(1) Income earned by a research and development firm which is unrelated to research and development activities is not eligible for the five-year exemption from the Montana corporation license tax. In making the determination of whether income earned is related to research and development activities, the department will review the facts presented in each case. However, the following examples demonstrate how the department would decide under certain situations.

(a) If a research and development firm derives income from a contract to perform research and development activities only, all of that income will be eligible for the exemption.

(b) If a research and development firm develops a patent from which it either sells or receives royalties, such income shall be deemed to be research and development income eligible for the exemption.

(c) If a research and development firm is in two distinct businesses, only the income related to the research and development activity shall be exempt.

(d) If a research and development firm develops a product which it then begins to manufacture and sell, a portion of the income from selling the product shall be deemed to be related to the research and development activities. The portion of the total Montana net income deemed to be research and development income activities shall be based upon the average percentage of Montana real and tangible personal property and Montana payroll related to the research and development activities as presented below:

                                                                                          R&D Montana Real & Tangible

R&D Montana Payroll                                 +                 Personal Property

Total Montana Payroll                                                    Total Montana Real & Tangible

                                                                                          Personal Property

Divided by 2