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MAY 27, 1983



Washington, D.C. The subcommittee met, pursuant to notice, at 9:07 a.m. in room SD-215, Dirksen Senate Office Building, Hon. John C. Danforth presiding.

Present: Senators Danforth and Heinz.

[The press release announcing the hearing, background information on S. 738, S. 1147, S. 1194, and S. 1195, and the prepared statement of Senator Bensten follow:]


[For immediate release—May 9, 1983]




FIVE MISCELLANEOUS Tax BILLS Senator Bob Packwood, Chairman of the Subcommittee on Taxation and Debt Management, announced today that a hearing will be held on Friday, May 27, 1983, on five miscellaneous tax bills.

The hearing will begin at 9:00 a.m. in Room SD-215 of the Dirksen Senate Office Building

The following legislative proposals will be considered:

S. 654.- Introduced by Senator Wallop and others. S. 654 would permit the deduction of all research and experimentation expenditures for research conducted in the United States against U.S. source income.

S. 738.-Introduced by Senator Danforth and others. S. 738 would make permanent the credit for increasing activity.

S. 1147.—Introduced by Senators Danforth and Tsongas. S. 1147 would exclude from income amounts arising out of the discharge of indebtedness on a principal residence.

S. 1194.-Introduced by Senator Danforth.
S. 1195.- Introduced by Senators Bentsen and Chafee.

S. 1194 and S. 1195 would increase the charitable contribution deduction for certain scientific equipment, expand the tax credit for research activities and extend the exclusion from income for certain amounts received by students.

STATEMENT OF SENATOR LLOYD BENSTEN Mr. Chairman: The R&D bills being discussed today have three major components:

Expansion of the R&D tax credit to cover faculty salaries and graduate student aid;

Expansion of the charitable deduction provision to include high-tech equipment donated for teaching purposes to colleges and VocEd schools;


Expansion of the charitable deduction provision to include computers donated to elementary and secondary schools.

The first and second components of both S. 1194 and S. 1195 are provisions which were first introduced by me last Spring in the 97th Congress. And the third provision was sponsored last year by Senator Danforth.

All three provisions reflect the best thinking of our universities, VocEd institutions, and the electronics industry regarding the most effective way to rebuild our Nation's technical base and boost basic research.

That base is in serious disrepair and jeopardizes our ability to maintain the technological lead we need to protect markets here and abroad and the jobs which go with them. We live in an interrelated world where resources and capital are very mobile internationally. The best guarantee of market expansion and expanding job opportunities here at home comes from maintaining a technology edge over our competitors. Yet, there are signs that our traditional edge is being blunted-perhaps best exemplified by the Japanese capture of 70 percent of the 64-K RAM chip market wouldwide.

The reasons are many:
Outdated and inadequate teaching equipment in our colleges and VocEd schools;

Serious faculty shortages-10 percent or more in engineering schools, for example-aggravated by sagging graduate student enrollments in engineering and the sciences, which has enabled Japan to graduate 25 percent more electrical engineers than we do with only half our population;

The need for greater computer literacy in our school curriculums.

Beneath these reasons is a fundamental need to boost the level of civilian research performed here, expecially basic R&D.

According to a new CRS analysis, we were greatly outspending the next four largest industrial nations in R&D back in the 1960's. In fact, Japan, Germany, France, and England together were spending only 10 to 12 percent of our own spending on civilian R&D in 1964. But they increased their commitment to R&D while we stood still. The result was that they caught us in 1975 and are now spending about 20 percent more than we are on civilian R&D. In fact, both Japan and Germany are devoting a considerably higher proportion of their GNP on civilian R&D than we are.

We see the same picture when we look at trends in basic research, too—the type of risky research which may never pay off or pays off down the road in spectacular fashion. As a share of GNP, our commitment to basic R&D has fallen by more than 20 percent since 1970. Both Japan and West Germany devote more of their GNP to basic research than we do now-meaning we face an even harder task in the years ahead maintaining our technological edge.

There are many things we must do to restore basic research-including accommodating establishment of basic R&D joint ventures like the Microelectronics and Computer Technology Corporation settling in Austin. But one critical step is to enhance the after-tax attractions of basic R&D by improving the incentives for firms to collaborate with universities on such research. That aspect of both S. 1194 and S. 1195 may be the most important single feature of these bills-or of any bill we consider this year.

DESCRIPTION OF TAX BILLS S. 738, S. 1147, S. 1194, AND S. 1195



(Prepared by the Staff of the Joint Committee on Taxation)

INTRODUCTION The bills described in this pamphlet have been scheduled for a public hearing on May 27, 1983, by the Senate Finance Subcommittee on Taxation and Debt Management.

There are five bills scheduled for the hearing. Four of the bills (S. S. 738, S. 1194, and S. 1195) generally would extend or expand provisions of present law relating to the tax treatment of expenditures for research and development. The fifth bill (S. 1147) relates to the tax treatment of income from discharge of indebtedness on a personal residence.

The first part of the pamphlet is a summary of the bills. This is followed by a more detailed description of the bills, including present law, explanation of provisions, and effective dates.


2. S. 738–Senators Danforth, Bentsen, Chafee, Glenn, Grassley,

Symms, Boren, Tsongas, Durenberger, Wilson, and Cohen Make Permanent the Credit for Increased Research Expenditures

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.

For purposes of the section 44F credit, the definition of research is the same as that used for purposes of the special deduction rules under section 174, but subject to certain exclusions. A taxpayer's 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.

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"


5. S. 1195–Senators Bentsen and Chafee

“High Technology Research and Educational Development Act of


a. Increased Deduction for Transfers of Scientific, Technical, or

Computer Equipment for Certain Research or Educational

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 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 the deduction under the special rule allowed for an amount which exceeds twice the basis of the property.

S. 1194 (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 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

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