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year expenditures ($130,975,000) over the base period average ($121,300,000), or $9,675,000.
Assume further that in 1984 the total of the corporation's qualified in-house research expenditures increases to $135 million, and that the corporation makes no new basic research expenditures. The corporation is treated as having qualifying basic research expenditures in 1984 equal to 65 percent of $1.5 million, or $975,000. The corporation's base period expenditures with respect to 1984 would be the average of qualified research expenditures for 1981 ($123,900,000), 1982 ($120 million), and 1983 ($130,975,000). Accordingly, under present law the 25-percent credit for 1984 would apply to the excess of current-year expenditures ($135,975,000) over the base period average ($124,958,333), or $11,016,667.
Explanation of Section 201 of the Bill
Under present law, research expenditures entering into the computation of the section 44F incremental credit include 65 percent of a corporation'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. Section 201 of the bill would provide more favorable tax treatment for corporate expenditures 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 is 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 university basic research expenditures. The excess credit-eligible expenditures over the fixed floor under the bill, to which the new credit would apply, would not also enter into the computation of the present-law incremental credit under section 44F. The amount of credit-eligible basic research expenditures up to the floor would remain eligible for the present-law incremental credit.
For purposes of the new credit and the incremental credit, qualifying university basic research expenditures would be expenditures paid or incurred pursuant to a written agreement between the taxpayer corporation15 and a university, scientific research organization, or certain other qualified organizations for basic research to be performed by the qualified organization (or by universities receiving funds through the initial recipient qualified organizations). Such corporate expenditures for university basic research would be deemed to satisfy the trade or business test (described above), whether or not the basic research is in the same field as the trade or business of the corporation.
15 The new basic research credit would not be available with respect to university basic research expenditures by corporations that are S corporations (sec. 1371(a)), personal holding companies (sec. 542), or service organizations (sec. 414(m)(3)).
Under the bill, qualifying expenditures would include both grants or contributions by the corporation which constitute charitable contributions under section 170, and also payments for contract research to be performed by the university on behalf of the corporation. The bill would make inapplicable to university basic research expenditures the prepayment limitation of present law, under which corporate expenditures for university basic research enter into the incremental credit computation only when the university actually expends the funds for basic research.
As under present law, the term "basic research" would be defined as any original investigation for the advancement of scientific knowledge not having a specific commercial objective, other than basic research in the social sciences or humanities (including the arts) or basic research conducted outside the United States.
To be eligible for a credit, the corporate expenditures must be for basic research to be conducted by a qualified organization. For this purpose, the term qualified organization generally would include colleges or universities, tax-exempt scientific research organizations, and certain qualified funds which are treated as qualified organizations under present law.
The first category of qualified organizations would consist of educational organizations that both are described in section 170(b)(1)(A)(ii)16 and constitute institutions of higher education as defined in section 3304(f).17 Scientific organizations that would qualify are tax-exempt organizations that (1) are organized and operated primarily to conduct scientific research, (2) are described in section 501(c)(3) (relating to exclusively charitable, educational, scientific, etc. organizations), and (3) are not private foundations. Also, certain tax-exempt funds which qualify under present law would continue to qualify under the bill.
In addition, the bill would treat as qualified any tax-exempt organization which is organized primarily to promote scientific research by colleges or universities pursuant to written research agreements, which expends on a current basis substantially all its funds through grants and contracts for basic research by colleges and universities and which is described in either section 501(c)(3) (charitable, educational, etc. organizations) or section 501(c)(6) (trade associations).
16 An educational organization is described in sec. 170(b)(1XAXii) "if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. The term includes institutions such as primary, secondary, preparatory, or high schools, and colleges and universities", and includes both public and private schools (Treas. Reg. sec. 1.170A-9(b)(1)).
17 Sec. 3304(f) defines "institution of higher education" as an educational institution which (1) admits as regular students only individuals having a certificate of graduation from a high school, or the recognized equivalent of such a certificate; (2) is legally authorized to provide a program of education beyond high school; (3) provides an educational program for it which awards a bachelor's or higher degree, or provides a program which is acceptable for full credit toward such a degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and (4) is a public or other nonprofit institution.
Computation rules for new credit
The fixed floor in computing university basic research expenditures to which the new credit would apply would be the greater of
(A) the average of all credit-eligible basic research expenditures under Code section 44F(e)(1) for each of the three taxable years immediately preceding the taxable year beginning after December 31, 1983; or
(B) one percent of the average of the sum of all in-house research expenses, contract research expenses, and credit-eligible university basic research expenditures under Code section 44F(e)(1) for each of the three taxable years immediately preceding the taxable year beginning after December 31, 1983. The amount of credit-eligible expenditures over the fixed floor, to which the new credit would apply, would not also enter into the computation of the present-law incremental credit under section 44F. The amount of credit-eligible basic research expenditures up to the floor would enter into the present-law incremental credit computation under section 44F (and would in subsequent years enter into the base period amounts for purposes of computing the incremental credit). The fixed floor would not be adjusted to reflect inflation.
