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TEI currently has more than 3,800 members who represent approximately 1,100 of the leading corporations in the United States and Canada.


No single industry dominates TEI. We represent a cross-section of the business community and believe diversity and dedication to the tax function qualify us to address issues concerning the administration of the tax laws and the effective implementation of tax policy. As the principal association of tax executives, TEI is dedicated to promoting the uniform and equitable enforcement of the tax laws throughout the nation and to reducing the costs and burdens of administration and compliance to the benefit of government and taxpayers alike.

S. 738

S. 738, sponsored by Senators Danforth, Bentsen, Chafee, Glenn, Grassley, Symms, Boren, Tsongas, Durenberger, Wilson, and Cohen, would make permanent section 44F of the Internal Revenue Code. Section 44F, which provides a credit for increasing research activities, was added to the Code by the Economic Recovery Tax Act of 1981 and applies with respect to amounts paid or incurred for "qualified research" (within the meaning of section 44F (b)) between July 1, 1981, and December 31, 1985. S. 738 would remove section 44F's sunset provision. TEI supports its passage.

A principal purpose of the Economic Recovery Tax Act of 1981, of course, was the stimulation of growth in the economy by providing incentives for capital formation. The legislative history of the 1981 Act clearly reflects Congress's view that increased investment in research and development is a key to increasing productivity. Section 44F is an integral part of the business incentives that Congress enacted to spur that increased investment and was intended to "overcome the resistance of many businesses to bear the significant costs of staffing which must be incurred in initiating or expanding research programs." S. Rep. 97-144, 97th Cong., 1st Sess. 7677 (1981); accord H.R. Rep. No. 97-201, 97th Cong., 1st Sess. 111 (1981). See also Staff of the Joint Comm. on Taxation, General Explanation of the Economic Recovery Tax Act of 1981, at 120 (1981). As Assistant Treasury Secretary Chapoton stated at the May 27 hearing, enactment of section 44F manifested Congress's decision that broad government support for research and experimentation -- in the form of subsidies for R & E investment -- is warranted and highly desirable.

The credit, however, is scheduled to expire at the end of 1985, and it has been suggested that the question posed by S. 738 is, "does the research tax credit work?" Has section 44F proven effective in increasing research and experimentation activities in the United States? The Subcommittee has heard testimony from several private sector witnesses that, to the extent the credit's short-term effect can be gauged, section 44F has indeed spurred research and development. The Treasury Department's own analysis would seem to confirm this.

Even if this were not the case, however, TEI submits that S. 738 should be favorably considered. This is because, in a very real sense, there is a wholly different question that the Subcommittee should consider. That question is, "has the research tax credit been given a chance to work?" Tax Executives Institute respectfully submits that, with respect to many taxpayers and a large number of research projects, the answer to that question is, unfortunately, no. We reach this conclusion for two reasons.

First, the planning cycle for research and development is typically long-term. Thus, decisions made today may not produce tangible results, or even necessitate significant expenditures of funds, for several years. In other words, planning decisions made following the enactment of section 44F are in many cases just now beginning to have operational effect. To suggest that the credit has not worked or will not work because its effect has not been immediate is to misapprehend the nature of research and development.

Secondly, and perhaps more important, continuing uncertainty over what the credit applies to and whether it will be available after 1985 has very possibly had both a short-term and a long-term stifling effect on research and development. In the short-term, the absence of implementing regulations (the Internal Revenue Service did not even issue proposed regulations until January of this year, and the promulgation of final regulations is still months away) could well have lead taxpayers (especially those at the margin) to delay or even cancel research projects that they might otherwise have undertaken. In the long-term, the uncertainty over whether the credit will be available after 1985 almost without question diminished the incentive effect of section 44F. This is especially the case since, as already noted, planning decisions made today will involve the expenditure of funds in the "out years" when the credit will not (save S. 738) be available. For this reason, the simple extension of section 44F (as the Treasury Department has suggested as an alternative to S. 738) could not possibly have the long-term salutary effect that

making the credit permanent would have.

In summary, Tax Executives Institute believes the removal of section 44F's sunset provision, coupled with either the regulatory or legislative clarification of the credit's reach, is essential if section 44F is to accomplish its intended and certainly laudable purpose. We recommend that the Subcommittee act favorably on S. 738.

S. 654

S. 654, sponsored by Senators Wallop, Armstrong, Symms, Boren, Durenberger, Danforth, Roth, Glenn, Heinz, Packwood, Chafee, and Baucus, would amend the Code to provide that, for purposes of sections 861 (b) and 862(b), all amounts allocable as a deduction for research and experimental expenditures (within the meaning of section 174) attributable to activities conducted within the United States are to be allocated to sources within the United States. The bill would thus render invalid section 1.861-8 of the Treasury Department's income tax regulations, which contains rules for allocating and apportioning such amounts between U.S.-source and foreign-source income, thereby making permanent a moratorium on the application of Treas. Reg. $ 1.861-8 which Congress passed as part of the Economic Recovery Tax Act of 1981. Unless Congress acts, the moratorium will expire (for calendar year taxpayers) at the end of 1983. TEI supports prompt enactment of S. 654.

Under Treas. Reg. $ 1.861-8 (before enactment of the congressional moratorium), when a taxpayer performed research activities in the United States, a portion of the tax deduction for expenses attributable to that research was allocated to the taxpayer's foreign-source income. In certain cases this allocation had the effect of denying the taxpayer a foreign tax credit on that income, thereby effectively depriving the taxpayer of the benefit of that portion of the deduction in the United States.

The allocation rules currently contained in Treas. Reg. 1.861-8 without question present a clear disincentive to the performance of research and experimental activities in the United States as opposed to European and other countries. Thus, the effect of allowing the moratorium on applying Treas. Reg. 1.861-8 to expire would be to undermine the policy underlying Congress's decision in enacting section 44F to favor research conducted within the United States. Consequently, Tax Executives Institute urges the Subcommittee to act favorably on S. 654.


Tax Executives Institute commends the Subcommittee for holding a hearing on these important bills and appreciates the opportunity to present our views. If we can be of any assistance to the Subcommittee, technical or otherwise, please do not hesitate to let us know.

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S.1194: Technology Education Assistance and Development Act of 1983

S.1195: High Technology Research and Education Development Act of 1983

May 27, 1983 Hearings

Timex Computer Corporation submits this statement in opposition to the portions of the "Apple Computer Bills", S.1194 and S.1195, which provide increased tax deductions for contributions of computers to primary and secondary schools.

We enthusiastically endorse the purpose of the Bills, to promote computer literacy among primary and secondary school students. A fundamental and far-reaching technological revolution is now under way. If our country is to compete with other technologically advanced countries like Japan in this new electronic world, our school children must be computer literate and have meaningful access to computers.


traditional educational system is adapting to meet this challenge. Some colleges now require every student to own a computer for use with all course work, while others require computer literacy as a prerequisite to graduation. Within the next ten years computer literacy will be a

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