Mr. CHAPOTON. We wouldn't object if you took it out. I guess we would like to look at it a little bit more and see if there is a problem that should be dealt with.

Senator DURENBERGER. Thank you.

Senator Danforth.

Senator DANFORTH. Buck, when we first passed the R&D tax credit in, I guess, 1981, there was a question at that time about how to define "research and development," and we decided to define it on the basis of just a reference to another section of the code. And it was thought that, while definitions of such things as "research and development" were always a little mushy, the greatest certainty would be provided if we could just reference something that was already established.

Nobody wants the provisions of the code to be used to rip off the Treasury, though very few deductions, I suppose, or credits, aren't used in an abusive way. Certainly the deductions for "ordinary and necessary" business expenses can be used for events that you and I would not consider "ordinary and necessary," but they deduct them anyhow.

If the definition is modified, I guess the question is, is it worth it? That is to say, will these changes produce sufficient additional revenues, to justify the uncertainty caused by the new definition?

Another way of putting the question, I guess, is: Can the redefining be done in a way which reasonably accomplishes most of your objectives and yet is sufficiently predictable to the business and the academic community so that they know what to plan, rather than to just think, "Well, this may or may not work out. But if we are audited, maybe we will be surprised," and, "We really can't plan whatever these investments are going to be?"

Mr. CHAPOTON. Well, the latter approach, of course, would be the most desirable. I recognize the need-we recognize and have spent a lot of time on this-and the desirability of predictability in this

area.

I think your first question-and let me back up for just a minute, Senator Danforth-is a very valid one: Do we do enough good by changing the definition, if that change is inherently uncertain? I think that's a good question that can be explored.

Our conclusion on that is, yes, that without a change we are simply giving a credit beyond—or at least the credit will be claimed, and in an audit activity we cannot stop it-well beyond what the Congress intended.

And then your bill, and the intent of the groups that we have been working with and that you have been working with do attempt to address that problem. I think they attempt to provide certainty and attempt to restrict the definition somewhat.

We think, though, in practice it hasn't worked, and we haven't restricted it enough. It would basically allow the credit for all preproduction engineering, so we think it has got to be targeted more.

But I recognize, when we say that, we are adding some uncertainty, whether a particular activity or a particular expenditure will qualify for the credit. And I think it is a judgment call whether that is worth it or not. Our judgment right now is that it is, that in a great preponderance of cases the taxpayers will know that a credit qualifies or know that it will not. There will always be cases

on the line, and we will simply have to have some development of the law.

That is not an unusual case, that we have to develop the law with respect to the tax deductions and credits in a lot of areas, but there is an awful lot of tension in a definition such as this when you are talking about a credit.

Senator DANFORTH. The markup is scheduled for Tuesday, and I know that you have been meeting with a variety of staff people and others to try to work something out. It's Friday now. My hope is that between now and Tuesday we can come to some kind of reasonable agreement; if not, we will just have to vote on the proposition and see what happens.

Mr. CHAPOTON. Let me say, we would like that, too, but we would surely like it in this bill.

Senator DANFORTH. Well, I hope you can continue working between now and Tuesday so that we can consider it in the markup. But I do hope that we don't throw out the baby with the bath; I hope we don't so try to hedge it so as to get away from some possible abuses that we create something that is just totally unpredictable and nobody can work with.

Mr. CHAPOTON. Well, I tend to agree with that. I think, though, that I'm not sure "abuses" is a proper term. I think what we are trying to see is that it is indeed targeted, and you would have some cases where the credit would be allowed for a manufacturing improvement that-I wouldn't call it an abuse, but I also wouldn't call it technological improvement that we are attempting to encourage.

Senator Durenberger, let me give you some figures on this 2-percent tax, if you would like.

Senator DURENBERGER. All right.

Mr. CHAPOTON. Our estimate-in 1982, $90 million was received from the tax. Our estimate, in examining all of the exempt organizations, the cost is about $33 million. The balance, $51 million on the pension plans from tax-exempt pension and profitsharing plans. So the main component, 33, is I think what you were looking for.

Senator DURENBERGER. Let me ask you one question before we leave S. 2165. I am trying to get clarified in my mind your testimony, your written testimony, on service contracts.

I understand that you favor including replacement parts, but not the labor to replace them. You don't have that problem on installation of equipment; you do favor including labor for that.

Mr. CHAPOTON. I think, in general, capitalized cost of equipment is――

Senator DURENBERGER. But why draw the distinction between original installation and replacement, between labor and parts? Mr. CHAPOTON. Between labor and parts, on replacement? Senator DURENBERGER. Yes.

Mr. CHAPOTON. I think we just cannot start down the road of saying services qualify

Senator DURENBERGER. I think the services play a part.

Mr. CHAPOTON. I understand, but services-many times, but not always-would be the major element of the picture there, and we

would be starting down a road that I think you soon could not stop at that level. I mean, you are talking about just pure services.

Senator DURENBERGER. But I'm not sure what your doctor example had to do with it.

