Explanation of provision Section 1 of the bill would provide the same charitable deduction rules for contributions by individuals to all private nonoperating foundations as now apply for contributions to public charities and private operating foundations. Thus, the 50-percent/30-percent limitations would apply instead of the 20-percent limitation; any contribution amounts exceeding the limitations could be carried forward five years; and the full fair market value of donated capital-gain property generally could be deducted. The amendments made by section 1 of the bill would apply to taxable years beginning after 1982. b. Narrowing definition of family members Present law Present law contains a number of restrictions imposed on private foundations (such as prohibitions on self-dealing and excess business holdings) which depend on determinations of "disqualified persons." A "disqualified person" includes a substantial contributor, a foundation manager, or a member of the family of either a substantial contributor or foundation manager (sec. 4946). For this purpose, a member of the family includes the spouse, ancestors, and lineal descendants (and spouses of lineal descendants) of the individual. Explanation of provision Section 2(a) of 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. The effect of this amendment would be to exclude from the definition of family member any lineal descendant who is more than two generations from the substantial contributor, etc. Thus, for example, a foundation could engage in commercial transactions with the great-grandchild of a substantial contributor which, under present law, would constitute self-dealing transactions. The amendment made by section 2(a) of the bill would take effect on January 1, 1983. c. Increasing reliance on IRS classification of donee organizations Present law The tax status of a donee organization as a public charity or private operating foundation is important to a donor private foundation because (1) foundation grants to operating foundations generally may be counted by the donor foundation as qualifying distributions in satisfaction of the section 4942 payout rules, while grants to nonoperating foundations do not so qualify (with certain exceptions); and (2) a donor foundation must exercise expenditure responsibility (sec. 4945) over grants to operating or nonoperating foundations, but not over grants to public charities. Pursuant to Treasury regulations under section 4945, once an or tion of whether a grant is subject to the expenditure responsibility requirements generally will not be affected by the donee's subsequent loss of classification as a publicly supported organization until notice of loss of classification is published. However, a donor foundation may not rely on the donee organization's classification if the donor foundation is responsible for or aware of a "substantial and material" change in the donee organization's sources of support that results in the organization's loss of classification as a publicly supported organization. In general, the donor foundation will not be considered responsible for or aware of such a change in support (and hence may rely on a published classification) if the grant is made in reliance on a detailed written statement by the grantee organization that the grant will not result in loss of public charity status, and the information in such statement would not give rise to a reasonable doubt as to the effect of the grant (Treas. Reg. sec. 1.509(a)-3(c)). To facilitate reliance on published classifications, the Internal Revenue Service has issued guidelines specifying circumstances under which a donor foundation will not be considered responsible for a "substantial and material" change in support of the donee organization (Rev. Proc. 81-6, 1981-1 C.B. 620).1 În addition, the Internal Revenue Service has published guidelines specifying circumstances under which a grant will be considered "unusual" and hence will not cause the donee organization to lose its status as publicly supported (Rev. Proc. 81-7, 1981-1 C.B. 621).? Explanation of provision Section 2(b) of the bill would provide that a grant to an organization which the Internal Revenue Service 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 Service 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 Service 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. The amendment made by section 2(b) of the bill would apply to grants made after 1982. 1 Under these guidelines, a donor organization generally will not be considered responsible for a substantial and material change in support if the aggregate of gifts, grants, and contributions received from the donor organization for a taxable year does not exceed 25 percent of the aggregate support received by the donee organization from all other sources for the four taxable years immediately preceding the year of the grant. In such circumstances, the donor foundation can rely on the classification of the donce organization as publicly supported without risk that its grant will later be treated as causing the donee organization to lose its public charity status (thereby subjecting the donor foundation to excise tax liability for failure to exercise expenditure responsibility). 2 Under these guidelines, a grant generally will be considered unusual where six conditions are met: (1) the grant is not made by a donor foundation which created the donee organization or was a substantial contributor to the donee organization; (2) the grant is not made by a donor organization which is in a position of authority to the donee organization; (3) the grant is made in cash, readily marketable securities, or assets that directly further the exempt purpose of the donee organization; (4) the donee organization has received an advance or final ruling that it is classified as a publicly supported organization; (5) there are no material restrictions imposed on the grant; and (6) if the grant is intended to pay for the operating expenses of the donee organization, the grant is expressly limited to one year's operating expenses. d. Exemption from expenditure responsibility requirements Present law To avoid imposition of excise taxes under Code section 4945, 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 Internal Revenue Service on the grants (sec. 4945(h)). There is no exception in present law from the expenditure responsibility requirements for grants below a specified dollar amount. Explanation of provision Section 2(c) of the bill would provide that a private foundation is not required to exercise expenditure responsibility over a grant 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. This exemption would apply to grants made after 1982. e. Abatement of first-tier excise taxes Present law The Tax Reform Act of 1969 established a two-tier system of excise taxes intended to ensure compliance with the private foundation rules set forth in Code sections 4941-4945. 