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Definition of Qualified Research. The Society supports the revised definition of qualified research approved by the Senate. Narrowing the definition will help insure that the credit is available only to organizations engaged in research and experimentation designed to produce technologically new or improved business components. In other words, the credit should not be available for activities where the modifications are only stylistic or cosmetic.

Computation of Allowable Credit. The Senate-approved revisions to Section 44F also included a modification of the way the credit for payments to support university basic research was to be computed. Under present law, research expenditures qualifying under the 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. According to the Senate Finance Committee explanation of this provision (SRpt. 98169, vol. 1, p. 914):

"A 25-percent tax credit applies to the excess of 1) 65 percent of corporate cash expenditures for university basic research over 2) the sum of the greater of two fixed research floors (the average yearly amount of the corporation's credit-eligible university basic research expenditures for 1981-1983 taxable years, or one percent of the average yearly amount of all the corporation's credit-eligible research expenditures for those years) plus an amount reflecting any decrease in nonresearch giving to universities by the corporation during a moving base period".

The Society favors this broadening of the credit because it tends to increase corporate support for university research.

Prepayment Rule for Contract Research. The Society also favors modification of the so-called "prepayment rule" for contract research. Current law requires that amounts prepaid by a corporation for contract research must be treated as paid during the period in which the research is conducted. By applying the current rule to these corporate payments, a nonprofit research fund may be prevented from accumulating the necessary assets to build up an endowment, the income from which would be disbursed as research grants to universities and colleges.

The Senate approved revisions, were they to become law, would exempt from the prepayment rule payments that are made, either directly or through a research fund, to support basic research in universities and colleges. This modification would allow a corporation to contribute to a research fund and take the credit in the year the contribution is made, rather than the year the funds are actually spent. This would provide a greater incentive for private sector contributions to such funds. Life of Credit. Finally, the Society agrees in principle with the Senate-approved revision to extend the life of the credit, but agrees with the Department of Treasury that it be for a period of three years.

A major reason the credit should be extended is due to its impact on small companies. A small, innovative chemical company, for example, would be able to hire an additional researcher, or pursue a promising line of inquiry, with the additional revenues available through the credit.

On the other hand, the Society believes that more data are needed on how effective the credit has been in increasing the amount of research performed. While the amount of private sector money spent on basic research has increased since the credit was enacted in 1981, it is uncertain how much of this increase is due directly to the existence of the credit. Of course, we do not rule out making the credit permanent at a later date, if additional data indicate that a permanent research tax credit is justified.

If the American Chemical Society can provide any assistance in this matter, please do not hesitate to call on us. Thank you for this opportunity to present our views.

Sincerely,

WARREN D. NIEDERHAUSER,

President.

Hon. CHARLES B. RANGEL,

ASSOCIATION OF INDEPENDENT RESEARCH INSTITUTES,
Shrewsbury, MA, August 15, 1984.

Rayburn House Office Building, Washington, DC.

DEAR MR. RANGEL: As a follow-up to the Oversight Subcommittee Hearing on the research and development tax credit, I would like to advise you of the strong interest of non-profit Scientific Research Organizations in the continuation of this provision in the tax code.

I am enclosing for your information a brochure which describes the work we do and which lists the membership of the Association of Independent Research Institutes.

If I can provide you with any additional information or answer any questions you may have please do not hesitate to contact me. Sincerely,

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FEDERICO WELSCH, M.D., Ph.D.,

President.

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222 MAPLE AVENUE • SHREW-BRY MASSACHUSETTS 01545 1617) 842-8921

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