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For purposes of determining whether an exempt trust or organization is a limited partner or a general partner in a limited partnership, the interests of certain related parties would be taken into account. In addition, an exempt trust or organization which is a limited partner would be treated as owning an interest in any general partner held by any other exempt trust or organization (including related persons) that is a partner in the partnership.

The bill authorizes the Treasury Department to prescribe regulations that would deny the special treatment under the bill in any case in which multi-tier partnerships or other arrangements are used for the principal purpose of avoiding the conditions of the bill. Debt-financed property

The bill would provide an exception to the rules relating to debtfinanced property for working interests in domestic oil and gas properties acquired by tax-qualified pension, etc., plans, IRAs, or certain educational organizations, which would be similar to the rules, under present law, that apply to investment by tax-qualified pension, etc., plans in debt-financed real property.

Under these rules, the exemption would only apply if the acquisition price is a fixed amount and payments are not dependent upon the profits from the property (items 1 and 2 under present law, above). However, the limitations relating to leases between related parties, acquisitions from related parties, and nonrecourse financing from related parties (items 3, 4, and 5, above) would not apply to any acquisition, lease, farm-out, or other transfer of a working interest to a person related to the general partner if the terms of the transfer are consistent with the terms of similar transfers in the same geographic area.

Effective Date

The bill would apply for partnership taxable years beginning after 1982.

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STATEMENT OF SENATOR ARMSTRONG

Not often do the House Ways and Means Committee, the full House of Representatives, Treasury Secretary Don Regan and Council of Economic Advisors Martin Feldstein agree on how to cut taxes and enact real tax reform. When they do, its worth a national celebration, replete with fireworks, hot dogs, and apple pie.

Exactly this sort of celebration should occur since these diverse interests have supported what ought to be the top tax priority of Congress-enactment of capital gains indexing.

Capital gains indexing, when enacted, will solve one of this nation's most serious tax inequities. Under current law, taxes are imposed on phoney profits and gains with the result that taxes are paid on capital gains that never actually occurred. Legislation I have introduced corrects this problem by eliminating this tax on phantom capital gains. The legislation is simple: It permits automatic inflation increases in the basis computation of the capital gains tax. The need for this legislation is clear when current capital gains tax law is understood.

Under current law the capital gains tax is applied on the increased portion of the value of an asset prior to its sale. While assets held for several years usually increase in value, in many instances the increase is a fictional, a paper, gain. It is an inflation gain rather than a real gain in purchasing power or value. In other words in its present form the capital gains tax now imposes not a tax on profit or gain or income but merely a tax on inflation, and it amounts to an unfair levy on capital. The legislation I am proposing removes the inflation tax by permitting taxpayers to adjust the basis of certain assets for inflation using the GNP deflator. The inflation adjustment is the percent of increase in inflation as measured by the GNP deflator from the time of the purchase of the asset or the effective date of legislation until the time the asset is sold. As a result, the capital gains tax will apply only to real gains and not to the inflation gain.

Because of the obvious tax equity this bill provides, it is no wonder then that this legislation has been

Endorsed by the House Ways and Means Committee in 1978.

Passed the full House of Representatives that same year by an overwhelming vote.

Passed by the Senate in 1982, and this legislation would now be law had the Senate action coincided with House approval.

Supported by Treasury Secretary Don Regan when he was chairman of the board of Merrill Lynch, Pierce, Fenner and Smith.

Supported by the chairman of the President' Council of Economic Advisors, Martin Feldstein.

Endorsed by the U.S. Chamber of Commerce.

Endorsed by the U.S. Industrial Council.

There are two critical reasons why this legislation has attracted such bipartisan support: First, it corrects a serious impairment in the capital formation process. Second, it corrects a severe tax inequity. A recent report of the National Bureau of Economic Research highlights these two issues.

NBER reported that for one year, there occurred $4 billion in capital gains transactions which were subject to capital gains taxes of $1.1 billion. However, this was inflation-again tax and if there had been an inflation adjustment as proposed by my amendment in fact the capital losses would have exceeded $1 billion. In other words, the current capital gains tax prevents the sale and exchange of property and the subsequent freeing up of capital for other investment.

We have put a provision in the Tax Code which inadvertently freezes people into marginal or unproductive investments. So the first reason to be in favor of this is because it will improve the marginal efficiency of the entire economy.

Mr. President, there is another more direct and more personal reason why every taxpayer has stake in the passage of this amendment, and it is simply one of equity. As a matter of basic fairness it is wrong to tax somebody on a gain which has not occurred. Let me give you a very specific example. Let us suppose someone bought an automobile repair business for, say $20,000 ten years ago. Let us suppose also during the last ten years the value of that business increased 106 percent in nominal dollars, and then you sold the busines.

