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Introduction and Summary Comments

Presented below are specific comments concerning proposed

legislation dealing with expanded incentives for research
and development activities. The comments relate to Senate

Bills S.738, S.1194 and S.1195.

S.738 proposes to make permanent the credit for increasing
research activities which was enacted by the Economic
Recovery Tax Act of 1981 (P.L.97-34). We agree with this
proposal since a permanent incentive, particularly an
incremental one, is much more likely to accomplish the long
range goal of increasing and continuing to increase research

S.1194 and S.1195 both propose to expand the scope of existing
law dealing with deductions for contributions of scientific
equipment to certain organizations and payment for basic
research for purposes of the credit for increased research
activities. Again, we agree with expanding these incentives
in order to enhance the level of primary, secondary and
higher education in the United States and to expand research
activities and facilities in our colleges and universities.
Specifically, with respect to scientific equipment contribu-
tions, the proposals should provide significant incentives to
potential donors to contribute computers and other scientific
equipment to our educational system in order to provide the
opportunity for students to acquire and develop skills needed
for the development of new technology. The proposals regarding
the credit for increased research activities through payments

for basic research should be enhanced by the exclusion of basic research from the base-period limitation, the elimination of the prepaid contract research rules, and the addition of payments for scientific education being eligible for the credit.

In general, the bills appear to contain the appropriate provisions to accomplish these goals. However, in a

few instances which are dealt with below, certain modifications may enhance the encouraging intent of the proposed legislation.



Research Incentives Continuation Act of 1983 The bill proposes to eliminate the sunset provision contained in Internal Revenue Code section 44F and make the credit provided by the section (R&D Credit)


We believe that this proposal is appropriate, in fact,
essential to provide the incentive for long-term
continued technological advancement of U.S. companies
in relation to competitive advancements of companies
in other nations. The purpose of a temporary tax
incentive is to satisfy a short term or temporary
need but, in general, it would not provide for a signi-
ficant long-term effect. In order for the R&D Credit
to encourage U.S. companies to adopt and pursue long-
range research programs intended to result in the
United States enhancing its position among the techno-
logically advanced nations of the world, a permanent and
significant incentive is necessary.

The present provisions which would cause the R&D Credit to
expire in 1985 should provide some short-term assistance
to encouraging research activities. The fact that the
credit will expire may cause some companies to choose to
accelerate research projects which are flexible as to
timing into the credit period in order to take advantage
of the R&D Credit. This type of action may give priority
to a project which otherwise may have taken a backseat to
another project which would have been of more significant
long-range benefit. Where the R&D Credit is a permanent
incentive, not only would this type of problem be minimized
but the incentive would provide continued encouragement to
constantly expand research activities.





Technology Education Assistance and Development
Act of 1983

Section 174A(c)(1) defines qualified computer equipment
property that can be donated to secondary schools to
qualify for the deduction. The language in this
section is very specific in defining the property
that will qualify in this category.

Because the definition is so specific, it is possible
that present equipment, that should qualify will
not qualify and that future technological develop-
ments will result in new products that also should,
but will not under the rules, qualify for the deduction.
For example, it seems clear that desks or stands to
hold the equipment will not qualify. More importantly,
it does not appear that voice synthesizers, future
developments that may take the place of the disk drive
as a storage medium, modems, and memory expansion
boards/chips would be easily excludable under a reasonable
reading of the language of the bill.

This problem could be cured by making it clear that the
deduction should be allowed for computers and accessories
including, but not limited to, items already listed in
the statute. Further, any particular types of items

of hardware or software which are not intended to

qualify could be specifically excluded.

Section 174A(c)(1):


Subparagraph (I) mandates that donated property be

kept by the recipient for the property's ACRS life.


A number of questions surface with respect to this.

First, since the bill specifically permits software
to be donated, is the bill somehow making a pre-
If so,

sumption that software is ACRS property?

which ACRS class is the appropriate one?

If not,

what would be the length of time software must be


From a policy point of view, it may not make sense
to require recipients to retain for long periods
of time equipment that could rapidly become
obsolete. Perhaps three years would be a time
period which would satisfy all of the objectives.
By the same token, schools should not be allowed to
use donated equipment to raise cash which would
not be used to replace the sold property.
Therefore, it may make sense to design a provision
that would allow recipients to at least "trade-up"
existing machines, that may be obsolete, for more
advanced versions. Such a change would certainly
be consistent with the expressed policy.
Subparagraph (J) provides that donated software and
ancillary equipment must be compatible with data
processors already owned by the recipient.

It may make more sense to make this provision more
flexible by allowing a contribution to recipients
that will own, pursuant to an existing arrangement,
data processors compatible with such software or
ancillary equipment within a reasonable period of


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