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puter equipment transfer must be made within the five-year period beginning on the date of enactment of the provision.

5. Restrictions on schools The transferred computer equipment could not be retransferred at any time by the school in exchange for money, other property, or services.

The transferor must obtain a written statement from the school, executed under penalties of perjury, representing that the school's use and disposition of the property will be in accordance with requirements for the augmented deduction. In the case of a transfer of ancillary computer equipment (including software), the transferor also must obtain a written finding by the school that the equipment is compatible with data processors which the school holds.

6. Distributional requirements The transfer of computer equipment must be made pursuant to a written plan under which there will be no undue concentration of the taxpayer's transfers of computer equipment (or qualified scientific property), either on a geographical basis or on the basis of the relative economic status of the students of all schools which receive such transfers from the taxpayer.

7. Required orientation services S. 1195 would require that the transferor, at no cost to the school or its teachers, must provide sufficient orientation to make at least one teacher per data processor proficient in the use of the transferred property in the direct education of students.

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 by agreement with the school. The determination of the degree of orientation required to meet the standard in the bill is to be made by agreement between the transferor and the school. Allowable deduction

The amount of deduction allowed for transfers of qualified scientific property or qualified computer equipment meeting the requirements of S. 1195 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).

(6) 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 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 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. 1195, the 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, 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.

Also, while transfers of scientific or computer equipment property would not have to qualify as charitable contributions23 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. 1195 would be effective for taxable years beginning after enactment of the bill.

23 See note 6, supra.

6. Expansion of Section 44F Credit

Present Law

Overview

An income tax credit is allowed for certain qualified research expenditures made by a taxpayer during the taxable year in carrying on a trade or business (Code sec. 44F, enacted in ERTA). The section 44F credit applies to such qualified research expenditures paid or incurred after June 30, 1981 and before January 1, 1986, when the credit is scheduled to expire.

The credit applies only to the extent that the taxpayer's qualified research expenditures for the taxable year exceed the average amount of the taxpayer's yearly qualified research expenditures in the specified base period (generally, the preceding three taxable years). The rate of the credit is 25 percent of the incremental research expenditure amount.

For purposes of the credit, the definition of research is the same as that used for purposes of Code section 174 (allowing current deductions for certain research expenditures), but subject to specified exclusions. Under present law, research expenditures eligible for the section 44F incremental credit consist of (1) "in-house" expenditures by the taxpayer for research wages and supplies used in research, plus certain amounts paid for research use of laboratory equipment, computers, or other personal property; (2) 65 percent of amounts paid by the taxpayer for contract research conducted on the taxpayer's behalf; and (3) if the taxpayer is a corporation, 65 percent of the taxpayer's expenditures (including grants or contributions) pursuant to a written research agreement for basic re search to be performed by universities or certain scientific research organizations. Expenditures for basic research

Under present law, corporations may take into account, for purposes of computing the section 44F credit for a taxable year, 65 percent of qualifying basic research expenditures for that year (subject to the contract research prepayment limitation).24 Similarly, this amount is treated as research expenditures in a base period year when calculating the credit in subsequent years.

The special rule for basic research applies only to corporate 2 expenditures paid or incurred pursuant to a written research agreement between the taxpayer

corporation and a college or university, certain tax-exempt scientific research organizations, and certain

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25

24 If any contract research amount paid or incurred during a taxable year is attributable to qualified research to be conducted after the close of that taxable year, that amount is treated as paid or incurred in the year or years during which the qualified research is actually conducted. 25 See note 7, supra.

qualified funds (organized exclusively to make basic research grants to colleges and universities).

