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1. S. 1857-Senators Durenberger, Moynihan, Bradley, Matsunaga, Lugar, Packwood, Tsongas, D'Amato, Riegle, and Heinz
Liberalize Charitable Deduction Rules for Private Nonoperating Foundations; Amendments to Foundation Excise Tax Provisions Liberalizing charitable deduction rules
The bill would conform the income tax treatment of contributions by individuals to private nonoperating (grantmaking) foundations to that provided under present law for contributions by individuals to public charities or private operating foundations (Code sec. 170), effective for contributions made after 1982.
Under the bill, contributions of cash or ordinary-income property to private nonoperating foundations would be deductible up to 50 percent of the donor's adjusted gross income, and contributions of capital-gain property, up to 30 percent, rather than up to 20 percent as under present law. Also, excess contributions to nonoperating foundations could be carried forward for five years. Finally, the full fair market value of capital-gain property donated to nonoperating foundations generally would be deductible; under present law, the amount deductible equals the fair market value reduced by 40 percent of the unrealized appreciation.
Narrowing definition of family members
Present law contains a number of restrictions imposed on private foundations which depend on determinations of "disqualified persons." This term includes a substantial contributor, a foundation manager, or a member of the family of such individuals (sec. 4946). A member of the family includes the spouse, ancestors, and lineal descendants (and spouses of lineal descendants) of the individual. The bill would narrow the category of disqualified persons by limiting family members to the spouse, ancestors, children, and grandchildren (and the spouses of children and grandchildren) of the substantial contributor, etc., effective January 1, 1983.
Increasing reliance on IRS classification of donee organizations
Under present law, Treasury regulations and IRS rulings establish guidelines under which a private foundation may rely on an IRS classification of a donee organization as a public charity or private operating foundation.
The bill would provide that a grant (made after 1982) to an organization which the IRS has determined to be a public charity (or private operating foundation) would be treated as a grant to such an organization, even though the donee organization loses such status, if (1) the grant was made prior to the earlier of the date of publication by the IRS that the donee organization has lost its
qualified status, or the date on which the foundation acquires actual knowledge that the donee organization has been notified by the IRS of loss of its qualified status, and (2) the donor foundation was not responsible for (other than by making grants) or aware of the change in the donee's status.
Exemption from expenditure responsibility requirements
Under present law, a private foundation must exercise "expenditure responsibility" over grants to organizations other than public charities. In order to ensure that such grants will be properly used by the recipient for charitable purposes, the grantor must make reasonable efforts, and establish adequate procedures, to see that the grant is spent solely for proper uses, to obtain full reports from the grantee, and to make full reports to the IRS on the grants (sec. 4945(h)).
The bill would provide that a private foundation is not required to exercise expenditure responsibility over a grant (made after 1982) to an organization if the aggregate amount of grants made during the taxable year by the foundation (and all related foundations) to that organization does not exceed $25,000.
Abatement of first-tier excise taxes
Under present law, any violation of the foundation rules results in imposition of an initial excise tax on the foundation (or in the case of self-dealing, on the disqualified person who entered into the prohibited transaction with the foundation). In general, this firsttier tax applies automatically when a foundation rule is violated. The bill would waive the first-tier excise tax imposed under sections 4941-4945 on the foundation (or disqualified person, in the case of self-dealing) if the IRS determines that the violation (1) was due to reasonable cause and not to intentional disregard of rules and regulations, and (2) the violation is "corrected" with the specified period. This provision would apply to post-1982 taxable years. 2. S. 2165-Senators Danforth, Bentsen, Chafee, Mitchell, Symms, Packwood, Wilson, Tsongas, Wallop, Pell, Dodd, and Bingaman
"High Technology Research and Scientific Education Act"
a. Extension of credit for increased research expenditures; modification of qualified research definition; equipment depreciation under credit, ACRS provisions; modification of trade or business requirement
An income tax credit is allowed for certain qualified research expenditures incurred in carrying on a trade or business (Code sec. 44F, enacted in ERTA). The credit applies only to the extent that the taxpayer's qualified research expenditures for the taxable year exceed the average amount of yearly qualified research expenditures in a specified base period (generally, the preceding three taxable years). The rate of the credit is 25 percent of the incremental
For purposes of the section 44F credit, the definition of research is the same as that used for purposes of the special deduction rules under section 174, but subject to certain exclusions. (Treasury regulations define qualifying expenditures under section 174 as "research and development costs in the experimental or laboratory sense.") A taxpayer's research expenditures eligible for the section 44F incremental credit consist of (1) "in-house" expenditures by the taxpayer for research wages and supplies used in research, plus certain amounts paid for research use of laboratory equipment, computers, or other personal property; (2) 65 percent of amounts paid by the taxpayer for contract research conducted on the taxpayer's behalf; and (3) if the taxpayer is a corporation, 65 percent of the taxpayer's expenditures (including grants or contributions) pursuant to a written research agreement for basic research to be performed by universities or certain scientific research organizations.
