S. 1758.-S. 1758 would generally provide a simplified accelerated cost recovery system. The bill would generally establish an open account system for 3- and 5-year personal property to replace the current asset-by-asset accounting system. In addition the bill would repeal the investment credit adjustment under TEFRA and the recapture provisions of the Internal Revenue Code.

STATEMENT BY SENATOR DAVE DURENBERGER

Mr. Chairman, I am pleased that we are holding this hearing today to consider S. 1857 and I commend you for your longstanding efforts on behalf of philanthropic organizations. I am hopeful that the Senate Finance Committee will include provisions for reform of our foundation tax laws in any tax package that we report this year.

America's private foundations have provided an invaluable service to our nation by supporting important charitable work in communities nationwide. So great has been their support that over $3 billion has been spent annually by private foundations for philanthropic causes. Foundation grants support new approaches to community health, emergency food and shelter for the homeless, housing for the poor, scholarships, medical research, and numerous other charitable activities. Let me just point out several examples of the innovative grants made by foundations in recent years.

Since 1980, the Ford Foundation has given $450,000 to a program administered by the Harlem YMCA addressing the needs of pregnant teenagers from the age of 11 through 17, as well as their families. Project Redirection has also received $70,000 more from the New York Community Trust, the Helena Rubenstein Foundation, and the J.C. Penney Foundation. This program has been so successful that it has become a national model for other efforts. The use of volunteer mentors, called "community women," in this program contributes enormously to its success. These women are residents of the Harlem community and perform and informal advocate role for the young mother and her family. They are on call seven days a week and perform a variety of functions. This total community effort has brought all segments of governmental agencies that never before have related to one another.

In Tampa, Florida, the Conn Foundation has contributed $20,000 over two and a half years in start-up funds to provide after school child care which has already benefitted over 500 young people.

Since 1976, the Charles Stewart Mott Foundation has provided grants totaling $23.3 million for black colleges, youth employment and training and handicapped. In 1982 the Mott Foundation made grants of over $6 million dollars to serve these purposes.

The Commonwealth Fund, in 1982, provided a three-year grant to examine the lives of 2,000 handicapped elementary school children to seek answers to two questions: Do children with specific types of handicapping conditions who attend regular classes do substantially better or worse than children with similar conditions attending special classes? Do children with specific types of handicapping conditions who live in districts that make a relatively large educational investment per handicapped child do substantially better than children with similar conditions living in districts making an average investment?

It is clear that America's foundations have met significant human needs that the Government might be called upon to perform without the initiatives of the private sector. And they have done so utilizing new ideas and incorporating better ways to perform such activities.

In an effort to correct certain abusive practices and ensure that they serve the public interest, Congress enacted comprehensive reform legislation in 1969. While these restrictions with respect to dealings with closely related parties, annual charitable distributions, business holdings, foundation investments and grants, and public reporting have generally been effective, we have discovered, with the passage of time, that we have gone too far. Since enactment of these regulations, foundations have been carefully audited by the IRS and have proven to be in compliance with our tax laws.

Although the private foundation rules have provided an effective framework for foundations' charitable activities, more than a decade of experience has demonstrated that certain aspects of the rules create significant impediments to effective foundation philanthropy.

In order to encourage foundation development and arrest a decline in foundation development, in 1981, we removed a significant unforseen impediment to foundation progress-the "5" percent rules. The time has now arisen for us to take an important step and remove additional impediments to foundation philanthropy.

Senator Moynihan and I have introduced legislation, S. 1857, which would eliminate the discriminatory tax treatment of lifetime gifts to foundations. Since 1969, such gifts have received significantly less favorable tax treatment than similar gifts to other charities. Currently only a part of the value of appreciated property given to a foundation is deductible; if the same property is given to a public charity, the full amount is deductible. In addition, deductions for gifts to foundations are limited to 20 percent of the donor's annual income; considerably higher limits apply to gifts to public charities. Finally, contributions to foundations in excess of the 20 percent limit cannot be carried over for future years; a five-year carryover period applies to excess contributions for public charities.