For purposes of this special rule, the term “basic research” means any original investigation for the advancement of scientific knowledge not having a specific commercial objective. However, the term basic research does not include expenditures for any activity excluded from the section 44F definition of qualified research, e.g., expenditures for basic research in the social sciences or humanities (including the arts). Computation of base period expenditures

General rule.-As a general rule, the section 44F credit applies to the amount of qualified research expenditures for the current taxable year which exceeds the average of the yearly qualified research expenditures in the preceding three taxable years. However, for the taxpayer's first taxable year to which the new credit applied (and which ended in 1981 or 1982), the credit applied to the amount of qualified research expenditures for that year which exceeded the amount of such expenditures in the preceding taxable year. Also, for the taxpayer's second taxable year to which the new credit applied (and which ended in 1982 or 1983), the credit applied to the amount of qualified research expenditures for that year which exceeded the average of yearly qualified research expenditures in the preceding two taxable years.

Because the credit became effective for qualified research expenditures paid or incurred after June 30, 1981, a special rule was provided for computing base period expenditures with respect to the taxpayer's taxable year which included July 1, 1981. A similar rule is to apply in the case of a taxpayer's taxable year which includes December 31, 1985 (when the credit is scheduled to expire).

New businesses. If the taxpayer was not in existence during a base period year, then the taxpayer is treated as having research expenditures of zero in such year, for purposes of computing average annual research expenditures during the base period, subject to the 50-percent limitation rule.

50-percent limitation rule.-Base period research expenditures are treated as at least equaling 50 percent of qualified research expenditures for the current year. This 50-percent limitation applies both in the case of existing businesses and in the case of newly organized businesses. Illustration of computation

Assume that a corporation makes qualified in-house research expenditures totalling $120 million in each of the years 1980, 1981, and 1982. In addition, in 1981 the corporation makes a $6 million grant to a university for qualifying basic research; all of this amount is expended by the university in that year. In 1983, the corporation makes qualified in-house research expenditures totalling $130 million and also contributes $3 million to a university for basic research pursuant to a written research agreement. The university expends 50 percent of the 1983 contribution funds during 1983 and the rest during 1984.

Under these facts, the corporation's qualified research expenditures for 1983 would equal $130 million plus 65 percent of $1.5 million ($975,000). The corporation's base period expenditures with respect to 1983 would be the average of its qualified research expenditures for 1980, 1981, and 1982, or $121,300,000. Accordingly, the 25 percent credit for 1983 would apply to the excess of total currentyear expenditures ($130,975,000) over the base period average ($121,300,000), or $9,675,000.

Assume further that in 1984 the total of the corporation's qualified in-house research expenditures increases to $135 million, and that the corporation makes no new basic research expenditures. The corporation is treated as having qualifying basic research expenditures in 1984 equal to 65 percent of $1.5 million, or $975,000. The corporation's base period expenditures with respect to 1984 would be the average of qualified research expenditures for 1981 ($123,900,000), 1982 ($120 million), and 1983 ($130,975,000). Accordingly, the 25 percent credit for 1984 would apply to the excess of current-year expenditures ($135,975,000) over the base period average ($124,958,333), or $11,016,667.

Explanation of Section 3, S. 1194 Expenditures for faculty wages and student loans

In general Under section 3 of the bill, the category of expenditures eligible for a 25-percent credit under Code section 44F would be expanded also to include 65 percent of amounts paid or incurred 26 by a corporation 27 to a college or university, pursuant to written agreement, for scientific education uses. The latter term would mean the education of students or faculty in mathematics, engineering, computer science, and the physical and biological/biomedical sciences.

To qualify as scientific education expenditures, the amounts would have to be used by the educational institution for payment of wages to faculty employees who are directly engaged in providing scientific education, or for funding scholarships or loans for students at the institution who possess a bachelor's degree or its equivalent and who are engaged in postgraduate study in mathematics, the physical or biological/biomedical sciences, engineering, or computer science. In addition, amounts to be used for wages would have to be paid to the college or university pursuant to a written agreement which obligates the taxpayer to render a like or greater amount to the recipient for at least three consecutive years.

Eligible recipients for credit purposes S. 1194 would define qualified organizations for certain section 44F credit purposes to mean

(1) an educational organization (as described in section 170(b)(1)(A)(ii))28 which is an institution of higher education (as defined in sec. 3304(f));29

26 The bill would repeal the contract research prepayment rule of present law (see note 24, supra). 27 See note 7, supra. 28 See note 4, supra.

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