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Transfers of qualified scientific property or services

The special deduction would apply to a transfer, without consideration, by a corporation21 of tangible personal property that is inventory (sec. 1221(1)), of tangible personal property used in the transferor's business (sec. 1231(b)), or of computer software, and to the performance, without consideration, of services in connection with such transferred property, if such transfer of property satisfies all of the following requirements.

(1) Qualified scientific property

The transferred property must be scientific or technical equipment or apparatus, or replacement parts for such equipment. In the case of transferred inventory, the equipment must be at least 50 percent assembled by the taxpayer, and the taxpayer must be regularly engaged in the business of assembling and selling or leasing scientific equipment of that type.

Substantially all (at least 80 percent) the use of the transferred equipment must be for the direct education of students or faculty, for research (within the meaning of sec. 174), or for research training. Also, the use of the equipment must be in the United States and must be in mathematics; the physical or biological sciences; engineering; computer science; physical, biological, computer, or engineering technologies; or electronic or automated industrial, medical, or agricultural equipment and instrumentation operation.

Except for replacement parts, or computer software, only single units of qualified scientific equipment having a value in excess of $250 would qualify for the special deduction. Property which had been used in the transferor's business would qualify only if it is functional and usable without need of any repair, reconditioning, or other similar investment by the recipient. All transferred equipment would have to be accompanied by the same warranties as normally provided by the manufacturer in connection with a sale of the transferred equipment.

(2) Qualified services

The bill would define qualified services as the performance of maintenance, repair, reconditioning, or similar services which the transferor furnishes, pursuant to a standard contract with the recipient, in connection with a transfer of qualified scientific property.

(3) Eligible recipients

The qualified scientific property must be transferred to—

(a) an educational organization (within the meaning of sec. 170(b)(1)(A)(ii))22 which is an institution of higher education (within the meaning of sec. 3304(f)); 23 or

(b) an association at least 80 percent of whose members are such institutions of higher education.

21 For this purpose, the term corporation would not include S corporations (sec. 1361(a)), personal holding companies (sec. 542), or service organizations (sec. 414(m)(3)).

22 See note 16, supra.

In either case, the transfer must be made through the recipient's governing body.

(4) Time of transfer/original use

In the case of inventory property, the transfer must be made within six months after substantial completion of assembly of the equipment. Also, the original use of the equipment must be by the recipient.

In the case of equipment which has been used in the transferor's business, the transfer must be made within three years after the property is first placed in service by the taxpayer.

(5) Restrictions on recipients

The bill would provide that the transferred equipment may not be retransferred by the recipient, in exchange for money, other property, or services, within five years after receipt.

The transferor must obtain a written statement from the recipient's governing body, executed under penalties of perjury, representing that the latter's use and disposition of the property will be in accordance with the requirements for the special deduction. In the case of a transfer of equipment which has been used in the taxpayer's business, the recipient must also state that the property will be functional and usable without need of any repair, reconditioning, or other investment.

Allowable deduction

The amount of deduction allowed for transfers of qualified scientific property or services meeting the requirements of the bill would be as follows:

(a) Tangible inventory property or computer software.-Fair market value, but limited to the lesser of (a) twice the taxpayer's basis in the property or (b) the sum of the taxpayer's basis in the property plus one-half of the unrealized appreciation (i.e., one-half of the difference between the property's fair market value determined at the time of the transfer and the basis in the property).

(b) Tangible property used in the transferor's business.-The lesser of (a) 150 percent of the taxpayer's basis in the property (computed without regard to depreciation adjustments), less accumulated depreciation, or (b) fair market value.

(c) Qualified services.-The lesser of (a) the fair market value of such services (as determined by the amount normally paid by customers for such services) or (b) 150 percent of the taxpayer's direct costs of providing such services, in either case reduced by the amount for which a deduction is allowed to the transferor under section 162, as ordinary and necessary business expenses, in respect of such services.

Special limitations

Equipment limitation.-Under the bill, the special deduction would not be allowed for transfers of scientific equipment (other than used equipment) to the extent that, determined on a productby-product basis, the total of transfers in the taxable year by the taxpayer of such equipment exceeds 20 percent of the number of

units of such product sold by the taxpayer in the ordinary course of its business in that taxable year.

