allows an R&E credit for contract research expenses contributed to colleges and universities. We would support the objectives of these bills. We do want to raise questions about the efficiency of the approaches followed in these bills, and we would like to work with the subcommittee to determine whether the bills could be modified to become more effective. We are particularly concerned about the change in the bills which would remove the incremental feature, would take the base period requirement out of the law so that taxpayers would be entitled to a full credit for continuing their present practices at their present level of gifts to colleges and universities for scientific education when the overall scheme of the credit is designed to encourage increased activity in this regard. Also, we question the fact that there is no requirement that schools utilize the funds to hire additional faculty or create new scholarships. There is an attempt through an agreement with the schools to accomplish this, but since money is fungible, we don't think that would have any effect, and we think these agreements would be meaningless.

Let me skip to section 4. Section 4 of the bill simply would modify the exclusion from gross income for scholarships and grants. Basically, current law provides that amounts received for scholarships or fellowships are fully or partially excluded from gross income. The exclusion is based on whether or not there is a significant quid pro quo from the recipient in the form of either current or future services. These bills would attempt to expand the exclusion with respect to taxpayers in the scientific area if they agree to provide further scientific work in the teaching field. We think that instead of a blanket exclusion for all rewards conditioned on future teaching services, standards should be developed to identify which scholarship awards are not truly compensatory even though they impose some conditions on the recipient, and we think those standards should apply to students in all areas of studies, not just students in the sciences.

Mr. Chairman, I think I will conclude. The final bill before you today involves a totally unrelated subject, that is, the subject of what happens on mortgage debt forgiveness to an individual homeowner when he is able to pay off his mortgage at a reduced rate. We do think there is some merit in considering some relief in this area. We would oppose retroactive relief, but, as the testimony points out, we do think some type of relief should be considered in this area.

Senator DANFORTH. I thank you very much, Mr. Chapoton. On 1194 and 1195, with respect to the deduction up to twice basis for the donation of computer equipment to elementary and secondary schools, the original position of the administration was to oppose that concept. Then, as I recall, the administration decided to support the concept. Now it is my understanding that once again the administration opposes it. Is that right?

Mr. CHAPOTON. That is correct. Mr. Chairman, this is much expanded. We estimate the revenue cost is about 10 times the bill that was before you last year. That was a very temporary item. This is 5 years, or it would basically be permanent. And the types of equipment that qualify are broadened, and the service element is included, which was not last year.

Senator DANFORTH. And with respect to contributions of scientific equipment to higher education, the present law is that the extra deduction, the twice basis deduction, is permitted for contributions of equipment used in research, but not equipment used in education and math science and engineering.

Mr. CHAPOTON. That is correct.

Senator DANFORTH. And does the administration oppose extending this to equipment used in education, or does the administration favor a repeal of the existing double deduction on research?

Mr. CHAPOTON. We do not favor repeal of the existing rule. I think I may have misstated the existing rule. It is for basic research, and for education in the math and science areas as well. We are not proposing repeal of that, no, sir.

Senator DANFORTH. So if a manufacturer of scientific equipment were to donate that equipment to a university for research purposes, that equipment would be deductible up to twice basis.

Mr. CHAPOTON. That equipment would be deductible up to twice basis, and that equipment would qualify under our proposed regulations for the R&E credit as well.

Senator DANFORTH. However, if the equipment were not contributed for research but instead for education in science or engineering or math, then it would not be subject to the deduction.

Mr. CHAPOTON. I believe it would be subject to the deduction if it were in education and science or math, Mr. Chairman. Let me verify that.

[Pause]

Mr. CHAPTON. Yes, sir, it would be.

Senator DANFORTH. I thought that the purpose of the bill was to apply the same rule to equipment donated for educational purposes as now exists for research purposes.

Mr. CHAPOTON. Well, my understanding of the present law is that it does qualify. The bill would expand the type of equipment and would expand the use of the equipment into vocational schools, 1195 into vocational schools.

Senator DANFORTH. No. I am talking about higher education right now, just the higher education portion of 1194, not the elementary and secondary.

