deduction under the special rule allowed for an amount which exceeds twice the basis of the property.

To qualify for this special deduction rule, a corporate contribution of scientific equipment to a college or university must satisfy the following requirements:

(1) The property contributed was constructed by the corporate donor;2

(2) The contribution is made within two years of substantial completion of construction of the property;

(3) The original use of the property is by the college or university;

(4) Substantially all (at least 80 percent) of the use of the scientific equipment or apparatus by the college or university is for research (within the meaning of sec. 174), or for research training, in the United States in the physical or biological sciences;3

(5) The property is not transferred by the donee in exchange for money, other property, or services; and

(6) The taxpayer receives the donee's written statement representing that the use and disposition of the property contributed will be in accordance with the last two requirements.

Prior Committee Action

In the 97th Congress, the Committee on Finance reported, with amendments, a bill (H.R. 5573) which would have provided a special deduction rule for certain corporate charitable contributions of newly manufactured computer equipment to an elementary or secondary school for use at the school, or to a museum or library for use at the museum or library, directly in the education of elementary or secondary schoolchildren (S. Rep. No. 97-647). No further action was taken on that bill prior to adjournment of the 97th Congress.

Requirements for favorable treatment

The special deduction rule of H.R. 5573 would have applied to a charitable contribution by a corporation of computer equipment which satisfied all of the following requirements.

1. Qualifying computer equipment

The donated property must be tangible personal property which is inventory and must be computer equipment as defined in H.R. 5573. Also, the donated computer equipment must be assembled by the taxpayer, and the taxpayer must be regularly engaged in the business of assembling and selling equipment of the same kind as the donated property.

H.R. 5573 defined computer equipment qualifying for the special deduction rule to mean only

(a) a data processor which could be programmed in at least three standard computer languages, which has a random access memory

2 Property is to be treated as constructed by the taxpayer only if the cost of parts (other than parts manufactured by the taxpayer or a related person) used in construction does not exceed 50 percent of the taxpayer's basis in the property.

3 For purposes of this limitation on research use, and on research training use, the physical sciences include physics, chemistry, astronomy, mathematics, and engineering, and the biological sciences include biology and medicine.

with a capacity for at least 32,000 bytes, and which is (or could be) connected with a screen for visual display of the data;

(b) a display screen, a printer, or a disc drive, but only if donated by the taxpayer together with the donated data processor; and (c) related installation equipment.

2. Eligible donees

The computer equipment must be donated to a qualified oranization (located in the United States), defined by H.R. 5573 to mean(a) an educational organization (within the meaning of sec. 170(b)(1)(A)(ii);4

(b) an elementary or secondary school operated as an activity of a tax-exempt section 501(c)(3) organization (such as a church), provided that such school normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on; or

(c) a tax-exempt museum or library which is described in section 501(c)(3), which is operated by a governmental unit, or which is operated as an activity of a section 501(c)(3) organization.

3. Governing body

The contribution of computer equiptment to an eligible donee must be made through the donee's governing body.

4. Time of contribution

The contribution must be made within six months after substantial completion of construction of the computer equipment. For any one donor corporation, only contributions made during a single taxable year of the corporation beginning in 1983, in 1984, or in 1985 would be eligible for the special rule in H.R. 5573.

5. Limitation to new equipment

The original use of the donated computer equipment must be by the donee.

6. Schoolchild education use requirement

Substantially all (at least 80 percent) of the use of the donated computer equipment by the donee must be at the location of the donee and must be directly in the education of elementary and secondary schoolchildren.

7. Prohibition on donee sale

The donated computer equipment may not be transferred by the donee in exchange for money, other property, or services.

4 An educational organization is described in sec. 170(b)(1)(A)(ii) "if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. The term includes institutions such as primary, secondary, preparatory, or high schools, and colleges and universities", and includes both public and private schools (Reg. sec. 1.170A-9(b)(1)).

8. Written confirmation

The donor corporation must receive a written statement from the donee representing that the use and disposition of the donated computer equipment would be in accordance with the preceding two requirements.

9. Distributional requirements

All contributions by any one donor corporation must be made pursuant to a written plan of the donor under which there would not be undue concentrations of the donor's contributions of computer equipment from either a geographic standpoint or from the standpoint of the relative economic status of the students of the donees which receive contributions from the donor. These distributional requirements under H.R. 5573 were intended to insure a widespread distribution of donated property which would benefit a wide cross-section of elementary and secondary schoolchildren. Allowable deduction

If all the requirements of H.R. 5573 were satisfied, the charitable deduction allowed by that bill for a charitable contribution of qualifying computer equipment generally would be for the sum of (1) the taxpayer's basis in the property plus (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 a deduction allowed for any amount in excess of 150 percent of the donor's basis in the property.