Under the present law you would have a large capital gain. In fact, you would have the capital gain on about $21,000 to pay. In fact, there has been no real increase in value, no increase in purchasing power. All that has occurred is a depreciation in the value of money because in the last decade the GNP deflator has increased 106 percent.

What this legislation seeks to do is to avoid in the future taxing people on paper gain, an unreal gain, an inflation gain.

The question this legislation puts is this: Is it fair to put a heavy tax, indeed a tax virtually on the entire value of these properties, at the time they are sold when the increase in value results almost entirely from inflation? I think the answer to that very clearly is that it is not fair to do so.

I wish it were possible to go back and index things back to 1900 or 1940 or 1960 to take care of all of the people who are already frozen into these investments. It would be impossible to do so, however, so this legislation takes effect January 1, 1984, after which time we will not further tax inflation gains.

Mr. Chairman, I appreciate the opportunity today to examine S. 108, a bill I sponsored which provides tax incentives to industry to support technician training programs within our post-secondary vocational education system. Skill renewal and job training are central to our ability to generate economic growth and strengthen the competitiveness of American industry. In recent months, Congress has concentrated an increasing amount of attention to the role the federal government can play to curb unemployment and help build a highly skilled workforce. We have enacted, for instance, the Jobs Training Partnership Act which serves as a model for federal, state and local governments to join forces with private industry in providing workers with competitive skills. Through this measure, as well as others, we have recognized that there are not sufficient federal dollars alone, nor sufficient state or private sector resources to address the specific skill needs of industry, in the present or the future. Rather, we must combine forces to strengthen the nation's training programs.

The need for relevant and effective training programs to meet the growing demands of new technologies is well-documented. The Task Force on Skilled Trades Shortages, a coalition of trade organizations representing 32,000 plants, reports that there will be a need for 23,000 new tool and die makers and machinists each year through 1990. Yet, only 5,000 individuals are completing their apprenticeships in these trades in recent years. Furthermore, the current skills of our workforce will not be adequate even three or four years down the road. Workers will need to be trained, retrained and cross-trained in order to hold their jobs and adapt to rapidly changing technologies.

As our witnesses will testify this morning, our community and junior colleges and technical institutes have emerged as a leading resource for job training and retraining. The strength of these institutions lies in their ability to provide the kinds of technical training programs that match the needs of local industries and are reflective of current job openings. The colleges create programs in cooperation with local business and industry officials, and reshape them as technology and training needs demand. They also design special training programs at the request of business and industrial firms. Through contractural agreements with these institutions, firms are able to arrange for tailored programs to meet their individual needs. On a dramatically increasing basis, industry is turning to the community and junior colleges and technical institutes to provide the specialized "employer specific" training programs for their workers. These institutions are equipped to provide high quality instruction, which is often better and less expensive than in-house skills training.

This educational system, however, is facing some very real and immediate needs. The lack of state-of-the-art equipment has become a serious hardship to community and junior colleges in their efforts to address our skills shortage. Technical programs rely on expensive equipment which rapidly becomes obsolete in this age of exploding technology. Much of the equipment in place within our community and junior colleges has fallen far behind the state-of-the-art, particularly in the fields of microprocessing, computer-assisted design and numerical control machining. Furthermore, many colleges have found it impossible to expand into emerging fields of robotics, laser optics and other current technologies because they lack the funds to initiate such programs. States, mired in budgetary pressures of their own, have been unable to meet the equipment needs of their community colleges.

The state of Iowa, for instance, provided no funding in FY 1982 for equipment upgrading among the state's 20 community collees and technical institutes. Funding for the current fiscal year is $300,000, which is probably insufficient to meet the actual equipment needs of even one of the 20 institutions. While the federal government cannot assume financial responsibility for this lack of resources, it can encourage private industry, at a relatively minor loss of revenue, to help in underwriting the expense of modernizing training programs from which they will benefit. Some colleges have benefitted from donated equipment from businesses which they could not have purchased on their own. The state of North Carolina received over $6 million of equipment donations for vocational training purposes in the last two years.

At a very little cost to the federal government, we could encourage even greater private sector participation and support in the training process.

To assist community and junior colleges in meeting the job training demands of the future, my bill, S. 108, makes three changes in the tax code. To encourage corporations to donate equipment, my bill amends the Internal Revenue Code to increase the charitable contribution deduction which may be taken by a corporation for the donation of eligible equipment. The amount of the deduction is the taxpayer's basis in the donated property plus one-half of the unrealized appreciation of the asset, not to exceed twice basis. Under current law, a corporate donor may only deduct its basis in the property.

