IRS now has taken the position in proposed regulations pub lished in the Federal Register of January 21, 1983, that the law dis allows credits for amounts paid by the government to a taxpayer on costplus and incentive-type contracts pursuant to indirect cost allocation rules for IRAD and bid and proposal costs. Charitable Contributions Existing provisions.--Under Code Section 170(e), deductions for contributions of property which have a value in excess of the taxpayer's basis in the property must be reduced by the amount of gain which would be ordinary income if the property were sold at fair market value. Thus, in the case of inventory, the taxpayer's deduction is reduced by the full amount of the value in excess of basis, so that the deduction is limited to basis. Under Section 170 (e) (3) and (4), there are limited exceptions for contributions of inventory to charitable organizations that use the property solely for the care of the ill, the needy, or infants, and for contributions of scientific property to institutions of higher education for use in R&E or research training, in the United States in physical or biological sciences. situations, taxpayers may deduct the fair market value of inventory, limited to the lesser of (1) basis plus one-half of the taxpayer's markup on the property, or (2) twice basis. Broadening the deduction, etc.; S. 1194 and S. 1195.--S. 1194 and S. 1195 are similar to one another and would broaden the charitable contribution deduction provisions and the credit for increasing research activity in order to facilitate gifts to educational institutions and otherwise increase the flow of resources to such organizations for research and scientific educational purposes. The bills also contain provisions to exclude from the gross income of certain graduate science students amounts received as scholarships, fellowship grants, qualified student loan forgiveness, and the reimbursement of certain expenses incidental to scholarships or fellowship grants. S. 1194 in particular.--In the case of S. 1194, one category of equipment donation would be for transfers of qualifying computer equipment to precollege schools or to museums, libraries, or correctional institutions that use the equipment for educational purposes. Another category of qualifying equipment donation applies to transfers of qualified scientific instruments to institutions of higher education. The amount of the deduction for qualifying transfers would depend on whether the property transferred is new inventory or used scientific equipment, but, in either event, generally would be more than is allowed under current law. The R&E credit would be amended in several ways: (1) payments to universities for the performance of basic research would be eliminated from base period research expenses; (2) payments by taxpayers to fund faculty salaries in mathematics, engineering, computer science, or the physical or biological/biomedical sciences in higher education would qualify for the credit as contract research expenses (3) amounts paid to fund scholarships, grants, or loans to graduate students in the various disciplines just mentioned would qualify for the credit as contract research expenses; and (4) organizations to which payments will qualify as contract research expenses would be redefined. As already mentioned, another feature of the bill would provide an exclusion from gross income with respect to certain scholarships, grants, or loan forgiveness. S. 1195.--S. 1195 is a variation on the theme of S. 1194, and differs in a number of relatively minor respects. The Research Credit We already have noted the significance of R&E to MAPI's member companies and to industry at large. Also, we have attempted, using NSF data and projections, to give a quick indication of U.S. performance in isolation and vis-a-vis selected other industrial countries in regard to R&E effort. Finally, we have briefly alluded to the findings of a recent National Commission concerning the deteriorating state of education in this country, particularly as it pertains to mathematics and the sciences. Certain of the information and statistics do not bode well, either as measures of current economic vitality or leading indicators of future progress. In our opinion, the level of R&E expenditures is less than desirable, both overall and as to the civilian element. Moreover, the existence of a 1985 sunset provision is impairing the operation of the R&E credit and should be eliminated as proposed by S. 738. Consideration also should be given to broadening the credit's impact. Reasons for R&E Credit Congress attempted in the Economic Recovery Tax Act of 1981 to address the relative economic stagnation of the 1970s by introducing a modernized system of capital cost recovery for tax purposes and by introducing a tax incentive to help spur R&E activity. These two tax provisions complemented one another because it was recognized that the economic malaise afflicting the nation was partly a function of the aging capital base and partly a consequence of an inadequate commitment to R&E. By encouraging new investment and experimentation through tax changes, Congress hoped to restore growth and productivity gain and to promote U.S. competitiveness in world markets without direct government intervention. With less than two years having elapsed since enactment of ERTA and with such period having coincided with the trough of a cyclical downturn, we have some difficulty in assessing the R&E credit but nonetheless see signs that it is working. Performance First, our experience historically has been that capital spending and R&E effort tend to be cut back in periods of economic slowdown. In part, this occurs because producers find themselves with unused or underutilized existing capacity, and generally cannot justify additions when profits are low or nonexistent, orders are down, interest rates are elevated, and market prospects appear questionable. Whereas decisions at the margin are affected by the reduced costs attributable to favorable tax provisions, capital additions simply will not be made where the foreseeable returns to capital in relation to outlays are unacceptable, as often is the case in a recession. R&E programs are less susceptible to cyclical swings because of their inherently longterm nature. However, the absence of a foreseeable near-term payoff also makes such programs vulnerable to funding reductions where shortterm pressures are severe. Notwithstanding the depth and duration of the recent reces sion, corporate spending for R&E has been maintained admirably. ing to NSF surveys in early 1982--which are borne out by our experience-R&E budgets are doing well compared to other company departments being cut back due to slack business conditions. Reasons given to NSF in cluded the increased awareness by company management of the importance of technological improvements and the favorable tax treatment accorded R&E activities. Need To Act Now We think it important that the favorable tax treatment for R&E be continued, and would remind the Subcommittee that the R&E credit was one of the few ERTA provisions benefiting some firms, especially those in areas of rapidly changing technology where asset lives already approximated those of the Accelerated Cost Recovery System. In our opinion, the "sunset" provision of the credit should be removed immediately rather than in 1985 because long-range planning for R&E already is being |