Overview

5

Explanation of Section 2, S. 1194

S. 1194 would delete from the section 170 charitable deduction rules a special provision (Code sec. 170(e)(4)), enacted in ERTA, which allows an augmented charitable deduction (up to twice the taxpayer's basis) for corporate donations of newly manufactured scientific equipment to colleges or universities for research use in the physical or biological sciences. The bill would enact a new deduction provision, generally of broader scope, outside the charitable deduction rules.

Under the new provision, a corporation would receive deductions for amounts in excess of its basis for transfers, without consideration, of scientific or technical equipment (including property used in the transferor's business and computer software) to colleges or universities, for use in either research or education in certain sciences or vocational education fields, and for transfers, without consideration, of newly manufactured computer equipment (including software) to secondary or elementary schools, museums, libraries,

5 Where donated property is a type which the taxpayer sells in the course of its business, the fair market value is the price which the taxpayer would have received if the taxpayer had sold the contributed property in the usual market in which it customarily sells, at the time and place of the contribution, and, in the case of a contribution of goods in quantity, in the quantity contributed. The usual market of a manufacturer or other producer consists of the wholesalers or any other distributors to or through whom it customarily sells; but if it sells only at retail, the usual market consists of its retail customers (Reg. sec. 170A-1(c)(2)),

or correctional institutions, for use in education. In addition, augmented deductions would be allowed for the costs of performing certain maintenance and repair services in connection with such property transfers. In the case of scientific equipment transferred to colleges or univiersities, only an item having a retail value exceeding $500 ($250 for computer software) generally would be eligible for the new augmented deduction.

The augmented deduction under S. 1194 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 augmented 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 five-year carryforward of any excess.

In the case of computer equipment transfers to secondary schools, etc., the augmented deduction would apply only during the five-year period beginning on enactment of the bill. Also, S. 1194 would require that the transferor of such computer equipment, at no cost to the recipient school, etc., generally must provide sufficient orientation to make at least one employee of the recipient per data processor proficient in use of the transferred property in the direct education of students.

Transfers of qualified scientific property

The augmented deduction under S. 1194 would apply to a transfer, without consideration, by a corporation of tangible personal property which is inventory (sec. 1221(1)), of computer software, or of property used in the transferor's business (sec. 1231(b)), and to the performance of services in connection with such transferred property, which 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 property must be assembled by the taxpayer, and the taxpayer must be regularly engaged in the business of assembling and selling or leasing property of that type.

Substantially all (at least 80 percent) the use of the transferred property 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 property must be in the United States and must be in mathematics, in the physical or biological/biomedical sciences, engineering, computer science, or certain categories of vo

6 Court cases have held that if a transfer to a charitable organization results in a benefit to the donor, no charitable deduction is allowed under section 170. For example, the U.S. Court of Claims has upheld denial of charitable deductions claimed by a manufacturer for discounts on purchase of sewing machines by schools, where the court had found that the discounts were offered for the predominant purpose of enlarging the market for the manufacturer's brand of sewing machines (Singer Co. v. U.S., 449 F.2d 413 (Ct. Cl. 1971)).

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

cational education (computer and information services, science technology, engineering and engineering-related technologies, and precision production-drafting and precision metalwork).

Except for replacement parts, only single units of qualified scientific property having a retail value in excess of $500 ($250 in the case of computer software) would qualify for an augmented 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 investment by the recipient. All transferred property would have to be accompanied by the same warranties as normally provided by the manufacturer in connection with a sale of the transferred scientific property.

2. Qualified services

S. 1194 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))8 which is an institution of higher education (within the meaning of sec. 3304(f));9 or

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

The transfer could be made directly to the organization or association, or through a clearinghouse for used scientific property (as defined in S. 1194).10 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 property. Also, the original use of the property must be by the recipient.

In the case of tangible property 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.

8 See note 4, supra.

Sec. 3304(f) defines "institution of higher education" as an educational institution which (1) admits as regular students only individuals having a certificate of graduation from a high school, or the recognized equivalent of such a certificate; (2) is legally authorized to provide a program of education beyond high school; (3) provides an educational program for it which awards a bachelor's or higher degree, or provides a program which is acceptable for full credit toward such a degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and (4) is a public or other nonprofit institution.

10 The bill refers to a clearinghouse to be established and administered by the National Technical Information Service of the Department of Commerce. The clearinghouse would publish in the Federal Register, at least once a month, descriptions of used scientific property which corporations wish to contribute under the augmented deduction provision, for the purpose of assisting colleges, etc. to identify potential transferors of scientific equipment which they need.

If scientific equipment used in the taxpayer's business is listed with the clearinghouse within three years after first being placed in service, and then transferred to a qualifying recipient within six months of the listing, the property would be deemed under the bill to have met the requirement that used scientific equipment must be transferred within three years after being placed in service.