This discriminatory tax treatment, coupled with other restrictive administrative burdens on foundations rules, have contributed to a two-thirds drop in the birthrate to new foundations since 1969. Our legislation would help reverse this trend by making these gifts deductible on the same basis as gifts to other charities.

Our legislation would also simplify parts of the 1969 legislation by making several technical changes. It would limit the definition of "family member" to the children and grandchildren of substantial contributors and other so-called “disqualified persons," rather than to all lineal descendents of such disqualified persons.

This legislation would allow foundations to rely on official Internal Revenue Service rulings recognizing the tax-qualified status of potential grantees, and ti would apply strict and detailed recordkeeping and reporting requirements only where total grants by a private foundation to a particular grantee during a taxable year exceed $25,000.

Finally, our bill would provide the Secretary of the Treasury with authority to abate first-level penalty rules in cases in which a violation of the private foundation rules is due to good faith error or omission and is corrected within the statutory period.

This legislation has received broad support from many voluntary and non-profit organizations, as evidenced today by the testimony of the Girl Scouts of America, the YMCA, The United Way and Independent Sector. These organizations will all testify to their recognition of the importance of foundations to all non-profit organizations and society as a whole.

Although the House Ways and Means Committee has reported legislation reducing the discriminatory tax treatment of foundations, I do not believe that its legislation goes far enough. The Ways and Means bill, H.R. 4170, represents progress, but is complex and continues discrepancies in tax treatment of foundations and charities. Senator Moynihan and my bill, on the other hand, is far less complicated and will provide greater impetus for foundation development.

I believe S. 1857 represents an important step in supporting the vital role foundations serve in our country and it sets an example to the rest of the private sector. I am hopeful that my colleagues will join me to work toward inclusion of this legislation in the Finance Committee Tax Bill.

STATEMENT OF SENATOR DANFORTH

Mr. Chairman, I am pleased we were able to schedule a heaing on S. 2165 before the Finance Committee completes its deliberations on what will likely be the only tax bill to be reported in 1984.

The credit, under current law, will expire at the end of 1985. Therefore, it is imperative that we act now to extend it. R&D activities are not planned and budgeted for on a quarterly basis. They, by their nature, are long-term investments, and corporations must plan these activities years in advance. Facing uncertainty over whether the credit will exist after 1985, a corporation today cannot make a rational decision on the level of their R&D activitiy in later years.

This country cannot afford to put this type of damper on the R&D efforts of our industries. It is well established that, prior to the enactment of the R&D credit, the decline in U.S. productivity growth over the last decade paralleled the declining pattern of U.S. R&D spending. To survive in world markets where the competition is intense, U.S. industries must continually invest in major research endeavors to develop and apply new technologies and products.

In a similar vein, Mr. Chairman, our colleges' and universities' efforts to maintain quality education in mathematics, engineering and science are being thwarted by a chronic shortage of faculty and a severe lack of up-to-date scientific equipment. For example, there are today over 2,000 vacancies in university engineering faculties. Universities face two problems in attracting qualified faculty. First, they simply don't have the resources to compete with private firms and the salaries they can

offer. Second, they face difficulty in attracting high calibar people because of antiquated laboratory facilities.

This bill attempts to alleviate this situation by encouraging greater collaboration between private industry and universities. Under the bill, incentives for private funding of university basic research and acquisition of scientific equipment which exist under current law would be broadened. The Association of American Universities, and other associations of institutions of higher education, agree that these provisions will go a long way toward helping our universities upgrade their ability to provide top flight programs in math, engineering, and sciences.

Mr. Chairman, we will find out this morning what the Administration's position on this will be. I expect it to be generally supportive of the major provisions of the bill. Over the last seven or eight months, my staff, the Treasury Department and industry representatives have worked to reach agreement on various issues, primarily the definition of the type of R&D activities should qualify for the credit. Although we may still have differences in approach, I believe our objectives are the same. I am willing to negotiate further, but I want to make it clear that, whether we reach a compromise or not, I will push to have this bill adopted. I hope a majority of my colleagues will join me.