Cost-recovery (depreciation) allowances on research equipment are not eligible for the section 44F credit, but are deductible under section 174. The cost of research equipment is recoverable over three years; such equipment is also eligible for a six-percent investment tax credit.
Under present law, the section 44F credit will not apply to research expenditures after December 31, 1985.
Title I of the bill
Extension of credit.-The bill would make permanent the section 44F credit for increased research expenditures.
Research definition.-The bill would provide a separate, statutory definition of qualified research for purposes of the credit, effective for post-1983 taxable years. This definition would not affect the category of research expenditures qualifying for the section 174 deduction.
Under the bill, only expenditures to develop new or significantly improved business items (including costs of the design, construction, and testing of prototypes, models, and pilot plants) would qualify for the credit. To meet this test, the business item must be developed by a process of experimentation, and the performance or cost aspects of the new or improved characteristics must outweigh the stylistic, cosmetic, or seasonal design aspects. Under a special rule in the bill, computer software that is separately developed by the taxpayer solely for its own internal use could qualify as a business item only if used in (1) qualified research undertaken by the taxpayer, (2) a production process, or (3) the performance for customers of services of which such software together with the corresponding hardware is the predominant component, or otherwise to the extent allowed by Treasury regulations.
Depreciation.-The bill would add cost-recovery allowances on tangible personal property used in the conduct of qualified research to the categories of research expenditures which are eligible for the section 44F credit. Where a taxpayer pays others to do research for it, the percentage of contract payments eligible for the credit would be increased from 65 to 75 percent. These changes would be effective for post-1983 taxable years.
In addition, the bill would provide that the cost of research equipment-which now is recoverable over three years, with a six percent investment tax credit-would be recoverable over five years, with a ten percent investment credit. This provision would apply to property placed in service in post-1983 taxable years.
Trade or business test.-The bill would in effect repeal the trade or business requirement of present law for most corporations. As a result, research expenditures of start-up corporations would be eligible for the credit, as would expenditures of established corporations incurred in research endeavors that are not directly related to their existing trades or businesses. With respect to research expenses of a partnership, the bill would provide that the trade or business test used to determine whether such expenses qualify for the credit is to be applied at the partnership level, without regard to the trade or business of any partner. This rule would be modified for certain corporate and other joint ventures.
b. Increased credit for corporate support of basic research at universities
Under present law, corporations may take into account, for purposes of computing the section 44F credit for a taxable year, 65 percent of university basic research expenditures for that year; similarly, this percentage amount is treated as qualified research expenditures in a base period year when the corporation calculates the credit in subsequent years. If any basic research payment made during a year is attributable to research to be conducted by the university in a later year, that amount is treated, pursuant to a prepayment limitation rule in present law, as paid in the year or years when the research is actually conducted.
This special rule for basic research applies only to corporate expenditures (including grants or contributions) paid or incurred pursuant to a written research agreement between the taxpayer corporation and a college or university, certain tax-exempt scientific research organizations, or certain qualified funds.
Section 201 of the bill
The bill would provide more favorable tax treatment for corporate expenditures (including grants or contributions) for basic research performed at universities or at certain scientific research organizations, by (1) increasing, from 65 to 75 percent, the percentage of such expenditures which are eligible for a credit; (2) applying a new 25-percent credit to the excess of the percentage amount over a fixed floor based on 1981-83 expenditures, rather than over a moving base period average; and (3) making the prepayment limitation of present law inapplicable to such expenditures.
The new 25-percent credit, effective for taxable years beginning after 1983, would apply to the excess of (1) 75 percent of qualifying university basic research expenditures over (2) the greater of the average yearly amount of credit-eligible university basic research expenditures for the corporation's 1981-1983 taxable years or one percent of the average yearly amount of the corporation's total in