TEI testimony at IRS public hearing on proposed definition of R & E expenditures.

• Author: Burk, William M.

TEI Testimony at IRS Public Hearing on Proposed Definition of R&E Expenditures

December 5, 1989

Good morning. My name is Bill Burk, and I am Director, Domestic Taxes and audits for CPC International Inc. in Englewood Cliffs, New Jersey. I am her today in my capacity as President of Tax Executives Institute. I am accompanied by Mike Bernard of Mobil Corporation, the Institute's Senior Vice President, and by Timothy McCormally, our Tax Counsel. Together, we will endeavor to respond to any questions you may have about our written comments on the R&E regulations.

Historical Perspective

In our written comments, TEL spends a good deal of time placing the R&E regulations into historical perspective. We do that because we believe it is important to remember that administrability and compliance concerns were key factors prompting Congress to enact section 174 in the first place. From an administrative standpoint, allowing current deductions for research and experimental costs makes sense. In the absence of a statutory rule, the problems of allocating costs, establishing useful lives, and justifying abandonment losses would pose serious administrative challenges -- for both taxpayers and the IRS.

Follwing years of contrvoersy, section 174 was enacted in 1954 "[t]o eliminate uncertainty and to encourage taxpayers to carry on research and experimentation." If section 174 were unduly narrowed through the regulatory process -- which we believe the proposed regulations threaten to do -- these administrative problems would again come to the fore.

The Flawed Nature of the IRS's Time-Line

Approach

On their face, of course, section 174 and the regulations are not limited in scope to so-called "hight tech" companies. To be sure, such companies may proportionally spend more n research and development than companies in other industries, but it would be unreasonable to confine the research credit and the R&E deduction to particular industries or particular types of research. Regrettably, some of the examples set forth in the regulations could have the effect of doing that.

TEI also believes it is wrong to provide that R&E expenditures are deductible only if they are incurred at or before a certain time -- that is to say, only if they fall in the right place on the IRS's "time line." Other witnesses will no doubt discuss in detail the flaws of the time-line approach. We join the chorus in supporting a funcitonal approach -- one that focuses on whether activities...