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amount of tax attributable to that portion of the person's taxable income which is allocable or apportionable to such interest.

Carryover.-If the amount of credit otherwise allowable exceeds the applicable limitation, the excess amount of credit can be carried back three years (including carrybacks to years before enactment of the credit) and carried forward 15 years, beginning with the earliest year.

Effective date

Under present law, the section 44F credit applies to qualified research expenditures paid or incurred after June 30, 1981 and before January 1, 1986.

General rule

Explanation of the Bill (S. 738)

The bill would make permanent the section 44F credit for increased research expenditures.

Effective date

The provisions of the bill would be effective on enactment.

3. S. 1147-Senators Danforth, Tsongas, Symms, and Thurmond "Mortgage Debt Forgiveness Tax Act of 1983"

In general

Present Law

Under present law, income is realized when indebtedness is forgiven or in other ways cancelled (Code sec. 61(a)(12)). For example, if a corporation has issued a $1,000 bond at par which it later repurchases for only $900, thereby increasing its net worth by $100, the corporation realizes $100 of income in the year of repurchase (U.S. v. Kirby Lumber Co., 284 U.S. 1 (1931)).

Discharge of qualified business indebtedness

Present law provides an exclusion, at the taxpayer's election, of income from discharge of qualified business indebtedness (secs. 108(a)(1)(C), 1017). The latter term means indebtedness incurred or assumed (1) by a corporation or (2) by an individual in connection with property used in the individual's trade or business.

The amount so excluded must be applied to reduce the taxpayer's basis (but not below zero) in depreciable property or, at the taxpayer's election, in real property held by the taxpayer for sale to customers in the ordinary course of business. If the taxpayer disposes of property.the basis of which has been reduced under these rules, the amount of the reduction is subject to recapture at ordinary income rates.

Discharge in bankruptcy or insolvency

Present law also provides an exclusion for income from a discharge of indebtedness occurring in a bankruptcy proceeding or when a taxpayer is insolvent (secs. 108(a)(1)(A) and (B), 1017).

The amount so excluded must be applied to reduce certain tax attributes of the taxpayer, including (in the order in which reduction is to occur) net operating losses and carryovers, carryovers of investment tax credit and certain other credits, capital losses and carryovers, basis of the taxpayer's assets (including depreciable and nondepreciable assets), and foreign tax credit carryovers. The basis of the taxpayer's assets may not be reduced below the amount of the taxpayer's remaining undischarged liabilities. Alternatively, the taxpayer may elect to apply the excluded amount first to reduce basis in depreciable property (or in real property held for sale to customers in the ordinary course of business). If the taxpayer disposes of property the basis of which has been reduced under these rules, the amount of the reduction is subject to recapture at ordinary income rates.

Discharge of mortgage indebtedness on personal residence

The Internal Revenue Service has ruled that a financially solvent taxpayer realizes income when he or she prepays the mortgage on a personal residence at less than the outstanding principal balance (Rev. Rul. 82-202, 1982-48 I.R.B. 5).

The ruling concerned a financial institution which offered a 10percent discount to individuals who would prepay existing low-interest mortgages on their personal residences. The taxpayer had borrowed from the financial institution in order to purchase a residence from a third-party seller.1 The fair market value of the residence was greater than the principal balance at the time of the transaction, and the taxpayer was not personally liable on the mortgage.

The ruling states that the taxpayer realized ordinary income to the extent of the 10-percent prepayment discount. The facts of the ruling did not involve bankruptcy, insolvency, or a qualified business indebtedness. Thus, the reduction of the taxpayer's liability produced taxable income under section 61(a)(12) and the Kirby Lumber rule. The ruling further added that the taxpayer would also realize ordinary income if (1) a discount was received for prepayment of only a portion of the outstanding balance of the mortgage, or (2) the taxpayer was personally liable on the mortgage.2 Explanation of the Bill

In general

The bill would provide for the exclusion of amounts otherwise includible in gross income by reason of the discharge (in whole or in part) of qualified mortgage indebtedness of the taxpayer. Qualified mortgage indebtedness would mean indebtedness incurred by an individual in acquiring the individual's principal residence, or in making improvements to the principal residence (if the costs of the improvements are taken into account in determining the taxpayer's basis). The amount excluded from income could not exceed the taxpayer's adjusted basis in the residence as of the close of the taxable year.

Under the bill, the taxpayer's basis in his or her principal residence would be reduced (but not below zero) by the amount of discharged indebtedness which was excluded from income under the new provision. If the taxpayer subsequently disposed of the principal residence in a taxable sale or exchange, any gain recognized would be recaptured as ordinary income to the extent of the excluded amount.

The term principal residence would have the same meaning as under section 1034 (relating to rollover of gain on sale of a principal residence). Under the section 1034 regulations, the determina

1 Under sec. 108(e)(5), the reduction of debt of a financially solvent purchaser of property, if the debt arose out of the purchase of the property, is to be treated as a nontaxable purchase price adjustment, rather than as a discharge of indebtedness. However, this exception applies only to debt owed to the seller of the property. The exception is thus inapplicable to most mortgage loans.

2 Rev. Rul. 82-202 concerned the amount of principal discount received by the taxpayer. Since interest payments are deductible, the forgiveness of mortgage interest payments generally does not result in gross income to a cash-basis taxpayer (sec. 108(e)(2)). However, the forgiveness of previously accrued and deducted interest results in realization of gross income.

tion of whether property constitutes the taxpayer's principal residence would be made on a facts and circumstances basis. Property used as a principal residence could include a houseboat, trailer, or stock in a cooperative housing corporation. However, the term principal residence would not include personal property (such as furniture) which is not treated under property law as a fixture (Treas. Reg. sec. 1034-1(c)(3)(i)).

Effective date

The bill would apply retroactively to taxable years beginning after December 31, 1953. Claims for retroactive credit or refund of overpayments arising by reason of the bill could be filed within the one-year period beginning on the date of enactment.

4. S. 1194-Senators Danforth, Symms, Chafee, Burdick, Pell, Wilson, Inouye, and Cohen

"Technology Education Assistance and Development Act of 1983"

and

5. S. 1195-Senators Bentsen and Chafee

"High Technology Research and Educational Development Act of 1983"

a. Increased Deduction for Transfers of Scientific, Technical, or Computer Equipment for Certain Research or Educational Purposes

Present Law

General reduction rule for donations of property

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)).

Thus, a donor of inventory or other ordinary-income property (property the sale of which would not give rise to long-term capital gain) generally may deduct only the donor's basis in the property, rather than its full fair market value. In the case of property used in the taxpayer's trade or business (sec. 1231 property), the charitable dedution must be reduced by the amount of depreciation recapture which would be recognized on sale of the donated property. Special rule for certain research equipment donations

Under a special rule, corporations are allowed an augmented charitable deduction for donations of newly manufactured scientific equipment or apparatus to a college or university for research use in the physical or biological sciences (sec. 170(e)(4), added by the Economic Recovery Tax Act of 1981). This provision applies to charitable contributions made after August 13, 1981.

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

1 Under a special rule enacted in 1976, an augmented charitable deduction also is allowed for corporate contributions of certain types of ordinary income property donated for the care of the needy, the ill, or infants (sec. 170(e)(3)).

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