the corresponding open-ended recovery account could be no greater than 30 percent and no smaller than 15 percent for any taxable year. The investment credit for qualifying property in category 2 would be 10 percent. This would be the same credit as under present law, except for category-1 property which the taxpayer elects to treat as category-2 property (discussed above). Progress expenditures Cost recovery for qualified progress expenditures would start in the taxable year the expenditures are made (using the half-year convention provided by the bill), if the completed asset would be post-1983 recovery property when placed in service. The cost of the asset placed in service would be added to a recovery account only to the extent it exceeds progress expenditures for the asset which were previously taken into account. Disposition of assets and recapture Under the open-ended account system, gains and losses on the disposition of assets would generally be deferred. Instead of immediate gain or loss recognition, the amount realized would reduce the appropriate account balance which, in turn, would reduce the amount of recovery deductions in the year of the disposition and in subsequent years. If the amount realized reduces the account balance to a negative amount, such amount would generally be treated as a capital gain under section 1231, and section 1245 recapture would not apply. The amount so treated would be reduced to the extent of one-half of the depreciable bases of assets placed in service (or qualified progress expenditures made) during the taxable year. No reduction in the balance of a recovery account would be made by reason of a transfer at death. In general, the fair market value of an asset would be subtracted from the appropriate recovery account in the case of transfers other than a sale. Property which ceases to qualify for cost recovery, such as property which is converted to personal use, would be treated as disposed of at fair market value. The bill would provide special rules for the treatment of likekind exchanges, involuntary conversions, and certain transactions in which basis carries over. In the case of like-kind exchanges or involuntary conversions where the properties were assigned to the same recovery account, no changes would be made to the account unless additional consideration in the form of money or other nonqualifying property were involved. Where such additional consideration is involved or the properties exchanged were assigned to different recovery accounts, adjustments would be made in accordance with regulations to be prescribed by the Treasury Department. In a disposition in which post-1983 recovery property is transferred and the transferee's basis is determined by reference to the adjusted basis of the transferor, the transferor's recovery account would generally be reduced by an amount which bears the same ratio to the account balance as the fair market value of the transferred property bears to the fair market value of all assets (including the transferred property) in the account. The transferee's basis in the transferred property would be the amount by which the transferor's account was reduced. Earnings and profits In the case of post-1983 recovery property, earnings and profits would be computed in the same way as recovery deductions, except that recovery percentages of 25 percent for the category-1 recovery account and 15 percent for the category-2 account would be used in every taxable year. Two separate accounts would be maintained for this purpose. C. Effective Dates In general, the provisions of the bill, as introduced, would apply to property placed in service by the taxpayer after December 31, 1982, in taxable years ending after that date. The provisions relating to qualified progress expenditures would apply to expenditures made by the taxpayer after December 31, 1985, in taxable years ending after that date. DESCRIPTION OF TAX BILLS SCHEDULED FOR A JOINT HEARING BEFORE THE SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT AND THE SUBCOMMITTEE ON SAVINGS, OF THE COMMITTEE ON FINANCE ON FEBRUARY 24, 1984 INTRODUCTION The bills described in this pamphlet have been scheduled for a joint hearing on February 24, 1984, before the Senate Finance Subcommittees on Taxation and Debt Management and on Savings, Pensions, and Investment Policy. The two bills scheduled for the hearing are S. 1857 (liberalize charitable deduction rules for private nonoperating foundations; amendments to foundation excise tax provisions) and S. 2165 ("High Technology Research and Scientific Education Act"). The first part of the pamphlet is a summary of the bills. This is followed in the second part by a more detailed description of the bills, including present law, explanation of provisions, and effective dates. (1) I. SUMMARY 1. S. 1857-Senators Durenberger, Moynihan, Bradley, Matsunaga, Lugar, Packwood, Tsongas, D'Amato, Riegle, and Heinz Liberalize Charitable Deduction Rules for Private Nonoperating Foundations; Amendments to Foundation Excise Tax Provisions Liberalizing charitable deduction rules The