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for basic research should be enhanced by the exclusion of basic research from the base-period limitation, the elimination of the prepaid contract research rules, and the addition of payments for scientific education being eligible for the credit.

In general, the bills appear to contain the appropriate provisions to accomplish these goals. However, in a

few instances which are dealt with below, certain modifications may enhance the encouraging intent of the proposed legislation.

II.

S.738

Research Incentives Continuation Act of 1983

The bill proposes to eliminate the sunset provision
contained in Internal Revenue Code section 44F and
make the credit provided by the section (R&D Credit)

permanent.

We believe that this proposal is appropriate, in fact,
essential to provide the incentive for long-term
continued technological advancement of U.S. companies
in relation to competitive advancements of companies
in other nations. The purpose of a temporary tax
incentive is to satisfy a short term or temporary
need but, in general, it would not provide for a signi-
ficant long-term effect. In order for the R&D Credit
to encourage U.S. companies to adopt and pursue long-
range research programs intended to result in the
United States enhancing its position among the techno-
logically advanced nations of the world, a permanent and
significant incentive is necessary.

The present provisions which would cause the R&D Credit to
expire in 1985 should provide some short-term assistance
to encouraging research activities. The fact that the
credit will expire may cause some companies to choose to
accelerate research projects which are flexible as to
timing into the credit period in order to take advantage
of the R&D Credit. This type of action may give priority
to a project which otherwise may have taken a backseat to
another project which would have been of more significant
long-range benefit. Where the R&D Credit is a
incentive, not only would this type of problem be minimized
but the incentive would provide continued encouragement to
constantly expand research activities.

permanent

III.

S.1194

A.

B.

Technology Education Assistance and Development
Act of 1983

Section 174A(c)(1) defines qualified computer equipment
property that can be donated to secondary schools to
qualify for the deduction. The language in this
section is very specific in defining the property
that will qualify in this category.

Because the definition is so specific, it is possible
that present equipment, that should qualify will
not qualify and that future technological develop-
ments will result in new products that also should,
but will not under the rules, qualify for the deduction.
For example, it seems clear that desks or stands to
hold the equipment will not qualify. More importantly,
it does not appear that voice synthesizers, future
developments that may take the place of the disk drive
as a storage medium, modems, and memory expansion
boards/chips would be easily excludable under a reasonable
reading of the language of the bill.

This problem could be cured by making it clear that the
deduction should be allowed for computers and accessories
including, but not limited to, items already listed in
the statute. Further, any particular types of items
of hardware or software which are not intended to

1.

qualify could be specifically excluded.

Section 174A(c)(1):

Subparagraph (I) mandates that donated property be

kept by the recipient for the property's ACRS life.

2.

A number of questions surface with respect to this.
First, since the bill specifically permits software
to be donated, is the bill somehow making a pre-
sumption that software is ACRS property?
which ACRS class is the appropriate one?

If not,

what would be the length of time software must be

retained?

If so,

From a policy point of view, it may not make sense to require recipients to retain for long periods of time equipment that could rapidly become obsolete. Perhaps three years would be a time

time.

period which would satisfy all of the objectives. By the same token, schools should not be allowed to use donated equipment to raise cash which would not be used to replace the sold property. Therefore, it may make sense to design a provision that would allow recipients to at least "trade-up" existing machines, that may be obsolete, for more advanced versions. Such a change would certainly be consistent with the expressed policy. Subparagraph (J) provides that donated software and ancillary equipment must be compatible with data processors already owned by the recipient.

It may make more sense to make this provision more flexible by allowing a contribution to recipients that will own, pursuant to an existing arrangement, data processors compatible with such software or ancillary equipment within a reasonable period of

C.

D.

Section 174A(d)(2) specifies that in the case of
tangible personal property that is used in the
taxpayer's trade or business, the deduction is
equal to 150% of the taxpayer's basis in the
property (without regard to adjustments under
section 1016(a)). Thus, the deduction is equal

to 150% of original costs unreduced by any allowance

for depreciation.

The Detailed Description indicates that the intent

is that the deduction be equal to (1) 150% of
original cost, minus (2) total depreciation deductions
taken. Under this provision the maximum deduction
is 150% of cost and the minimum deduction is 50% of

cost.

The actual bill language must be changed to reduce the
amount of the deduction by depreciation taken in order
to reflect the expressed intent.

Section 174A(f)(2) excludes an electing small business
corporation from the definition of the term "corporation".
Perhaps it is a policy issue as to whether deductions such
as those provided by proposed section 174A not be allowed
to individuals, even in a flow-through environment.
However, as a result of the SubChapter S Revision Act of
1982 (P.L.97-354), many corporations including computer
and computer equipment manufacturers, scientific equipment
manufacturers, and software developers can and will avail
themselves of the small business corporation provisions
as defined in section 1371(b). Accordingly, in order

22-894 0-83--20

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