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.

Transfers of qualified scientific property

The augmented deduction under S. 1195 would apply to a transfer, without consideration, by a corporation 16 of tangible personal property which is inventory (sec. 1221(1)), of computer software, or of property used in the transferor's business (sec. 1231(b)), and to the performance of services in connection with such transferred property, which satisfies all of the following requirements.

1. Qualified scientific property

The transferred property must be scientific or technical equipment (or similar property or apparatus), or replacement parts for such equipment. In the case of transferred inventory, at least 50 percent of the item must have been assembled by the taxpayer, and the taxpayer must be regularly engaged in the business of assembling and selling property of that type.

Substantially all (at least 80 percent) the use of the transferred property must be for the direct education of students or faculty, for research (within the meaning of sec. 174), or for research training. Also, the use of the property must be in the United States and must be in the physical, computer, and biological sciences or technologies, engineering and engineering technologies, mathematics, or electronic and automatic industrial, medical, and agricultural equipment and instrumentation operation.

Except for computer software or replacement parts, only transferred property having a value in excess of $250 would qualify for an augmented deduction. Property which had been used in the transferor's business would qualify only if it is functional and usable without need of any repair, reconditioning, or other investment by the educational organization. All transferred property would have to be accompanied by the same warranties as normally provided by the manufacturer in connection with a sale of the transferred scientific property.

2. Qualified services

S. 1195 would define qualified services as the performance of maintenance, repair, reconditioning, or similar services which the transferor furnishes, pursuant to a standard contract with the recipient, in connection with a transfer of qualified scientific property.

3. Eligible recipients

Under the bill, the qualified scientific property must be transferred (through the recipient's governing body) to

16 See note 7, supra.

(a) an educational organization (within the meaning of sec. 170(b)(1)(A)(ii))17 which is an institution of higher education (within the meaning of sec. 3304(f));18

(b) a secondary school offering vocational education programs; or (c) an area vocational school (as defined in P.L. 94-482).19

4. Time of transfer/original use

In the case of inventory property, the transfer must be made within six months after substantial completion of assembly of the property. Also, the original use of the scientific equipment must be by the recipient educational organization.

In the case of tangible property used in the transferor's business, the transfer must be made within three years after the property is first placed in service by the taxpayer.

5. Restrictions on recipients

S. 1195 would provide that transferred property may not be retransferred by the educational organization within five years after receipt in exchange for money, other property, or services.

The transferor must obtain a written statement from the educational organization, executed under penalties of perjury, representing that the latter's use and disposition of the property will be in accordance with the requirements for the augmented deduction. In the case of a transfer of property used in the taxpayer's business, the recipient also must state that the property will be functional and usable without need of any repair, reconditioning, or other investment.

Transfers of qualified computer equipment

The augmented deduction under S. 1195 would also apply to a transfer, without consideration, by a corporation 20 of computer equipment (including software) which is inventory property (sec. 1221(1)), and to the performance of services in connection with such transferred computer equipment, which satisfies all of the following requirements.

1. Qualified computer equipment

The transferred property must be computer equipment as defined in the bill, i.e., any of the following—

17 See note 4, supra.

18 See note 9, supra.

19 The term area vocational school means (a) a specialized high school used principally to provide vocational education to persons available for study in preparation for entering the labor market; (b) the department of a high school principally used to provide vocational education in at least five different occupational fields to such persons available for study in preparation for entering the labor market; (c) a technical or vocational school used principally to provide vocational education to persons who have completed or left high school and who are available for study in preparation for entering the labor market; or (d) the department or division of a junior college or community college or university operating under the policies of the State board and which provides vocational education in at least five different occupational fields, leading to immediate employment but not necessarily leading to a baccalaureate degree, if it is available to all residents of the State or an area of the State designated and approved by the State board, and if, in the case of a school, department, or division described in (c) or (d), if it admits as regular students both persons who have completed high school and persons who have left high school (20 U.S.C. sec. 2461(2)).

20 See note 7, supra.

(a) A data processor which will support at least three computer languages; which has a random access memory with a capacity for at least 16,000 bytes (expandable to at least 48,000 bytes); which is accompanied by a screen for visual display of the data; and which is suitable for educational use.

(b) Ancillary computer equipment transferred for use in connection with such a data processor (whether the processor was contributed by the taxpayer or already owned by the recipient). This category includes only display screens, printers, disc drives, and computer software which is suitable for use in instructional applications in the educational environment in which the data processor is to be used.

(c) Any installation equipment or replacement parts for a qualifying data processor or qualifying ancillary computer equipment.

