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5. Restrictions on recipients

S. 1194 would provide that the transferred property may not be retransferred by the recipient, during the ACRS life of the property, in exchange for money, other property, or services.

The transferor must obtain a written statement from the recipient, 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 augmented deduction. In the case of a transfer of property 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. Transfers of qualified computer equipment

The augmented deduction under S. 1194 also would apply to a transfer, without consideration, by a corporation11 of computer equipment (including software) which is inventory property (sec. 1221(1)), and to the performance of services in connection with such transferred computer equipment, which satisfies all of the following requirements.

1. Qualified computer equipment

The transferred property must be computer equipment as defined in the bill, i.e., any of the following

(a) A data processor which will support at least three computer languages; which has a random access memory with a capacity for at least 16,000 bytes (expandable to at least 48,000 bytes); which is accompanied by a screen for visual display of the data; and which is suitable for educational use.

(b) Ancillary computer equipment transferred for use in connection with such a data processor (whether the processor was contributed by the taxpayer or already owned by the recipient). Only display screens, printers, or disc drives qualify in this category.

(c) Any installation equipment or replacement parts for a qualifying data processor or qualifying ancillary computer equipment. (d) Computer software which is suitable for use in instructional applications in the educational environment in which the data processor is to be used.

Except for computer software, the transferred property must have been assembled by the taxpayer, and the taxpayer must be regularly engaged in the business of assembling and selling or leasing of computer equipment of the same kind.

Substantially all (at least 80 percent) the use of the transferred property by the recipient must be at its institutions directly in the education of students or teachers, and must be in the United States. The transferred property would have to be accompanied by the same warranties as normally provided by the manufacturer in connection with a sale of the computer equipment of that type.

2. Qualified services

S. 1194 would define qualified services as the performance of maintenance, repair, reconditioning, or similar services which the

11 See note 7, supra.

transferor furnishes, pursuant to a standard contract with the recipient, in connection with a transfer of qualified computer property.

3. Eligible recipients

Under the bill, the qualified computer equipment must be transferred (through the recipient's governing body) to

(a) an educational organization (within the meaning of sec. 170(b)(1)(A)(ii))12 which is not an institution of higher education (as defined in sec. 3304(f));13

(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, library, or correctional institution which is operated either as an activity of a section 501(c)(3) organization or by a section 170(c)(1) governmental unit.

4. Time of transfer/original use

The transfer must be made within six months after assembly of the computer equipment has been substantially completed, and the original use of the property must be by the recipient. Also, the computer equipment transfer must be made within the five-year period beginning on the date of enactment of the provision.

5. Restrictions on recipients

The transferred computer equipment could not be retransferred by the recipient, during the property's ACRS life, in exchange for money, other property, or services.

The transferor must obtain a written statement from the recipient, executed under penalties of perjury, representing that its use and disposition of the property will be in accordance with requirements for the augmented deduction. In the case of a transfer of computer software, the statement must represent that the software is compatible with data processors owned by the recipient and is suitable for use in its educational programs. In the case of a transfer of ancillary computer equipment, the statement must represent that the equipment is compatible with data processors which the school owns or will receive from the transferor.

6. Distributional requirements

The transfer of computer equipment must be made pursuant to a written plan under which there will be diversity in the distribution of all computer equipment transferred by the taxpayer both on a geographical basis and on the basis of the relative economic status of the students of all recipients which receive such transfers.

12 See note 4, supra. 13 See note 9, supra.

7. Required orientation services

S. 1194 would require that the transferor, at no cost to the recipient or its employees, must provide sufficient orientation to make at least one such employee per data processor proficient in the use of the transferred property in the direct education of students or teachers. The orientation program must be conducted by employees of the transferor, or by any other competent person authorized by the transferor, at a location determined pursuant to agreement with the recipient.

The determination of the degree of orientation required to meet the standard is to be made by agreement between the transferor and the recipient. In general, the program must provide at least three hours of orientation per transferred data processor. However, this minimum will not apply if the school determines that its employees have sufficient knowledge of the transferred property to justify less than three hours of orientation.

Allowable deduction

The amount of deduction allowed for transfers of qualified scientific property or qualified computer equipment meeting the requirements of S. 1194 would be as follows:

(a) Tangible inventory property.-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.—150 percent of the taxpayer's basis in the property, computed with certain adjustments.

(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.

(d) Purchased computer software.-Fair market value of the software, determined at the time of transfer.

(e) Developed computer software.-50 percent of the fair market value of the software, determined at the time of transfer.

In the case of required orientation services with respect to transfers of computer equipment, the taxpayer's direct costs of providing such services are to be added to the basis of the transferred computer equipment property for purposes of computing the augmented deduction under the above rules for tangible inventory. Special limitations

Under S. 1194, an augmented deduction would not be allowed to the extent that, determined on a product-by-product basis, the total of transfers in the taxable year by the taxpayer of qualified computer equipment property or qualified scientific property (excluding property used in the taxpayer's business) 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.

22-894 0-83- -3

Also, while transfers of scientific or computer equipment property would not have to qualify as charitable contributions 14 in order for the augmented deduction to apply, the taxpayer's aggregate deduction for charitable contributions under section 170 and transfers under the new provision could not exceed 10 percent of the taxpayer's taxable income (computed with certain modifications). Any amount of an augmented deduction exceeding this limitation could be carried forward in the same manner as an excess charitable deduction (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 2 of S. 1194 would be effective for taxable years beginning after enactment of the bill.

Overview

Explanation of Section 2, S. 1195

S. 1195 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, universities, or vocational education schools or programs, for use in either research or education in certain scientific or technological fields, and for transfers, without consideration, of newly manufactured computer equipment (including software) to secondary or elementary schools, 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. With certain exceptions, only an item having a value exceeding $250 would be eligible for the new augmented deduction.

The augmented deduction under S. 1195 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 15 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

14 See note 6, supra. 15 See note 6, supra.

In the case of computer equipment transfers to schools, the augmented deduction would apply only during the five-year period beginning on enactment of the bill. Also, S. 1195 would require that the transferor of such computer equipment must provide, at no cost to the school or its teachers, sufficient orientation to make at least one teacher 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. 1195 would apply to a transfer, without consideration, by a corporation 16 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 similar property or apparatus), or replacement parts for such equipment. In the case of transferred inventory, at least 50 percent of the item must have been assembled by the taxpayer, and the taxpayer must be regularly engaged in the business of assembling and selling 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 the physical, computer, and biological sciences or technologies, engineering and engineering technologies, mathematics, or electronic and automatic industrial, medical, and agricultural equipment and instrumentation operation.

Except for computer software or replacement parts, only transferred property having a value in excess of $250 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 educational organization. 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. 1195 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

Under the bill, the qualified scientific property must be transferred (through the recipient's governing body) to—

16 See note 7, supra.

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