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, even if the violation in a particular instance could be deemed inadvertent. However, where a foundation fails to satisfy the section 4942 payout requirements solely as a result of an incorrect asset valuation which was due to reasonable cause, the excise tax under that section is excused if the payout deficiency is made up during a specified period. If a violation of the foundation rules is not "corrected" within a specified period, an additional excise tax is imposed on the foundation (or in the case of self-dealing, on the disqualified person). Explanation of provision Section 2(d) of 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 Internal Revenue Service 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. The amendments made by section 2(d) of the bill would apply to 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 Current deduction for certain research expenditures General rule.-As a general rule, business expenditures to develop or create an asset which has a useful life that extends beyond the taxable year, such as expenditures to develop a new product or improve a production process, must be capitalized. However, Code section 174 permits a taxpayer to elect to deduct currently the amount of "research or experimental expenditures" incurred in connection with the taxpayer's trade or business. For example, a taxpayer may elect to expense the costs of wages paid for services performed in qualifying research activities, and of supplies and materials used in such activities, even though these research costs otherwise would have to be capitalized. The section 174 election does not apply to expenditures for the acquisition or improvement of depreciable property, or land, to be used in connection with research.3 Thus, for example, the total cost of a research building or of equipment used for research cannot be currently deducted under 174 in the year of acquisition. However, the amount of depreciation (cost recovery) allowance for a year with respect to depreciable property used for research may be deducted in that year under the election. Under ACRS, machinery and equipment used in connection with research and experimentation are classified as three-year recovery property and are eligible for a six-percent regular investment tax credit. Qualifying expenditures.-The Code does not specifically define "research or experimental expenditures" eligible for the section 174 deduction election (except to exclude certain costs). Treasury regulations (sec. 1.174-2(a)) define this term to mean "research and development costs in the experimental or laboratory sense." This includes generally "all such costs incident to the development of an experimental or pilot model, a plant process, a product, a formula, Also, the statute excludes expenditures to ascertain the existence, location, extent, or quality of mineral deposits, including oil and gas, from eligibility for section 174 elections (sec. 174(d)). However, expenses of developing new and innovative methods of extracting minerals from the ground may be eligible for sec. 174 elections (Rev. Rul. 74-67, 1974-1 C.B. 63). Also, certain expenses for development of a mine or other natural deposit (other than an oil or gas well) may be deductible under sec. 616. an invention, or similar property", and also the costs of obtaining a patent on such property. The present regulations provide that qualifying research expenditures do not include expenditures "such as those for the ordinary testing or inspection of materials or products for quality control or those for efficiency surveys, management studies, consumer surveys, advertising, or promotions." Also, the section 174 election cannot be applied to costs of acquiring another person's patent, model, production, or process or to research expenditures incurred in connection with literary, historical, or similar projects (Reg. sec. 1.174-2(a)). Credit for increasing certain research expenditures Overview General rule.-An income tax credit is allowed for certain qualified research expenditures paid or incurred by a taxpayer during the taxable year in carrying on a trade or business of the taxpayer (Code sec. 44F, enacted in the Economic Recovery Tax Act of 1981). The credit applies only to the extent that the taxpayer's qualified research expenditures for the taxable year exceed the average amount of the taxpayer's yearly qualified research expenditures in the specified base period (generally, the preceding three taxable years). The rate of the credit is 25 percent of the incremental research expenditure amount. Under present law, the section 44F credit applies to qualified research expenditures paid or incurred after June 30, 1981 and before January 1, 1986. Qualifying expenditures.-For purposes of the section 44F credit, the definition of research is the same as that used for purposes of the special deduction rules under section 174, but subject to certain exclusions. A taxpayer's research expenditures eligible for the section 44F incremental credit consist of (1) "in-house" expenditures by the taxpayer for research wages and supplies used in research, plus certain amounts paid for research use of laboratory equipment, computers, or other personal property; (2) 65 percent of amounts paid by the taxpayer for contract research conducted on the taxpayer's behalf; and (3) if the taxpayer is a corporation, 65 percent of the taxpayer's expenditures (including grants or contributions) pursuant to a written research agreement for basic research to be performed by universities or certain scientific research organizations. Relation to deduction.-The credit is available for incremental qualified research expenditures for the taxable year whether or not the taxpayer has elected under section 174 to deduct currently research expenditures. The amount of any section 174 deduction to which the taxpayer is entitled is not reduced by the amount of any credit allowed for qualified research expenditures. Trade or business limitations The section 44F credit is available only for research expenditures paid or incurred in carrying on a trade or business of the taxpayer. With one exception (described below), the "carrying on" test for |