Disallowance of double benefit
Under the bill, no amount for which a special deduction would be provided under section 202 of the bill (relating to transfers of scientific equipment to universities for certain research or educational purposes) would also be eligible for the new credit under the bill or the existing incremental credit.
The amendments made by section 201 of the bill would apply to taxable years beginning after 1983.
c. Expanded special deduction for transfers to universities of scientific equipment for certain research or educational purposes
General reduction rule for donations of property
In general, the amount of charitable deduction otherwise allowable for donated property must be reduced by the amount of any ordinary gain which the taxpayer would have realized had the property been sold for its fair market value at the date of the contribution (Code sec. 170(e)).
Thus, a donor of inventory or other ordinary-income property (property the sale of which would not give rise to long-term capital gain) generally may deduct only the donor's basis in the property, rather than its full fair market value. In the case of property used in the taxpayer's trade or business (sec. 1231), the charitable deduction must be reduced by the amount of depreciation recapture which would be recognized on sale of the donated property.
Special rule for certain research equipment donations
Under a special rule, corporations are allowed an augmented charitable deduction for donations of newly manufactured scientific equipment or apparatus to a college or university for research use in the physical or biological sciences (sec. 170(e)(4), added by ERTA).1
This increased deduction is generally for the sum of (1) the corporation's basis in the donated property and (2) one-half of the unrealized appreciation (i.e., one-half of the difference between the property's fair market value determined at the time of the contribution and the donor's basis in the property). However, in no event is the deduction under the special rule allowed for an amount which exceeds twice the basis of the property.
To qualify for this special deduction rule, a corporate contribution of scientific equipment to a college or university must satisfy the following requirements:
(1) The property contributed was constructed by the corporate donor;
(2) The contribution is made within two years of substantial completion of construction of the property;
(3) The original use of the property is by the college or university;
(4) Substantially all (at least 80 percent) of the use of the scientific equipment or apparatus by the college or university is for re
18 Under a special rule enacted in 1976, an augmented charitable deduction also is allowed for corporate contributions of certain types of ordinary income property donated for the care of the needy, the ill, or infants (sec. 170(e)(3)).
search (within the meaning of sec. 174), or for research training, in the United States in the physical or biological sciences;19
(5) The property is not transferred by the donee in exchange for money, other property, or services; and
(6) The taxpayer receives the donee's written statement representing that the use and disposition of the property contributed will be in accordance with the last two requirements.
For purposes of the first requirement listed above, property is treated as constructed by the taxpayer only if the cost of parts (other than parts manufactured by the taxpayer or a related person) used in construction does not exceed 50 percent of the taxpayer's basis in the property.
Explanation of Section 202 of the Bill
The bill would delete from the section 170 charitable deduction rules the special provision (Code sec. 170(e)(4), enacted in ERTA), which allows an augmented charitable deduction up to twice the taxpayer's basis for corporate donations of newly manufactured scientific equipment to colleges or universities for research use in the physical or biological sciences. The bill would enact a new deduction provision, generally of broader scope, outside the charitable deduction rules.
Under the new provision, a corporation would receive special deductions for amounts in excess of its basis for transfers, without consideration, of scientific or technical equipment (including property used in the transferor's business, computer software, and replacement parts) to colleges or universities, for use in either research or education in certain sciences, technologies, or equipment operation fields. In addition, special deductions would be allowed for the value of performing certain maintenance and repair services in connection with such equipment transfers. Except for computer software and replacement parts, only an item having a value exceeding $250 generally would be eligible for the new deduction. The special deduction under the bill generally would not be allowed to the extent that, determined on a product-by-product basis, the number of transferred items exceeds 20 percent of the number of such items sold by the taxpayer during the year. Also, while the transfers would not be required to qualify as charitable contributions20 in order for the special deduction to apply, the taxpayer's aggregate deduction in one year for both charitable contributions and transfers under the new provision would be limited to 10 percent of taxable income (computed with certain modifications), with a five-year carryforward of any excess.
19 For purposes of this limitation on research use, and on research training use, the physical sciences include physics, chemistry, astronomy, mathematics, and engineering, and the biological sciences include biology and medicine.
20 Court cases have held that if a transfer to a charitable organization results in a benefit to the donor, no charitable deduction is allowed under section 170. For example, the U.S. Court of Claims has upheld denial of charitable deductions claimed by a manufacturer for discounts on purchase of sewing machines by schools, where the court had found that the discounts were offered for the predominant purpose of enlarging the market for the manufacturer's brand of sewing machines (Singer Co. v. U.S., 449 F.2d 413 (Ct. Cl. 1971)).