those years. The 1981-83 fixed floor would not be adjusted to reflect inflation. The amount exceeding the floor, to which the new credit would apply, would not also enter into the computation of the present-law incremental credit under section 44F. The amount of credit-eligible basic research expenditures up to the floor would remain eligible for the present-law incremental credit under section 44F (and would in later years enter into the base period amounts for purposes of computing the incremental credit). Under the bill, no amount of property transferred to universities, etc. for basic research for which an augmented deduction (described below) would be provided would also be eligible for the new credit or the existing incremental credit. c. Expanded special deduction for transfers to universities of scientific equipment for certain research or educational purposes Present law In general, the amount of charitable deduction otherwise allowable for donated property must be reduced by the amount of any ordinary gain which the taxpayer would have realized had the property been sold for its fair market value at the date of the contribution (Code sec. 170(e)). For example, a manufacturer which makes a charitable contribution of its inventory generally may deduct only its basis in the property. However, under a provision enacted in ERTA, corporations are allowed an augmented charitable deduction for donations of newly manufactured scientific equipment to a college or university for research use in the physical or biological sciences (sec. 170(e)(4)). This increased deduction is generally for the sum of (1) the corporation's basis in the donated property and (2) 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 contribution and the donor's basis in the property). However, in no event is the augmented deduction allowed for an amount which exceeds twice the basis of the property. Section 202 of the bill In place of the augmented charitable deduction rule enacted in ERTA, the bill would enact a new deduction provision, generally of broader scope, outside the charitable deduction rules. The provision would be effective for taxable years beginning after 1983. Under the new provision, corporations would receive special deductions for amounts in excess of basis for transfers, without consideration, of scientific or technical equipment to colleges or universities or certain associations of such educational institutions, for use in either research or education in certain sciences, technologies, or equipment operation fields. Unlike present law, an increased deduction would apply to transfers of property which has been used in the transferor's business (if not for more than three years), and to transfers of computer software. In addition, special deductions would be allowed under the bill for the value of performing certain maintenance and repair services in connection In addition, the bill would provide that the cost of research equipment-which now is recoverable over three years, with a six percent investment tax credit-would be recoverable over five years, with a ten percent investment credit. This provision would apply to property placed in service in post-1983 taxable years. Trade or business test.-The bill would in effect repeal the trade or business requirement of present law for most corporations. As a result, research expenditures of start-up corporations would be eligible for the credit, as would expenditures of established corporations incurred in research endeavors that are not directly related to their existing trades or businesses. With respect to research expenses of a partnership, the bill would provide that the trade or business test used to determine whether such expenses qualify for the credit is to be applied at the partnership level, without regard to the trade or business of any partner. This rule would be modified for certain corporate and other joint ventures. b. Increased credit for corporate support of basic research at universities Present law Under present law, corporations may take into account, for purposes of computing the section 44F credit for a taxable year, 65 percent of university basic research expenditures for that year; similarly, this percentage amount is treated as qualified research expenditures in a base period year when the corporation calculates the credit in subsequent years. If any basic research payment made during a year is attributable to research to be conducted by the university in a later year, that amount is treated, pursuant to a prepayment limitation rule in present law, as paid in the year or years when the research is actually conducted. This special rule for basic research applies only to corporate expenditures (including grants or contributions) paid or incurred pursuant to a written research agreement between the taxpayer corporation and a college or university, certain tax-exempt scientific research organizations, or certain qualified funds. Section 201 of the bill The bill would provide more favorable tax treatment for corporate expenditures (including grants or contributions) for basic research performed at universities or at certain scientific research organizations, by (1) increasing, from 65 to 75 percent, the percentage of such expenditures which are eligible for a credit; (2) applying a new 25-percent credit to the excess of the percentage amount over a fixed floor based on 1981-83 expenditures, rather than over a moving base period average; and (3) making the prepayment limitation of present law inapplicable to such expenditures. The new 25-percent credit, effective for taxable years beginning after 1983, would apply to the excess of (1) 75 percent of qualifying university basic research expenditures over (2) the greater of the average yearly amount of credit-eligible university basic research expenditures for the corporation's 1981-1983 taxable years or one percent of the average yearly amount of the corporation's total in those years. The 1981-83 fixed floor would not be adjusted to reflect inflation. The amount exceeding the floor, to which the new credit would apply, would not also enter into the computation of the present-law incremental credit under section 44F. The amount of credit-eligible basic research expenditures up to the floor would remain eligible for the present-law incremental credit under section 44F (and would in later years enter into the base period amounts for purposes