Etc.— (1) In general.— Any qualified research and experimental expenditures described in paragraph (2)— (A) 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 (B) 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. (2) Description of expenditures.— For purposes of paragraph (1), qualified research and experimental expenditures are described in this paragraph if such expenditures are attributable to activities conducted— (A) in space, (B) 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 (C) in Antarctica. (d) Affiliated Group.— (1) Except as provided in paragraph (2), the allocation and apportionment required by subsection (a) shall be determined as if all members of the affiliated group (as defined in subsection (e)(5) of section 864 of the 1986 Code) were a single corporation. (2) For purposes of the allocation and apportionment required by subsection (a)— (A) 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) of the 1986 Code); and (B) dividends from an electing corporation, shall not be taken into account, except that this paragraph 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) of the 1986 Code is not in effect. (3) The qualified research and experimental expenditures taken into account for purposes of subsection (a) shall be adjusted to reflect the amount of such expenditures included in102 STAT. 3655 computing the cost-sharing amount (determined under section 936(h)(5)(C)(i)(I) of the 1986 Code). (4) The Secretary of the Treasury or his delegate may prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations providing for the source of gross income and the allocation and apportionment of deductions to take into account the adjustments required by paragraph (3). (5) Paragraph (6) of section 864(e) of the 1986 Code shall not apply to qualified research and experimental expenditures. (e) Years to Which Section Applies.— (1) In general.— Except as provided in this subsection, this section shall apply to the taxpayer’s 1st taxable year beginning after August 1, 1987. (2) Reduction in amounts to which section applies.— Notwithstanding paragraph (1), this section shall only apply to that portion of the qualified research and experimental expenditures for the taxable year referred to in paragraph (1) which bears the same ratio to the total amount of such expenditures as— (A) the lesser of 4 months or the number of months in the taxable year, bears to (B) the number of months in the taxable year.