Except for computer software, at least 50 percent of the transferred property must have been assembled by the taxpayer, and the taxpayer must be regularly engaged in the business of assembling and selling of computer equipment of the same kind.

Substantially all (at least 80 percent) the use of the transferred property by the recipient must be at its institutions directly in the education of students, and must be in the United States. Except in the case of installation equipment or replacement parts, only items having a value in excess of $250 would qualify for an augmented deduction. All transferred property would have to be accompanied by the same warranty as normally provided by the manufacturer in connection with the sale of the transferred property.

2. Qualified services

S. 1195 would define qualified services as the performance of maintenance, repair, reconditioning, or similar services which the transferor furnishes, pursuant to a standard contract with the recipient, in connection with a transfer of qualified computer property.

3. Eligible recipients

Under the bill, the qualified computer equipment must be transferred (through the recipient's governing body) to

(a) an educational organization (within the meaning of sec. 170(b)(1)(A)(ii))21 which is not an institution of higher education (as defined in sec. 3304(f)); or22

(b) an elementary or secondary school operated as an activity of a tax-exempt section 501(c)(3) organization (such as a church), provided that such school normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.

4. Time of transfer/original use

The transfer must be made within six months after assembly of the computer equipment has been substantially completed, and the original use of the property must be by the school. Also, the com

21 See note 4, supra. 22 See note 9, supra.

puter equipment transfer must be made within the five-year period beginning on the date of enactment of the provision.

5. Restrictions on schools

The transferred computer equipment could not be retransferred at any time by the school in exchange for money, other property, or services.

The transferor must obtain a written statement from the school, executed under penalties of perjury, representing that the school's use and disposition of the property will be in accordance with requirements for the augmented deduction. In the case of a transfer of ancillary computer equipment (including software), the transferor also must obtain a written finding by the school that the equipment is compatible with data processors which the school holds.

6. Distributional requirements

The transfer of computer equipment must be made pursuant to a written plan under which there will be no undue concentration of the taxpayer's transfers of computer equipment (or qualified scientific property), either on a geographical basis or on the basis of the relative economic status of the students of all schools which receive such transfers from the taxpayer.

7. Required orientation services

S. 1195 would require that the transferor, at no cost to the school or its teachers, must provide sufficient orientation to make at least one teacher per data processor proficient in the use of the transferred property in the direct education of students.

The orientation program must be conducted by employees of the transferor, or by any other competent person authorized by the transferor, at a location determined by agreement with the school. The determination of the degree of orientation required to meet the standard in the bill is to be made by agreement between the transferor and the school.

Allowable deduction

The amount of deduction allowed for transfers of qualified scientific property or qualified computer equipment meeting the requirements of S. 1195 would be as follows:

(a) Tangible inventory property.-Fair market value, but limited to the lesser of (a) twice the taxpayer's basis in the property or (b) the sum of the taxpayer's basis in the property plus 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 transfer and the basis in the property).

(b) Tangible property used in the transferor's business.-150 percent of the taxpayer's basis in the property, computed with certain adjustments.

(c) Qualified services.-The lesser of (a) the fair market value of such services (as determined by the amount normally paid by customers for such services) or (b) 150 percent of the taxpayer's costs of providing such services.

(d) Purchased computer software.-Fair market value of the software, determined at the time of transfer.

(e) Developed computer software.-50 percent of the fair market value of the software, determined at the time of transfer.

In the case of required orientation services with respect to transfers of computer equipment, the taxpayer's costs of providing such services are to be added to the basis of the transferred computer equipment property for purposes of computing the augmented deduction under the above rules for tangible inventory.

Special limitations

Under S. 1195, the augmented deduction would not be allowed to the extent that, determined on a product-by-product basis, the total of transfers in the taxable year by the taxpayer of qualified computer equipment property or qualified scientific property, exceeds 20 percent of the number of units of such product sold by the taxpayer in the ordinary course of its business in that taxable year. Also, while transfers of scientific or computer equipment property would not have to qualify as charitable contributions23 in order for the augmented deduction to apply, the taxpayer's aggregate deduction for charitable contributions under section 170 and transfers under the new provision could not exceed 10 percent of the taxpayer's taxable income (computed with certain modifications). Any amount of an augmented deduction exceeding this limitation could be carried forward in the same manner as an excess charitable deduction (i.e., the excess could be carried forward to the five succeeding taxable years, subject to the percentage limitation in those years).

Effective date

The provisions of section 2 of S. 1195 would be effective for taxable years beginning after enactment of the bill.

23 See note 6, supra.