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has been that basic or exploratory research requires huge amounts of money and

time and the private sector simply cannot afford to take the risks of funding it.

As is the case with many SAMA members, Foxboro has had a modest

program of cooperation with colleges and universities for a number of years.

Unlike most companies, however, some of our activity has taken place with

foreign universities.

Since the enactment of ERTA, we have refocused our

thinking such that our involvement with American universities and colleges is

greater than it other wise might have been. If proposals such as contained in S.

1194 and S. 1195 are enacted, it will make it even more attractive to support

university research through research grants and equipment donations, and

Foxboro will further increase its involvement with universities in this country.

Mr. Chairman, SAMA's Tax Committee is presently reviewing the specific

provisions of S. 1194 and S. 1195. Some of those provisions we have already

endorsed, such as those relating to the need to refurbish U.S. educational and

research. laboratories through expanded deductions for equipment donations.

Other provisions of the bills --- such as inclusion of community colleges and

vocational courses and the donation of computers to elementary and secondary

schools -- are not the subject of present SAMA policy.

We are especially pleased to note that both S. 1194 and S. 1195 contain

provisions which would exclude amounts paid by companies to universities for the

conduct of basic research from the "rolling base" which is used to calculate the

R&D credit. SAMA supported legislation in the last Congress to accomplish this objective on the grounds that a revitalization of university/industry cooperation

in basic research was needed, and all possible incentives should be given to

accomplish this objective. We believe this concept is still valid, perhaps more

so today than a year ago, and we commend both Senators Danforth and Bentsen

for pursuing this course of action.

I must say, however, that overriding these refinements in the present R&D

credit, is our concern about its temporary nature. If this Congress takes no

other action on it, we hope it will eliminate the credit's sunset provisions.

TREASURY REGULATION 1.861-8

Several years ago, Foxboro established a European Technology operation.

We did so for several reasons, including the existence of an infrastructure already in place in England and Holland, the availability of skilled technical

people in those countries, and the disincentive to domestic R&D found in some

of the U.S. tax regulations, specifically Treasury Regulation 1.861-8. From a

policy point of view, limiting applicability of the R&D credit to expenditures in

the U.S. is a good thing. However, elimination of disincentives is probably a good idea also, and thus we support S. 654 which is designed to make permanent

the two-year suspension of Treasury Regulation 1.861-8.

Our tax experts are always talking to me about the application of the

incremental credit rules to university expenditures, the definition of expend

itures eligible for the credit, limitations on the deductibility of equipment

donated to universities, disincentives found in some tax regulations, and so forth.

I really can't comment upon those things, I just know that from my perspective

as Director of Research for Foxboro, anything you can do to support my requests

for expanded R&D budgets is good for my company and its competitiveness in

the world marketplace, and is therefore good for our country. To this end, I

hope that Congress will make the R&D credit per manent.

Senator DANFORTH. Dr. McCrea, the one item of contention that was indicated this morning between the Treasury Department, on one hand, and the three people who appeared on the panel that you are now appearing on retroactively-

Dr. McCREA. A deferred participant. Senator Danforth. Right. And the one bone of contention had to do with whether the tax credit should be made permanent or whether it should be extended for 3 years, as the Treasury Department suggested. Mr. Chapoton, representing the Treasury Department, stated that he supported and the Department supported the credit and felt that it should be extended for 3 years. The other members of the panel took the position that research and development spending has to be programed over a number of years, and that companies involved in research and development have to make plans, and they have to have some knowledge of what the law is going to be not just 3 years down the road but beyond that as well. Therefore, they believe that it was highly important that the credit be made permanent and not simply be extended by 3 years. Do you have any comments one way or another on that one point of contention?

Dr. McCREA. Yes, I do. I believe 3 years is much too short a horizon for any extention of R&D tax credits, and that a 5., 7., to 10year horizon is much more typical of the changes in my industry. And we have to make plans for investments over that time horizon.

Senator DANFORTH. Why is that?

Dr. McCREA. The nature of the product, the nature of the investment, and the fact that new processes that are coming on line in our customer companies. We essentially have to put in place the skills necessary to develop instrumentation for those needs. This requires a very longtime delay in the total R&D process.

Senator DANFORTH. In hiring personnel and in buying equipment and so forth?

Dr. McCREA. Mainly, finding and training skilled people, and focusing them toward the applied and long-range R&D necessary to achieve our commercial end.

Senator DANFORTH. And whether or not there is a tax credit that you can count on would govern the amount that you would be willing to allocate to research and development in future years?

Dr. MCCREA. There is a definite correlation.

Senator DANFORTH. Thank you very much, sir. Thank you for fighting your way down to Washington. Dr. MCCREA. Thank you for the opportunity to testify.

