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interest legislation to benefit a few manufacturers; education groups have

endorsed them but essentially as

"better than nothing"; most computer

manufacturers have been silent except the few who are sure to benefit; the

Treasury has opposed them.

If, however, the Congress believes it would be in the national

interest to promote computer literacy by public funds, we believe that a grant

bill would be preferable in every respect to any tax expenditure bill, however

it is revised to remove the defects stated above. With a grant bill, local school teachers and administrators could develop programs that suit their

local needs, and purchase exactly those computers, peripherals and software

that fit their programs.

All manufacturers could freely compete for this

market on an equal footing. The public's interest could be served because the

cost of the program could be known at the beginning and reduced or increased

over time as desired.

The only arguments we have heard against a grant bill are that it

will cost money, that the schools will not get as much computer equipment for

their dollar as under the present bills, and bureaucracy will be increased.

These tax expenditure Bills involve a cost to the public just as

surely as a grant bill. We are convinced a grant bill could be drafted that would provide better computer equipment for schools at no greater cost than

S.1194 or S.1195, with no increase in federal or state bureaucracy, and with

broader and more certain educational benefit. We would be pleased to assist Congress in preparing such legislation.

Varian / 611 Hansen Way / P.O. Box 10800 / Palo Alto / California 94303 / U.S.A.

Tel. (415) 493-4000
Telex 348476

varian

May 25, 1983

Roderick A. De Arment
Chief Counsel, Committee on Finance
Room SD-221, Dirksen Senate Office Bldg.
Washington, D.C. 20510

Dear Mr. De Arment:

My name is George W. O'Dair and I am Executive Vice President, Finance and Administration for Varian Associates, Inc. headquartered in Palo Alto, California. Varian is a diversified multi-national manufacturer of high-technology products used in the electronics, communications, defense, medical, scientific and analytical instrument, industrial components and semiconductor equipment industries. In 1982, Varian had total sales of $691 million of which approximately 22% were from products sold outside the United States. My purpose in writing is to offer some comments about the u.s. tax treatment of R&D expenses, especially the allocation of such expenses against foreign source income (S. 654). My colleague, Dr. E.J. Barlow, Vice President, Research & Development, will address the R&D tax credit (s. 738) in a separate letter.

Varian prides itself in offering customers the most advanced technology in the products it sells. To accomplish this, we must constantly spend considerable amounts on R&D to improve and upgrade existing products, as well as to develop new products which will meet the ever-changing needs of customers in a hightechnology environment. Varian faces significant competition from both domestic and international manufacturers in most areas of its business.

During fiscal 1980 through 1982 Varian expended the following amounts for R&D.

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Estimates indicate Varian's R&D spending will increase by approximately 25% during fiscal 1983 over 1982 levels. Approximately 96% of FY 1983 R&D expenditures will be spent in the U.S.

It is significant to note that Varian's increased R&D expenditures come at a time of worldwide recession. One reason is the lower after-tax cost of U.S. R&D spending due to the enactment of special R&D tax benefits in 1981. It is equally important to note that Varian's domestic R&D expenditures have increased while foreign R&D expenditures have decreased. Although many foreign countries have established extremely favorable tax and business incentives for R&D, we nevertheless have found it economically justifiable to retain and even increase domestic R&D spending primarily because of the recent tax incentives. Thus, 'while other factors will influence our decision on where to conduct future R&D projects, tax incentives will play a significant role in such decisions.

In addition to the cost-savings of such programs, a strong national R&D program provides marketing benefits to U.S. companies by permitting them to offer superior products. This is an invaluable asset in overcoming the barriers currently emerging in international trade.

In summary, we believe the R&D tax credit and the moratorium on allocating domestic R&D expenditures against foreign source income are important economic incentives and should both be incorporated into a permanent tax incentive program for u.s. growth industries. Thus, we encourage the Finance Committee and other members of Congress to strongly support Senate Bills 654 and 738.

Very truly yours,

VARIAN ASSOCIATES, INC.

i
George W. O'Dair
Executive Vice President
Finance & Administration

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The Federal National Mortgage Association (FNMA) supports s. 1147, the "Mortgage Debt Forgiveness Tax Act of 1983," and encourages the Congress to pass this bill into law during 1983. This letter sets forth the reasons for our support. We respectfully request that you include this letter in the record of the hearings on s. 1147 held by your Subcommittee on May 27, 1983.

Senators Danforth and Tsongas, the sponsors of s. 1147,

to be commended for introducing this important and highly desirable proposed amendment to the Internal Revenue code of 1954. They should also be commended for their concern for taxpayers who prepay their home mortgage loans at a discount only to find out later, to their surprise and financial detriment, that the discount amounts to an incidence of receipt of "ordinary income" taxable in the year of receipt. While no statistics are available as to the number of taxpayers who have unintentionally made themselves subject to such taxation, we suspect that the number is significant.

Present law acts as a deterrent to the prepayment of a home mortgage loan by a mortgagor (borrower) because the benefit of the discount is outweighed by the consequence of the taxes incurred. ' s. 1147 would correct this situation by providing an additional exception to the general rule of Section 61(a) (12) of the Internal Revenue Code of 1954

that the gross income of a taxpayer includes income from the discharge of indebtedness. S. 1147 would give home mortgage indebtedness treatment similar to "qualified business indebtedness," defined under the Code as indebtedness incurred or assumed by a corporation or by an individual in connection with property used in his or her trade or business. believe that the public policy reasons for providing special tax treatment to qualified business indebtedness are no greater than those for providing the same special tax treatment to individuals who own and live in homes encumbered by mortgage debt.

We would emphasize that s. 1147 would not result in a revenue loss to the U.S. Government, but a shift in the receipt of such revenue. The bill does not relieve the homeowner of tax liability on income. It simply defers recognition of the income until such time as the taxpayer sells the property. As Senator Danforth has pointed out, this proposal is similar to other provisions in the code which allow income recognition to be deferred until the taxpayer actually has the funds with which to pay the tax.

The benefit accruing to homeowners from s. 1147 is obvious. The benefits to others are less obvious but equally important. Some of these are:

Housing production and home mortgage financing would be aided by the infusion of money from home mortgage prepayments because the increase in the supply of mortgage funds should help reduce mortgage interest rates.

With greater levels of housing production and sales of existing homes, additional jobs would be added to the economy and additional income would be generated for individuals and businesses. The net result would be an increase in revenues to the Federal Government.

Portfolio lenders such as thrift institutions and FNMA would be able to ameliorate their financial conditions. The elimination of low-yielding, fixedrate long-term mortgages from their portfolios would increase the average yield on portfolio. One of the important measures of financial health of a portfolio lender is the degree to which the yield on portfolio exceeds the cost of borrowing.

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