Johnson Announces Hearing on the Research &
Experimentation Tax Credit &
The Allocation of Research Expenses
Under Internal Revenue Code Section 861

Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on Oversight of the Committee on Ways and Means, today announced that the Subcommittee will hold a hearing to examine issues relating to the research and experimentation (R&E) tax credit and the temporary rule for allocating research expenses between U.S. and foreign source income under Internal Revenue Code section 861. The hearing will take place on Wednesday, May 10, 1995, in the main Committee hearing room, 1100 Longworth House Office Building, beginning at 10:00 a.m.

BACKGROUND:

Section 41 of the Internal Revenue Code provides for a research and experimentation tax credit equal to 20 percent of the amount by which a taxpayer's qualified research expenditures for a taxable year exceed its base amount for that year. The R&E credit, which was enacted on a temporary basis in 1981, has been extended several times since, most recently in the Omnibus Budget Reconciliation Act of 1993 (the "1993 Act"). The credit is currently scheduled to expire after June 30, 1995.

The 1993 Act also provided a temporary rule for allocation of research expenses between U.S. and foreign source income. The 1993 Act rule generally is identical to temporary rules in effect prior to the 1993 Act for allocating research expenses, except that the portion of U.S.-incurred research expenses allocated to U.S. source income (and the percentage of foreign-incurred research expenses allocated to foreign source income) is 50 percent instead of 64 percent. The 1993 Act's temporary rule generally expires for taxable years beginning after August 1, 1994.

Chairman Johnson and Ranking Democrat Robert Matsui have sponsored H.R. 803, a bill to extend permanently the R&E credit. In announcing the hearing, Chairman Johnson stated, "Before Congress moves forward on legislation to extend the credit, I believe it's critically important to evaluate whether the credit's current structure is effective in achieving the goal of stimulating long-term research activities, and to examine proposals for improving its design to better meet the rapidly changing circumstances of global competition."

FOCUS OF THE HEARING:

The Subcommittee on Oversight will examine the effectiveness of the current credit and possible structural modifications to improve its utility in stimulating long-term research and experimentation activities. The current research credit is incremental in nature, rewarding companies for increasing their research expenditures (as a portion of gross receipts) above the average expenditures they made (as a portion of gross receipts) during the period from 1984 through 1988. To the extent that companies' current year research expenditures are significantly below or far above their base spending amounts, the credit becomes a less efficient policy tool.

In particular, the Subcommittee is interested in receiving testimony regarding the effectiveness of the current credit in stimulating long-term research and experimentation activities and regarding potential alternatives to the current structure of the credit, such as giving taxpayers some choice over their base period, or doing away with the base completely and providing a lower rate of credit on all qualified expenditures. In addition, the Subcommittee will receive testimony on whether the 1993 Act's temporary rule for allocating research expenses between U.S. and foreign source income should be extended SUBCOMMITTEE ON OVERSIGHT PAGE TWO

DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD:

Requests to be heard at the hearing must be made by telephone to Traci Altman or Bradley Schreiber at (202) 225-1721 no later than the close of business, Friday, April 28, 1995. The telephone request should be followed by a formal written request to Phillip D. Moseley, Chief of Staff, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. The staff of the Subcommittee on Oversight will notify by telephone those scheduled to appear as soon as possible after the filing deadline. Any questions concerning a scheduled appearance should be directed to the Subcommittee staff at (202) 225-7601.

In view of the limited time available to hear witnesses, the Subcommittee may not be able to accommodate all requests to be heard. Those persons and organizations not scheduled for an oral appearance are encouraged to submit written statements for the record of the hearing. All persons requesting to be heard, whether they are scheduled for oral testimony or not, will be notified as soon as possible after the filing deadline.

Witnesses-scheduled to present oral testimony are required to summarize briefly their written statements in no more than five minutes. THE FIVE MINUTE RULE WILL BE STRICTLY ENFORCED. The full written statement of each witness will be included in the printed record.

In order to assure the most productive use of the limited amount of time available to question witnesses, all witnesses scheduled to appear before the Subcommittee are required to submit 200 copies of their prepared statements for review by Members prior to the hearing. Testimony should arrive at the Subcommittee on Oversight office, room 1136 Longworth House Office Building, no later than 5:00 p.m. on Friday, May 5, 1995. Failure to do so may result in the witness being denied the opportunity to testify in person.

WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:

Any person or organization wishing to submit a written statement for the printed record of the hearing should submit at least six (6) copies of their statement, with their address and date of hearing noted, by the close of business, Wednesday, May 24, 1995, to Phillip D. Moseley, Chief of Staff, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. If those filing written statements wish to have their statements distributed to the press and interested public at the hearing, they may deliver 200 additional copies for this purpose to the Subcommittee on Oversight office, room 1136 Longworth House Office Building, at least one hour before the hearing begins.

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