Senator DANFORTH. The next panel is on S. 1147, Messrs. Cramer, Pitt, and Willoughby. Mr. Čramer? STATEMENT OF DAVID CRAMER, MANAGING DIRECTOR, PUMP

FINANCIAL SERVICES, INC., A SUBSIDIARY OF PHILADELPHIA NATIONAL BANK, PHILADELPHIA, PA.

Mr. CRAMER. Thank you, Mr. Chairman. My name is David Cramer, managing director of PUMP Financial Services, a subsidiary of the Philadelphia National Bank. PUMP is an acronym that stands for the program to upgrade mortgage portfolios, and as a business it has been operating for about 3 years. PUMP was developed as an outgrowth of the high interest rate environment and the need primarily in the thrift industry to address the mismatch between the long-term, low yielding, fixed rate assets, mostly in the form of mortgages, and the escalating higher interest rates on liabilities. What PUMP does is provide a service to lenders where we conduct a marketing campaign to the borrowers of the institutions, offering a number of plans which include an opportunity to pay off a loan at a discount and the opportunity to curtail the mortgage by making a prepayment at a discount.

Over the last 18 months we have promoted about a quarter of a million borrowers and received about $90 million in payoffs and prepayments from borrowers, which generated about $30 million in discounts. In all the promotions we made to borrowers they were informed of the tax liability that they would incur when paying off the loan at a discount. However, the experience that we had in talking with these borrowers on the telephone, which I personally have some experience with, is that before the IRS ruling and even after it, borrowers were really incredulous for having to make a payment in the current year. For example, the average loan borrowers paid off was about a $24,000 loan with about an $18,000 payment from the borrower. But for the privilege of paying $18,000 now, they were also going to incur a tax liability on an additional $6,000 of discount in the current year.

Most borrowers are used to the tax system as it currently stands where taxes are paid on the receipt of cash in a current year; they were amazed that, having depleted their savings to pay off the loan, they were now further obligated to pay a tax.

A second reason that we feel that the proposed legislation, S. 1147, is important is that it represents a way for the industry to try to work its way out of a difficult situation that it found itself in, partly through deregulation, partly through the movement in market forces. We find that we need to offer borrowers higher discounts than they probably otherwise would need because of the tax liability. It is not unusual, in our experience, that for every three borrowers who initially inquire about paying off the loan at a discount, and who then in the followup piece, find out that they will incur the tax liability, that only two borrowers accept an offer. If we were able to lower the discount to a borrower, and tell the borrower that now you are going to be obligated to pay tax, but only when you receive the cash from the sale of your house, there would be less cost to the lenders in the form of a discount. This would serve two functions. The lenders right now are able to deduct those losses in the year in which they give a discount, and they also have to write off the entire loss, depending on the accounting treatment, which hurts current earnings. If we could lower the discount, there would be less loss to the Treasury from the form of the discount that is deducted, and the lenders would find themselves further on the road to recovery, lessening the chance in the future of FSLIC or FDIC bailouts.

One final point I would just like to make concerns the average loan that we found does pay off at a discount. As I mentioned, it is about a $24,000, 712 percent loan with just short of 15 years left to run. When that borrower incurs a discount of approximately $6,000, that same loan, if it ran to term, would generate interest deductions, or interest deductible expenses, of almost $16,000. And it seems to me that it is a small price to pay for the Treasury to put off receipt of tax on $6,000 for, whether it is a couple of years or 10 or 20 years until the borrower sells the home in exchange for also giving up the deductions that Treasury otherwise would have lost income on.

Many thanks to you, Mr. Chairman, for your support of this bill and the opportunity to testify here today.

Senator DANFORTH. Thank you, sir. Mr. Pitt?
[The prepared written statement of Mr. Cramer follows:)

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40 lending institutions have entrusted PUMP with over
$5,000,000,000 of mortgage assets. PUMP, at these institutions'
request, has made over 1,000,000 offers to 250,000 borrower/
homeowners and raised over $90,000,000 in payments from individual
borrowers.

PUMP has spoken directly with thousands of borrowers about
mortgages, personal financial planning and taxes.

Most borrowers cannot believe and have great difficulty
understanding why the discounts are taxable. Many reject offers
for early payoffs at a discount when they're told the discounts are
taxable.

Church and charitable organizations, which are exempt from taxes, have been enthusiastic acceptors of our offers.

Senate Bill 1147, by deferring, not eliminating the taxes on discounts strikes a reasonable balance between the revenue requirements of the federal government and the need to restore vitality to the private sector's ability to support homebuyers and the housing industry.

We endorse Senate Bill 1147 as drafted.

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