[Pause]

Mr. CHAPOTON. Well, Mr. Chairman, I think, as I understand the purpose of the bills is to broaden the permitted uses beyond training related to research but just general education. And I guess that is your point. It would move it away from the use of equipment targeted for research but more for basic education.

Senator DANFORTH. Yes. But limit it to math, science, or engineering education.

Mr. CHAPOTON. Yes, that's right. Your bill would limit it to math, science, and engineering, right.

Senator DANFORTH. So let's suppose that X corporation manufactures a piece of scientific equipment, say it manufactures a computer, and it wants to give the computer to, say, the University of Missouri. If that computer is to be used for research, then it gets the double deduction?

Mr. CHAPOTON. That's right. If it is research or related to research training.

Senator DANFORTH. And if it is to be used for education in the engineering department, somehow teaching people who are students in the engineering department, that would not be subject to the double deduction in your view, should not be?

Mr. CHAPOTON. I believe that is correct, yes, sir.

Senator DANFORTH. Isn't that a very fine line to try to draw? Mr. CHAPOTON. No question about it. Wherever you expand this, the next line is going to be very difficult to draw.

Senator DANFORTH. That's the present law, the fine line.

Mr. CHAPOTON. Absolutely.

Senator DANFORTH. My view is that if a company that makes the equipment wants to contribute it to a university, it should be treated the same whether the intention is to use it for research itself or for educating people in math, science, or engineering.

Mr. CHAPOTON. Well, I couldn't argue with the fact that that is a desirable goal. As I remember when this came up 2 years ago, the argument was made that we should enhance basic research, and that was the point, that this gift should be available for basic research. If ever it could be expanded, logically, I agree, to other types of education, and it obviously could be expanded far beyond the areas your bill would expand it to. And I think that suggestion would be made if we expand it.

Senator DANFORTH. Well, that's not what I am suggesting in this bill. I am just suggesting that if, say, IBM wanted to contribute some equipment to a university for research purposes, and the university wanted to use the equipment to help educate its people in the school of engineering, then that should be subject to the same treatment. I mean, it seems to me that our purpose should be not only to encourage our universities to conduct research but should be to encourage our universities to train new generations of scientists and engineers where there is now a shortage. And for us to take a position where we are encouraging the same piece of equipment to be used somehow purely for research and not to be used for education is a kind of an odd view of what the law should be. Mr. CHAPOTON. Mr. Chairman, this is exactly comparable to a Government expenditure program. The Government is paying virtually all the cost of whatever you decide that the Government is not administering, that is, the companies are deciding what they want to favor, and are doing it at virtually no cost, and in some cases under this bill, at indeed a profit to the company. So you then have to decide what types of programs those companies can choose. The decision 2 years ago was to attempt to limit it, recognizing that it was basically a Government program, to basic research. And there is no question the desirability of broader education. The question is whether we want a Government program funding equipment for broader education.

Senator DANFORTH. Right. That is correct. I think that is the question, whether our aim is to provide an advantage to education, whether higher education or elementary and secondary education in math, science, engineering and related fields.

Mr. CHAPOTON. It is, in effect, an educational program, and it is administered by private industry.

Senator DANFORTH. Well, I am not sure it is administered by the industry. There has to be a willing donor and there has to be an

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educational institution that is willing to receive it. But I had thought that one of the points that has been made by the President himself is that we should be encouraging not just Government to make direct grants to education or any other nonprofit organization, but we should attempt to encourage the private sector, the American people, to contribute to our nonprofit organizations, including our colleges and universities. And it seems to me that this effort of Government to try to make it attractive for the private sector to do its part is a good thing, not a bad thing.

Mr. CHAPOTON. Mr. Chairman, I don't disagree for a moment that it is a good thing. But the point is that there is a no cost program, that is, a donor will have little, if any, cost, and in some cases under these bills could come out ahead by the contribution. So there would be no charity in the charitable gift.