bill would conform the income tax treatment of contributions by individuals to private nonoperating (grantmaking) foundations to that provided under present law for contributions by individuals to public charities or private operating foundations (Code sec. 170), effective for contributions made after 1982. Under the bill, contributions of cash or ordinary-income property to private nonoperating foundations would be deductible up to 50 percent of the donor's adjusted gross income, and contributions of capital-gain property, up to 30 percent, rather than up to 20 percent as under present law. Also, excess contributions to nonoperating foundations could be carried forward for five years. Finally, the full fair market value of capital-gain property donated to nonoperating foundations generally would be deductible; under present law, the amount deductible equals the fair market value reduced by 40 percent of the unrealized appreciation. Narrowing definition of family members Present law contains a number of restrictions imposed on private foundations which depend on determinations of "disqualified persons." This term includes a substantial contributor, a foundation manager, or a member of the family of such individuals (sec. 4946). A member of the family includes the spouse, ancestors, and lineal descendants (and spouses of lineal descendants) of the individual. The bill would narrow the category of disqualified persons by limiting family members to the spouse, ancestors, children, and grandchildren (and the spouses of children and grandchildren) of the substantial contributor, etc., effective January 1, 1983. Increasing reliance on IRS classification of donee organizations Under present law, Treasury regulations and IRS rulings establish guidelines under which a private foundation may rely on an IRS classification of a donee organization as a public charity or private operating foundation. The bill would provide that a grant (made after 1982) to an organization which the IRS has determined to be a public charity (or private operating foundation) would be treated as a grant to such an organization, even though the donee organization loses such status, if (1) the grant was made prior to the earlier of the date of publication by the IRS that the donee organization has lost its qualified status, or the date on which the foundation acquires actual knowledge that the donee organization has been notified by the IRS of loss of its qualified status, and (2) the donor foundation was not responsible for (other than by making grants) or aware of the change in the donee's status. Exemption from expenditure responsibility requirements Under present law, a private foundation must exercise "expenditure responsibility" over grants to organizations other than public charities. In order to ensure that such grants will be properly used by the recipient for charitable purposes, the grantor must make reasonable efforts, and establish adequate procedures, to see that the grant is spent solely for proper uses, to obtain full reports from the grantee, and to make full reports to the IRS on the grants (sec. 4945(h)). The bill would provide that a private foundation is not required to exercise expenditure responsibility over a grant (made after 1982) to an organization if the aggregate amount of grants made during the taxable year by the foundation (and all related foundations) to that organization does not exceed $25,000. Abatement of first-tier excise taxes Under present law, any violation of the foundation rules results in imposition of an initial excise tax on the foundation (or in the case of self-dealing, on the disqualified person who entered into the prohibited transaction with the foundation). In general, this firsttier tax applies automatically when a foundation rule is violated. The bill would waive the first-tier excise tax imposed under sections 4941-4945 on the foundation (or disqualified person, in the case of self-dealing) if the IRS determines that the violation (1) was due to reasonable cause and not to intentional disregard of rules and regulations, and (2) the violation is "corrected" with the specified period. This provision would apply to post-1982 taxable years. 2. S. 2165-Senators Danforth, Bentsen, Chafee, Mitchell, Symms, Packwood, Wilson, Tsongas, Wallop, Pell, Dodd, and Bingaman "High Technology Research and Scientific Education Act" a. Extension of credit for increased research expenditures; modification of qualified research definition; equipment depreciation under credit, ACRS provisions; modification of trade or business requirement Present law An income tax credit is allowed for certain qualified research expenditures incurred in carrying on a trade or business (Code sec. 44F, enacted in ERTA). The credit applies only to the extent that the taxpayer's qualified research expenditures for the taxable year exceed the average amount of yearly qualified research expenditures in a specified base period (generally, the preceding three taxable years). The rate of the credit is 25 percent of the incremental research expenditure amount. |