Mr. CHAPOTON. Well, just that if you provide services, then the services in the replacement parts would have to be a substantial portion but not the greater portion of the cost of the job. So you are talking about, really, a full deduction for the fair market value of services.

Senator DURENBERGER. Well, maybe we could iron that out by Tuesday.

Senator Bentsen, do you have any questions of the Secretary? Senator BENTSEN. Mr. Chairman, I appreciate your scheduling this hearing and including S. 1758, the Accounting Cost Recovery Simplification Act.

I understand the Secretary has stated, you know, we just went through ACRS and issued regulations on that. I am sympathetic to that point of view, and I wish we had been able to get this one in the first instance. I think it would have been a very major step forward. It has substantial support in the Congress in those who have taken the time to study it.

I am not sure when we are going to attain this one, but I think we ultimately will. It has worked rather well in Canada, I think, from what we have seen there.

One of the things that we should be striving for is as much simplification as we can in the tax structure. I believe this would be a substantial step forward.

I would urge that the Department do what it can to see if we can work toward this without being disruptive in the process. I think it is a very worthwhile objective.

Mr. CHAPOTON. Senator Bentsen, I would certainly agree that there are some worthwhile features, simplifying features in going to an open-account system. We did look at it some in 1981. The other had a great deal of movement, as we all remember.

Senator BENTSEN. I think there was a great deal of pride of authorship on that one at that moment, and I agree with you, it had a great deal of movement. Personally, I think you are a little bit in the category of some of those people saying, "Well, we didn't think of this," and going ahead with it.

One of the problems we run into around here is everybody wanting to be an author. And just as the Carter administration had some good ideas, and some bad ones, there is a tendency to reject all that the other side has done. I hope after this year that we retain some of you fellows' good ideas. [Laughter.]

Mr. CHAPOTON. I hope so, too.

Senator BENTSEN. Thank you. [Laughter.]
Senator DURENBERGER. Any other questions?

[No response.]

Senator DURENBERGER. Thank you, Buck, very much.
Mr. CHAPOTON. Thank you, Mr. Chairman.

Senator DURENBERGER. Next we have a panel of two on S. 1758, Stan Bregman, on behalf of the Truck Renting & Leasing Association and the American Car Rental Association; and John J. Motley

III, director of Federal legislation for the National Federation of Independent Business.

Mr. WALLOP. Mr. Chairman, while they are coming up, I have a brief statement which I would like to put in the record.

Senator DURENBERGER. Without objection, that statement will be made part of the record.

I will remind the witnesses that we will be operating now with the 3-minute rule on each statement. Your written statements will be made part of the record, and you may proceed to abbreviate them.

We will start with Mr. Bregman.

STATEMENT OF STANLEY I. BREGMAN, BREGMAN, ABELL & KAY, WASHINGTON, DC, ON BEHALF OF THE TRUCK RENTING & LEASING ASSOCIATION AND THE AMERICAN CAR RENTAL ASSOCIATION, WASHINGTON, DC

Mr. BREGMAN. Thank you, Mr. Chairman.

My name is Stanley Bregman, a member of the firm of Bregman, Abell, & Kay, and I am representing the Truck Renting & Leasing Association and the American Car Rental Association.

I would like just to briefly summarize the written statement that I have submitted for the record.

I would like to first commend Senator Bentsen and Senator Wallop for taking the lead in introducing S. 1758. We believe this to be a very good piece of legislation and good tax policy.

The Truck Renting & Leasing Association and the American Car Rental Association are made up of a few large corporations and thousands of very small businesses. And it is primarily because of these small businesses that we urge the passage of S. 1758.

An open-account system is certainly a more simple system of accounting. It will reduce the number of accounts, and allow small companies to manage their assets and their gains and losses in a much more simple fashion. It gives them the flexibility not to take the maximum recovery percentage allowed in any one year. This is very helpful to small businesses, for they can then enjoy the benefit in future years.

If the open-account system was enacted by itself, it might be somewhat expensive to some of our members; but this bill was very wisely constructed to couple it with the repeal of the basis adjustment. The basis adjustment is a very costly, burdensome, complex procedure that not only gives trouble to small business with undue complications but it affects the bottom line of profits and losses, and that in turn affects the financial capabilities of the companies. The basis adjustment affects the financial statement, and it is the financial statement that determines bank financing.

There is one more point that I would like to make as far as this bill is concerned, which I think is a very good point, and that is that it allows people with 3-year property to drop that 3-year property into the 5-year class.

When ERTA was first enacted, a last minute amendment was put in that said that all 1245 property with a mid-point life of 4 years would be in the 3-year class. That was an advantage to some and a disadvantage to others. Because of this, for instance, over

the-road tractors are constructed and engineered in different ways, before ERTA some over-the-road tractors, were depreciated over a 5-year period and others over a 3-year period. We believe that each company should have the option to place their 3-year property in the 5-year class.

Thank you, Mr. Chairman.

Senator DURENBERGER. Thank you very much.
Mr. Motley.

[Mr. Bregman's prepared statement follows:]