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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 research to be performed by universities or certain scientific research organizations.

Under present law, the section 44F credit will not apply to research expenditures after December 31, 1985. The bill would make the credit permanent.

3. S. 1147-Senators Danforth, Tsongas, Symms, and Thurmond "Mortgage Debt Forgiveness Tax Act of 1983"

Under present law, the amount of any discharged indebtedness generally is includible in income in the year of the discharge (Code sec. 61(a)(12)). However, if the debt was incurred in connection with property used in a trade or business (or if the debt is discharged when the taxpayer is in bankruptcy or insolvent), certain of the taxpayer's tax attributes may be reduced in lieu of recognizing income (secs. 108, 1017). The Internal Revenue Service has ruled that when a financially solvent taxpayer prepays a mortgage on his or her personal residence for an amount less than the remaining principal balance of the mortgage, the taxpayer realizes income equal to the amount of the discount.

The bill would exclude from gross income the amount of discharged mortgage indebtedness on an individual's principal residence. The taxpayer's basis in the residence would be reduced by the excluded amount. The bill also provides that if the taxpayer subsequently disposes of the residence in a taxable sale or exchange, any gain recognized would be recaptured as ordinary income to the extent of the excluded amount, i.e., the amount of discharged mortgage indebtedness.

The bill would apply retroactively to taxable years beginning after 1953. Claims for retroactive credit or refund of overpayments arising by reason of the bill could be filed within a one-year period beginning on the date of enactment.

4. S. 1194-Senators Danforth, Symms, Chafee, Burdick, Pell, Wilson, Inouye, and Cohen

"Technology Education Assistance and Development Act of 1983"

and

5. S. 1195-Senators Bentsen and Chafee

"High Technology Research and Educational Development Act of 1983"

a. Increased Deduction for Transfers of Scientific, Technical, or Computer Equipment for Certain Research or Educational Purposes

Present law

In general, the amount of charitable deduction otherwise allowable for donated property must be reduced by the amount of any ordinary gain which the taxpayer would have realized had the property been sold for its fair market value at the date of the contribution (Code sec. 170(e)). For example, a manufacturer which makes a charitable contribution of its inventory generally may deduct only its basis in the property.

However, under a special rule enacted in ERTA, corporations are allowed an augmented charitable deduction for donations of newly manufactured scientific equipment to a college or university for research use in the physical or biological sciences (sec. 170(e)(4)). This increased deduction is generally for the sum of (1) the corporation's basis in the donated property and (2) one-half of the unrealized preciation (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 the deduction under the special rule allowed for an amount which exceeds twice the basis of the property.

S. 1194 (section 2)

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In place of the special charitable deduction rule enacted in ERTA, the bill would enact a new deduction provision, generally of broader scope, outside the charitable deduction rules. The provision would be effective for taxable years beginning after the date of enactment.

Under the new provision, corporations would receive deductions for amounts in excess of 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, 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 universities, only an item having a retail value ex

ceeding $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 enhanced 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 generally must provide, at no cost to the recipient school, etc., 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.

S. 1195 (section 2)

In place of the special charitable deduction rule enacted in ERTA, the bill would enact a new deduction provision, generally of broader scope, outside the charitable deduction rules. The provision would be effective for taxable years beginning after the date of enactment.

Under the new provision, corporations would receive deductions for amounts in excess of 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 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 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.

b. Expansion of Section 44F Credit

Present law

An income tax credit is allowed for certain qualified research expenditures incurred in carrying on a trade or business (Code sec. 44F, enacted in ERTA). The credit applies only to the extent that the taxpayer's qualified research expenditures for the taxable year exceed the average amount of 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.

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 research to be performed by universities or certain scientific research organizations.

S. 1194 (section 3)

Expansion of credit.-Under the bill, the category of corporate expenditures eligible for a 25-percent credit under Code section 44F would be expanded also to include 65 percent of amounts paid 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, the amounts would have to be used 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 are engaged in postgraduate study in certain scientific fields. 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 amount to the recipient for at least three consecutive years.

Under a special limitation in the bill, corporate expenditures for scientific education would be eligible for the section 44F credit only to the extent exceeding the average of all charitable contributions made by the taxpayer to colleges and universities during the three preceding taxable years, excluding such contributions which were designated by the taxpayer for scientific education use.

Base period determinations.-Under S. 1194, corporate expenditures for either basic research or scientific education which were included in the section 44F credit computation in a prior taxable year would be excluded, in calculating incremental expenditures for the current taxable year, from the amount of base period ex

penditures for that prior year. Thus, as long as the taxpayer did not decrease the amount of its other expenditures qualifying under section 44F, the 25-percent credit would apply to 65 percent of all the taxpayer's qualifying basic research or qualifying scientific education expenditures in the current year (determined after application of the special limitation described above).

Effective date.-The amendments to the section 44F credit made by the bill would apply to taxable years beginning after the date of enactment.

S. 1195 (section 3)

Expansion of credit.-Under the bill, the category of corporate expenditures eligible for a 25 percent credit under Code section 44F would be expanded also to include 65 percent of amounts paid to a college, university, or area vocational education school, pursuant to written agreement, for scientific education uses. The latter term would mean the education of students or faculty in engineering or engineering technologies, the physical, biological, and computer sciences or technologies, mathematics, and electronic and automated medical, industrial, and agricultural equipment and instrumentation orientation.

To qualify, the amounts would have to be used for payment of wages to faculty employees who are directly engaged in providing scientific education, or for funding scholarships or loans for students who are engaged in postgraduate study in certain scientific fields. In addition, amounts to be used for wages would have to be paid to the educational institution pursuant to a written agreement which obligates the taxpayer to render a like amount to the recipient for at least three consecutive years.

Based period computation.-Under S. 1195, corporate expenditures for either basic research or scientific education which were included in the section 44F credit computation in a prior taxable year would be excluded, in calculating incremental expenditures for the current taxable year, from the amount of base period expenditures for that prior year. Thus, as long as the taxpayer did not decrease the amount of its other expenditures qualifying under section 44F, the 25 percent credit would apply to 65 percent of all the taxpayer's qualifying basic research and scientific education expenditures in the current year.

Effective date.-The amendments to the section 44F credit made by the bill would apply to taxable years beginning after the date of enactment.

c. Tax Treatment of Payments and Loan Forgiveness Received by Certain Graduate Science Students

Present law

Scholarship exclusion.-Subject to several limitations, gross income does not include amounts received as a scholarship at an educational institution or as a fellowship grant (Code sec. 117).

In general, scholarships or fellowship grants are not excludable from gross income if they constitute compensation for past, present, or future employment services or for services subject to the direction or supervision of the grantor, or if the funded studies

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