Senator DANFORTH. Well, I would like to study some of your examples of no cost. I don't think it would be no cost. The deduction of double basis does not recover the entire cost. It recovers a very substantial portion of the cost if that cost doesn't include general administration and overhead within the company, and so on. But there is a cost to the company. But I think that the general principle, and really the bone of contention, is this: Is our principle effort to be to encourage scientific equipment, computers, to be available for kids to be educated, or instead is that going to be the secondary concern, and our primary concern is that nobody should get tax advantages? But it seems to me that any time you are talking about a tax expenditure you are talking about providing an advantage for somebody or some business to do something that is thought to be socially desirable. I guess the question is, what has the heaviest weight, the socially desirable objective, on one hand, or the need to prevent anybody from getting a very substantial tax advantage?

Mr. CHAPOTON. I think that our main quarrel-and I just want to emphasize this-that our calculation is that under these changes, and particularly when you add the services part, a deduction for the services under the charitable guise, and also entering into the basis for the 200-percent limit, that we see a definite profit result, that is, the donor coming out ahead financially as a result of the gift.

Senator DANFORTH. Well, we can work that out.

Mr. CHAPOTON. All right.

Senator DANFORTH. If that is true. I mean, obviously, nobody wants anybody to come out ahead. But couldn't the administration suggest some modifications to prevent that from happening, as opposed to just a really blanket dismissal of the whole idea?

Mr. CHAPOTON. Well, we would certainly like to work with you to prevent that from happening. I think you are then deciding to give an additional benefit to a certain type of activity. Then that is the judgment call that you were talking about earlier, that is, that you want to give an incentive for this type of gift over other types of gifts. I think we have trouble making those judgment determinations in the tax route. But I would concede readily that those are the judgments that can be made.

Senator DANFORTH. Can I ask, is the administration supporting the sunsetting of tax expenditures?

Mr. CHAPOTON. The sunsetting of tax expenditures? You mean, all tax expenditures?

Senator DANFORTH. Well, you certainly are in the case of the R&D credit.

Mr. CHAPOTON. We are supporting an extension of the present law sunset.

Senator DANFORTH. But you are still, as opposed to making the credit permanent, you are supporting a sunset version of it.

Mr. CHAPOTON. Well, we are proposing a 3-year extension. We are taking it through virtually the end of the decade. We are very supportive of the credit. So if there is a great concern about the date picked, I think that would not be a great moment to us. We do think the credit should be extended. We think it should be improved, and we are very supportive of it.

Senator DANFORTH. Does the sunsetting of tax expenditures for business tend to create uncertainty in the business community?

Mr. CHAPOTON. I think that sunset as it is approaching too near, as it is approaching in the near future, does create uncertainty. I think that is about to happen with the present sunset on the R&E credit.

Senator DANFORTH. Senator Heinz.

Senator HEINZ. Mr. Chairman, thank you. Mr. Chapoton, you said that in your remarks that you would be sending down some recommendations as to how we might address the problems of industries, such as steel, chemicals, mining, and others, that are not either currently or expected to be soon able to benefit from the R&D tax credit. How soon would you be able to have such recommendations to us?

Mr. CHAPOTON. Senator Heinz, I don't know that I can be specific on that. We want to send recommendations on the credit, in general. That is one of the principal problems that we are having with the credit in the startup area and in the loss company area. But in the loss company area, it is a more difficult problem because—well, it is a difficult problem in both cases, because it does run head long into the problem this committee addressed in 1981 through the safe harbor leasing. It was our same concern at that time. It is a concern under ACRS, generally, and it is a concern here. I don't want to suggest that it is going to be an easy problem to address.

Senator HEINZ. But do you have some timeframe?

Mr. CHAPOTON. No, I am afraid I cannot give you a timeframe. We, as I mentioned, have an interagency task force. I would think certainly it would be sometime during this summer, but I don't think I could be any more definite than that.

Senator HEINZ. I would hope that Treasury would consult with those of us on the committee, and there are a number of us who have industries that have this problem.

Mr. CHAPOTON. Yes, sir, I know.

Senator HEINZ. Can you keep us posted on your progress?

Mr. CHAPOTON. I would be happy to, yes, sir.

Senator HEINZ. All right. Thank you.

Senator DANFORTH. Thank you, Buck.

Mr. CHAPOTON. Thank you, Mr. Chairman.

[The prepared written statement of Mr. Chapoton follows:]