Overall limitation.-Also, while transfers of qualified scientific property or services would not have to qualify as charitable contributions24 in order for the special deduction to apply under the bill, the corporation's aggregate deduction for charitable contributions under section 170 and transfers under the new provision could not exceed 10 percent of its taxable income (computed with certain modifications). Any amount of the special deduction exceeding this limitation could be carried forward in the same manner as an excess charitable deduction by a corporation (i.e., the excess could be carried forward to the five succeeding taxable years, subject to the percentage limitation in those years).

Effective date

The provisions of section 202 of the bill would be effective for taxable years beginning after 1983.

d. Tax treatment of payments and loan forgiveness received by certain graduate science students

In general

Present Law

Subject to several limitations, gross income does not include amounts received as a scholarship at an educational institution or as a fellowship grant (Code sec. 117). In general, a degree candidate may exclude the entire amount of the scholarship or fellowship grant, except for any portion which is regarded as payment for services in the nature of part-time employment. An individual who is not a candidate for a degree is limited to an exclusion of $300 per month for a period of 36 months.

Future services as compensation

In general, scholarships or fellowship grants are not excludable from gross income if they constitute compensation for past, present, or future employment services or for services subject to the direction or supervision of the grantor, or if the funded studies or research are primarily for the benefit of the grantor (Treas. Regs. sec. 1.117-4(c)). However, amounts received under Federal programs that are used for qualified tuition and related expenses are not disqualified from the exclusion merely because the recipient agrees to perform future services as a Federal employee or in a health manpower shortage area (sec. 117(c)).

In 1977, the Internal Revenue Service ruled that awards made under the provisions of the National Research Service Awards Act to individuals who, in return for receiving the awards, must subsequently engage in health research or teaching or some equivalent service (and must allow the government to make royalty-free use of any copyrighted materials produced as a result of the research) are not excludable as scholarships or fellowship grants (Rev. Rul. 77319, 1977-2 C.B. 48). However, this ruling was overturned by the Revenue Act of 1978 for awards made during calendar years 19741979, and by subsequent legislation for awards made through 1983. Income from debt cancellation

As a general rule, income is realized when indebtedness is forgiven or cancelled (sec. 61(a)(12)). In the case of discharge from debt when the taxpayer is in bankruptcy or is insolvent or the discharge of qualified business indebtedness, the discharge amount instead may be applied to reduce tax attributes of the debtor (or in certain circumstances, may be excluded from income) (secs. 108, 1017).

The Tax Reform Act of 1976 provided a special income exclusion rule for cancellation of certain student loans. The exclusion under that rule applied to debt discharges (prior to 1979) pursuant to a


loan agreement under which the indebtedness would be discharged if the individual worked for a period of time in specified professions in certain geographical areas or for certain classes of employers. This rule applied to student loans made to an individual to assist in attending an educational institution only if the loan was made by a government unit or agency. The rule was extended by the Revenue Act of 1978 to such discharges occurring through 1982.

In general

Explanation of Section 203 of the Bill

The bill would provide a new Code section 117A, under which gross income would not include amounts received by certain graduate science students as a scholarship, fellowship grant, or qualified student loan forgiveness, including situations where the recipient is required as a condition of receiving such amounts to perform future teaching services for any of a broad class of qualified educational organizations.

Qualified recipients

Under the bill, the new provision would apply to a student who has a bachelor's degree or its equivalent and who is engaged in postgraduate study as a degree candidate in mathematics, engineering, the physical or biological sciences, or computer science at a qualified educational organization. The latter term would mean an educational institution that is described in section 170(b)(1)(A)(ii),25 admits as regular students only individuals having a certificate of graduation from a high school (or the recognized equivalent of such certificate), is legally authorized to provide an educational program beyond high school, and provides an educational program for which it awards a bachelor's or higher degree. Qualified student loan forgiveness would be defined as forgiveness of a loan received by a qualified student for the purpose of financing postgraduate study in mathematics, engineering, the physical or biological sciences, or computer science, but only to the extent that the loan was actually expended for qualified tuition and related expenses (as defined below), and where the student is required to perform teaching services for any of a broad class of qualified educational organizations on completion of the postgraduate course of study, under the terms of a written loan agreement and as a condition of receiving loan forgiveness.

Limitations on exclusion

The exclusion from gross income under the bills would not extend to amounts received as payment for teaching, research, or other services as part-time employment required during the period of postgraduate study as a condition to receiving the scholarship, fellowship grant, or qualified student loan. However, teaching, research, or other services would not be regarded as such part-time employment if such activities are required of all candidates (whether or not recipients of scholarships, fellowship grants, or qualified

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