of computing the incremental credit). Under the bill, no amount of property transferred to universities, etc. for basic research for which an augmented deduction (described below) would be provided would also be eligible for the new credit or the existing incremental credit. c. Expanded special deduction for transfers to universities of scientific equipment for certain research or educational purposes Present law In general, the amount of charitable deduction otherwise allowable for donated property must be reduced by the amount of any ordinary gain which the taxpayer would have realized had the property been sold for its fair market value at the date of the contribution (Code sec. 170(e)). For example, a manufacturer which makes a charitable contribution of its inventory generally may deduct only its basis in the property. However, under a provision enacted in ERTA, corporations are allowed an augmented charitable deduction for donations of newly manufactured scientific equipment to a college or university for research use in the physical or biological sciences (sec. 170(e)(4)). This increased deduction is generally for the sum of (1) the corporation's basis in the donated property and (2) 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 contribution and the donor's basis in the property). However, in no event is the augmented deduction allowed for an amount which exceeds twice the basis of the property. Section 202 of the bill In place of the augmented charitable deduction rule enacted in ERTA, the bill would enact a new deduction provision, generally of broader scope, outside the charitable deduction rules. The provision would be effective for taxable years beginning after 1983. Under the new provision, corporations would receive special deductions for amounts in excess of basis for transfers, without consideration, of scientific or technical equipment to colleges or universities or certain associations of such educational institutions, for use in either research or education in certain sciences, technologies, or equipment operation fields. Unlike present law, an increased deduction would apply to transfers of property which has been used in the transferor's business (if not for more than three years), and to transfers of computer software. In addition, special deductions would be allowed under the bill for the value of performing certain maintenance and repair services in connection with qualified equipment transfers. Except for computer software and replacement parts, only an item having a value exceeding $250 generally would be eligible for the new special deduction. The special deduction under the bill generally would not be allowed to the extent that, determined on a product-by-product basis, the number of transferred items exceeds 20 percent of the number of such items sold by the taxpayer during the year. Also, while the transfers would not be required to qualify as charitable contributions in order for the special deduction to apply, the taxpayer's aggregate deduction in one year for both charitable contributions and transfers under the new provision would be limited to 10 percent of taxable income (computed with certain modifications), with a fiveyear carryforward of any excess. d. Tax treatment of payments and loan forgiveness received by certain graduate science students Present law Scholarship exclusion.-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, 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. Reg. 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)). Forgiveness of debt.-As a general rule, income is realized when indebtedness is forgiven or cancelled (sec. 61(a)(12)). Section 203 of the bill The bill would provide a new Code section under which gross income would not include amounts received by graduate students in certain scientific fields as a scholarship, fellowship grant, or qualified student loan forgiveness, notwithstanding that the recipient is required, as a condition of receiving such amounts, to perform future teaching services for any of a broad class of colleges or universities. The scholarship and loan forgiveness provisions of the bill would apply to taxable years beginning after 1983. II. DESCRIPTION OF THE BILLS 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 a. Liberalizing charitable deduction rules Present law In general.-Present law generally provides more favorable income tax treatment for contributions by individuals to public charities or private operating foundations than for such contributions to private nonoperating (grantmaking) foundations (Code sec. 170). Percentage limitations.-For contributions of cash or ordinaryincome property to public charities or operating foundations, the maximum amount which an individual may deduct in one year is 50 percent of his or her adjusted gross income. The 50-percent limitation applies to private nonoperating foundations only if the donees either redistribute all contributions within a specified period after receipt or qualify as a "pooled fund" foundation. For contributions of capital-gain property to organizations otherwise qualifying for the 50-percent limitation, the limitation generally is 30 percent. In the case of contributions of cash or property to private nonoperating foundations other than the two categories eligible for the 50-percent/30-percent limitations, and for certain other charitable contributions, the limitation is 20 percent. Carryover.-Amounts in excess of the 50-percent/30-percent limitations may be carried forward and deducted over the following five years (subject to applicable percentage limitations in those years). Under present law, there is no carryover of excess deduction amounts where the 20-percent limitation applies. Appreciated property.-In the case of donations by individuals of capital-gain property to private nonoperating foundations where the 20-percent limitation applies, the amount deductible equals the asset's fair market value reduced by 40 percent of the unrealized appreciation, i.e., by 40 percent of the amount by which the value exceeds the donor's basis in the property. In the case of donations by individuals of capital-gain property to public charities, etc., where the 30-percent limitation applies, there is no reduction from fair market value (except with respect to donated tangible personal property if use by the donee of the property is unrelated to the donee's tax-exempt purposes). |