conducted through the year of credit termination, and businesses need to know whether the tax credit will be applicable or not. In that connection, 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 know otherwise. IRAD 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. In our 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 Accounting 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 IRAD is 22-894 0-83--23 taxpayer-managed; can be started, stopped, or changed at the taxpayer's pleasure; and is in all respects the taxpayer's own obligation. The cost ordinarily is borne by customers through indirect charges to business 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 appropriations 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 a ceiling. Assuming that these are cost-plus or incentive-type contracts, 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. Scientific Education (S. 1194 and S. 1195) 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. 1195. 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 useful. Respectfully, charles thwart President Statement by Saul K. Fenster President New Jersey Institute of Technology on S 1194, Technology Education Assistance and Development Act of 1983 and S 1195, High Technology Research and Educational Development Act of 1983 on behalf of the American Association of State Colleges and Universities and American Association of Colleges for Teacher Education American Educational Research Association Council of Graduate Schools in the United States before the 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 years. 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 confronting 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. |