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conducted through the year of credit termination, and businesses need to
know whether the tax credit will be applicable or not.
In that con
nection, we would point out to the Subcommittee that companies now seem
to face major revenue law changes annually, and the uncertainty and
instability caused by constant revisions in the tax requirements is an
impediment to their planning processes. Similarly, the prospect that a
tax credit will terminate forces them to disregard the credit until they
Although legislation before the Subcommittee does not deal
with IRAD specifically, we feel that the Subcommittee should be aware
that IRS proposes to disqualify from creditability the R&E of many
contractors on the basis of a garbled legislative history rather than
the construction that would flow naturally from the statute.
opinion, although legislation does not appear to be necessary, the
Subcommittee should take such steps as are needed to clarify that IRAD
qualifies for the credit and is not to be considered "funded by any
person (or any governmental entity)."
To explain, IRAD is that part of a taxpayer's R&E program that
is not performed pursuant to a contract, grant, or similar agreement, as
explained in Defense Acquisition Regulation 15-205.35(a) and Cost Account
ing Standard 420.30(a)(6) for affected government contractors.
undertaken at the discretion of the taxpayer, and need not relate to any
current business with any customer. IRAD is taxpayer-initiated and
taxpayer-managed; can be started, stopped, or changed at the taxpayer's
pleasure; and is in all respects the taxpayer's own obligation.
cost ordinarily is borne by customers through indirect charges to busi
ness transactions that may have no relationship to the IRAD effort.
The Department of Defense (DoD) negotiates advance agreements
for IRAD indirect cost allocations with some contractors because Public
Law 91-441 requires such agreements and prohibits the use of DoD appro
priations for IRAD that is not militarily germane. However, government
does not purchase the IRAD, and the contractor remains substantially at
risk for it. The result of government's intervention is that a ceiling
is placed on the allocation--a procedure that may, in fact, increase the
risk to the contractor by imposing limitations on recovery that may not
exist in dealings with other customers.
The ceiling does not mean that
actual IRAD costs incurred and allocated to contracts will be allowed by
DoD and, perhaps more significantly, the government normally does not
obtain any rights to the IRAD work product.
Although our basic contention is that IRAD should be qualified
under the law, as enacted, we note further that the IRS proposal would
treat similarly situated taxpayers differently where, for example, there
are two identical contracts, one with the government and having a cost
ceiling for IRAD, and one with a commercial customer and not having such
Assuming that these are cost-plus or incentive-type con
tracts, the first contractor would be denied research credits but the
second would have such credits undiminished.
Similarly, the concept of
"funding" as embracing indirect cost allocations seems erroneous because such a concept, if applicable to all businesses, would disqualify most
research from credit eligibility.
We doubt that Congress would have
enacted a research credit under such circumstances.
In short, we believe that the IRAD proposal of IRS--which is
not called for by the statute itself--is discriminatory and contrary to
the public interest as it would apply to government contractors with
certain kinds of agreements.
For these reasons, we urge that all such
costs qualify without reference to contract type or advance agreements
limiting indirect cost allocations.
We support s. 1194 and S. 1195 in principle, but do not want
consideration of such measures to delay S. 738, which can be acted on
with dispatch. In working to improve the bills, we suggest that the
Subcommittee review the definitions of eligible property contributions
to be certain that they cover all types of equipment, the use of which
by the donee would be consistent with the purposes of s. 1194 and S.
Also, further attention should be given to the proposal to alter
the base period for the R&E credit to determine, among other things,
whether additional structural changes should be made beyond those
stated in the bills.
MAPI appreciates having the opportunity to present its views
on these matters, and hopes that the Subcommittee will find them to be
Saul K. Fenster
New Jersey Institute of Technology
S 1194, Technology Education Assistance and Development Act of 1983
S 1195, High Technology Research and Educational Development Act of 1983
on behalf of the
American Association of State Colleges and Universities
American Association of Colleges for Teacher Education
American Council on Education
American Educational Research Association
Association of Urban Universities
National Association of Independent Colleges and Universities National Association of State Universities and Land-Grant Colleges
National Society of Professional Engineers
State University of New York
Subcommittee on Taxation and Debt Management
Committee on Finance
United States Senate
May 27, 1983
My name is Saul K. Fenster and I am President of New Jersey Institute of
Technology in Newark, New Jersey, a position I have held for the last five
Prior to assuming the Presidency of New Jersey Institute of Technology
I was Chairman of the Department of Mechanical Engineering, Associate Dean of
Engineering and Provost at Fairleigh Dickinson University. I received a BME
from City University of New York, an MS from Columbia University, and a Ph.D.
from the University of Michigan. I am a member of the American Association for the Advancement of Science, American Society for Mechanical Engineering and American Society for Engineering Education.
I am pleased to have the opportunity to appear before this Subcommittee
today to testify on S. 1194 and S. 1195.
I represent the 355 member institutions of the American Association of
State Colleges and Universities and am currently Vice Chairman of its Committee
on Science and Technology. I am also speaking on behalf of many of the
associations that participated in the drafting of Higher Education's Agenda in
Mathematics, Science and Technology Education. A copy of this document is
attached for your information.
This subcommittee, Senators Danforth and Bentsen, are to be congratulated
for the legislative initiatives contained in S. 1194 and S. 1195. S. 1194 and S. 1195 are important elements in developing a solution to the crisis
conronting our nation in science, mathematics, technology and engineering
education. We regard these proposals as one aspect of the total effort needed
to resolve the urgent problems faced by our nation's educational institutions.