STATEMENT OF SENATOR MALCOLM WALLOP

As we begin this hearing this morning on the open accounts legislation introduced last year by Senator Bentsen, I, and several of our Finance Committee colleagues, I would like to make just a few brief comments on our goals in introducing this legislation and some of the possible concerns which remain to be addressed. As a practical matter, our overriding concern was that of simplification. Open accounts does that, and with the repeal of the basis adjustment provisions passed as a part of TEFRA, the present value of depreciation deductions remains relatively the same as it currently stands under the present system. Before we hear from the Treasury Department and the scheduled witnesses there are two points which I would like to make.

The first of these points concerns a fear which I have picked up in conversations with people interested in this legislation. That fear is that if this legislation were to be passed by the Senate there would be considerable pressure from members of the House of Representatives to drop the basis adjustment repeal provisions, while accepting the remainder of the bill. Were that to happen, American business, especially small business, would be in a much worse position than they are under current law. Let me make my intentions with respect to that possible situation clear. I can conceive of no circumstances that would justify my support for such action, and if that looked like a possibility I would work for a commitment from the Chairman of the Committee to drop the open accounts proposal were the basis adjustment repeal to be dropped. Let me stress that it was our intention in introducing this legislation to create a revenue raising measure.

With respect to one of the overriding goals in introducing this legislation, that of simplification, there are provisions of our legislation which I believe must be addressed before that goal is attained. While the bill would eliminate the need for vintage accounting for the purpose of computing depreciation, many of those vintage accounts would nevertheless be required to be maintained for purposes of the investment tax credit and possible ITC recapture. I believe that issue must be addressed if we are going to fulfill our own intent when the legislation was introduced. I am sure the Treasury Department will express some of these same concerns and I look forward to hearing their comments as well as those from other witnesses scheduled to appear before the Committee this morning.

STATEMENT BY SENATOR GEORGE MITCHELL

Mr. Chairman, I congratulate you for scheduling a hearing on S. 2165, the High Technology Research and Scientific Education Act. I hope that this hearing will be followed by prompt action by the Finance Committee.

Maintaining and improving our world leadership in technology is an objective that enjoys bipartisan support. Anyone who examines the economic challenges facing the U.S. will conclude that steps must be taken to enhance our economy's capacity to innovate. Essential to any comprehensive program aimed at advancing American research and development capabilities is conforming the tax code to reflect the unique concerns of innovative companies.

S. 2165 acknowledges the importance of both businesses and universities in the innovation process. By improving and making permanent the R&D tax credit, the bill should improve the effectiveness of the credit by giving research-intensive busi

nesses greater certainty on the long-term availability of this incentive. In addition, the proposed credit for business contributions to universities should provide much needed financial support for basic research.

The bill also modifies the tax incentive for the donation of scientific and technical equipment to universities. I am pleased to have played a role in the enactment of the existing provision. In 1981, Representative Shannon and I introduced the special deduction, which was incorporated in the Economic Recovery Tax Act of 1981. The improvements included in S. 2165 will enable the equipment donation incentive to improve both the education of science students and the research done at universities.

While I recognize, Mr. Chairman, that tax proposals constitute only one part of an overall program to bolster U.S. research and development efforts, I believe that enactment of S. 2165 should be a high priority. I hope the short legislative schedule this year will not prevent us from moving quickly on this legislation.

DESCRIPTION OF S. 1758

RELATING TO

SIMPLIFIED COST RECOVERY SYSTEM
FOR PERSONAL PROPERTY

SCHEDULED FOR A HEARING

BEFORE THE

SUBCOMMITTEE ON

TAXATION AND DEBT MANAGEMENT

OF THE

SENATE COMMITTEE ON FINANCE

ON FEBRUARY 24, 1984

PREPARED BY THE STAFF

OF THE

JOINT COMMITTEE ON TAXATION

INTRODUCTION

The Subcommittee on Taxation and Debt Management of the Senate Committee on Finance has scheduled a public hearing on February 24, 1984, on S. 1758 (introduced by Senators Bentsen, Wallop, Symms, Bradley, Grassley, Mitchell, Durenberger, Baucus, Matsunaga, and Roth). The bill relates to a simplified cost recovery system for personal property.

The first part of the pamphlet is a summary. This is followed in the second part with a description of S. 1758, including present law, explanation of provisions, and effective dates.