This provision mirrors an ERTA provision permitting a corporation to claim a deduction of the same magnitude for the donation of equipment for research or research training to an institution of higher education. My bill expands the ERTA provision by permitting a corporation to donate equipment used for vocational training to two and four year colleges, technical institutes and universities. The equipment must be donated for use in a qualified post-secondary vocational education program as defined by the Higher Education Act of 1965; furthermore, the donee must certify that substantially all of the use of the property will be for training students enrolled in qualified post-secondary vocational education programs. A qualified post-secondary vocational education program is a two-year program in applied mathematics, science or engineering and their related technical fields which directly pertains to the career preparation of students without a baccalaureate or advanced degree. To prevent abuse, the property received by the donee may not be transferred in exchange for other services or property.

My bill also addresses the difficulty educational institutions face in competing with private industry to attract and maintain qualified technical instructors. S. 108 has two provisions designed to enable teaching skills to keep pace with technological growth. First, corporations are eligible to claim a $100 tax credit for employees lent to community and junior colleges to teach vocational training courses. An employer may not claim a credit for more than 5 courses taught by each employee during a taxable year. Eligible courses are those offered in a two-year program in the fields of engineering, mathematics, physical or biological sciences designed to prepare a student to work as a technician or a para-professional. This incentive would encourage industry to contribute needed technical instruction that colleges are currently unable to provide, particularly in highly specialized technologies.

Second, my bill offers employers a tax credit of $100 if they employ a full time vocational education instructor with at least two years of teaching experience. To claim the tax credit, an employer must hire the instructor for not less than three months and not more than one year. If the instructor does not return to his or her teaching position, the corporation cannot claim the credit. This provision is designed to provide employers with a small incentive to hire community college vocational instructors. Not only would these instructors be exposed to the technological needs of the area's employers, their skills would also be upgraded by working with modern equipment. This double benefit enhances the ability of vocational education instructors to teach and place their students.

Although not a comprehensive answer to our skills shortage, I feel my bill would offer immediate and needed assistance to one of our best delivery systems for job training. It would also enhance the cooperation between the business sector and our educational institutions in providing more effective training services.

I thank the Chair for the hearing this morning on my bill, S. 108, and look forward to the testimony of our distinguished witnesses.

Senator ARMSTRONG. Today is the 107th anniversary of Colorado joining the Union. Today is Colorado day. [Applause.]

Let the record of this proceeding reflect that that announcement was well received. And I also would like to announce that we are here for the purpose of holding hearings on a series of tax reform measures which are near and dear to the hearts of the people of Colorado, and so it is a very appropriate day.

I will insert into the record of this proceeding a detailed statement on each of the bills, but they are, just for the record, S. 1600, capital gains indexing; S. 1579, charitable deduction for mileage; S. 1464, exempting the El Pomar Foundation from foundation divestiture requirements; and S. 1549, permitting pension plans and college endowments to invest in all forms of energy exploration

through limited partnerships and not be subject to the unrelated business income tax.

The provisions I think of these bills are well known to the committee. And I will put a statement at length in the record. We have a very distinguished list of witnesses and we are delighted to welcome them here today.

S. 1600-CAPITAL GAINS INDEXING

May I first call on my colleague and old friend, Bill Archer, a Member of the U.S. House of Representatives for, I want to say seven terms, but that may be one too many. Is that correct?

Representative ARCHER. That is correct.

Senator ARMSTRONG. From the State of Texas, one of the foremost authorities on tax law, generally, and on indexing the Tax Code, in particular. We are delighted to welcome you and we are eager to have your statement.

STATEMENT OF HON. WILLIAM ARCHER, U.S. REPRESENTATIVE STATE OF TEXAS

Representative ARCHER. Thank you, Mr. Chairman. At the onset, I would say that we in Texas view the admission of Colorado with some mixed emotions inasmuch as you took a big chunk of the original Republic of Texas within your confines.

Senator ARMSTRONG. Could we strike that out of the record? [Laughter.]

Representative ARCHER. But to get on to the business before the committee this morning. I am pleased to have an opportunity to publicly testify on a subject that has been close to the hearts and activities of both you, Mr. Chairman, and myself over the years, which is the indexation of the cost basis of capital gains. You are the author of Senate bill 1600, and I am the author of a similar bill, H.R. 3651, in the House.

Historically, we might look back a couple of years, and in 1981 the Congress for the first time recognized in public law that inflation erodes the value of the dollars on which tax liabilities are based and index the individual tax rates for individuals in 1981. And I might say, Mr. Chairman, I would like to submit my entire testimony for the record, and I will tend to paraphrase and synthesize to the greatest degree that I can.

Senator ARMSTRONG. We are glad to have your statement in its entirety.

[The prepared written statement of Representative Archer follows:]

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