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 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. În 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 of fered 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)). ? 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 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. |