Statement of Joint Venture: Silicon Valley Network, San Jose, California

Our comments are divided into two categories:

1) Technical Corrections, and
2) Enhancements.

We recommend the following four changes:

1. Clarify terminology: IRC Section 170(e)(6) uses the following terms to refer to the donee: "educational organization," "entity," and "donee." Use of multiple words could lead to confusion in applying the requirements for an enhanced deduction at IRC Section 170(e)(6)(B)(i) to (vii). For example, Section 170(e)(6)(B)(i) provides that donations must be made to either "(I) an educational organization" or "(II) an entity described in section 501(c)(3)." IRC Section 170(e)(6)(B)(vii) states that the "entity's use and disposition of the property will be in accordance with the provisions of clauses (iv) and (v)." "Entity" is also used at IRC Section 170(e)(6)(B)(vi) with reference to the "entity's education plan." Other requirements at IRC Section 170(e)(6), such as (iii) and (v), use the term "donee" rather than "entity." And, (iv) refers to "organization or entity." Thus, while it would seem that the requirements at (B)(i) through (vii) should be met with respect to a contribution to either an educational organization or a Section 501(c)(3) entity, a literal reading of the requirements indicates that some only apply if the donee is a Section 501(c)(3) entity.

Recommendation: Clarify that requirements (ii) through (vii) at IRC Section 170(e)(6)(B) apply whether the donee is an educational organization or a Section 501(c)(3) entity. This clarification could be made by only using the term "donee" at (iii) through (vii), and adding a definition of "donee" at Section 170(e)(6)(E), which could read: "As used in paragraph (6)(B), the term "donee" means an organization described at paragraph (e)(6)(B)(i)(I) or (II)."

2. Split Section 170(e)(6)(B)(v) into two separate requirements: IRC Section 170(e)(6)(B)(v) states: "the property is not transferred by the donee in exchange for money, other property, or services, except for shipping, installation and transfer costs." This provision is difficult to understand. The problem stems from the fact that it combines two separate requirements when it would be easier to understand if they were separated.

The first part -- "the property is not transferred by the donee in exchange for money, other property, or services" -- is similar to language used in the other enhanced deduction provisions at Section 170(e)(3)(A)(ii) and Section 170(e)(4)(B)(vi). The second part -- "except for shipping, installation and transfer costs" -- comes from the legislative history to the Taxpayer Relief Act of 1997. Per the House Committee Report: "The bill permits payment by the donee organization of shipping, transfer, and installation costs."

Recommendation: Split Section 170(e)(6)(B)(v) into two requirements as follows (and renumber the requirements to be (i) through (viii)):

(v) the property is not transferred by the donee in exchange for money, other property, or services,

(vi) no payment is made by the donee to the donor (although it is permissible for the donee to pay shipping, transfer, and installation costs),

3. Clarify that refurbished property is qualified property: IRC Section 170(e)(6) requires that the property be acquired or constructed by the donor, and that the original use of the property be with either the donor or donee. These requirements may exclude property refurbished by the taxpayer. For example, a potential donor (such as a manufacturer or retailer) may sell a computer only to have it returned because the customer wanted a different model or features, or the equipment had a defect. The potential donor can upgrade, repair, or modify the equipment and then sell it or donate it. Likewise, a manufacturer or retailer may accept trade-ins of equipment, which are then refurbished to new standards and then sold or donated. However, because the original use was with the customer, even though it has been restored to new by the potential donor, the donor will not obtain an enhanced deduction. Given that Section 170(e)(6) is not limited to donations of new equipment, but also applies to used equipment (provided it is donated within two years of acquisition), the terms "constructed" and "original use" should be clarified to ensure that the provision also applies to refurbished equipment (which is likely to be better quality and newer than "used" equipment). There should be no concern that this clarification will result in donations of out-dated refurbished equipment because the fair market value of such equipment is likely to be lower than its basis and thus, would not qualify for an enhanced deduction (the deduction would be limited to the lower fair market value).

Recommendation: The following definition should be added at IRC Section 170(e)(6)(E): "For purposes of this paragraph, refurbished property is treated as newly acquired or newly constructed by the taxpayer." This clarification addresses the "original use" requirement of Section 170(e)(6)(B)(iii) by treating refurbished property as originally used by the donee, as well as the "two-year" requirement of Section 170(e)(6)(B)(ii) by treating refurbished property as newly acquired or constructed.

Committee report language could indicate that such refurbished equipment must have a manufacturer's warranty or be regularly sold by the manufacturer in order to be treated as newly acquired or constructed property and therefore, qualify for the enhanced deduction.

4. The requirement for manufacturers should not be stricter than for other donors: IRC Section 170(e)(6)(D) provides that the rules of Section 170(e)(4)(C) apply to Section 170(e)(6). Under Section 170(e)(4)(C) property is treated as constructed by the taxpayer only if the cost of the parts used in its construction (other than parts manufactured by the taxpayer or a related person) do not exceed 50 percent of the taxpayer's basis in the property. This requirement should be eliminated from Section 170(e)(6) because it both limits and complicates the incentive. Determining whether a manufacturer has "constructed" a PC within the meaning of Section 170(e)(4)(C) is time consuming and challenging because of the lack of regulations specifying the exact meaning of some of the terms needed to perform this analysis.

More importantly, the enhanced deduction provision of Section 170(e)(4) (contributions of scientific property used for research) only applies to property constructed by the taxpayer. However, Section 170(e)(6) applies not only to property constructed by the donor, but also to inventory acquired for resale and property used in a donor's business. Thus, the special rule for constructed property has no relevance to the objectives of new Section 170(e)(6) and will unnecessarily limit the number of donations. Furthermore, it seems quite anomalous to require new PC’s of a manufacturer to meet the "constructed by the taxpayer" test of Section 170(e)(4)(C), while purchased or used PC’s would not need to meet this requirement.

Recommendation: Repeal IRC Section 170(e)(6)(D).

The goals of encouraging donations of technology to schools and helping students obtain access to technology in the classroom could be further enhanced with the following two changes to IRC Section 170(e)(6).

1. Send a permanent message: School needs for technology will be permanent ones. Schools will continue to need state-of-the-art equipment and thus, will always be seeking donations. Because the needs to be addressed by the enactment of Section 170(e)(6) are not temporary ones, the provision should be made permanent. This would also be appropriate given the fact that the other enhanced charitable deduction provisions at IRC Section 170(e)(3) and (e)(4) are permanent provisions.

Recommendation: Eliminate IRC Section 170(e)(6)(F) to make this incentive provision a permanent one.

2. Include community colleges as eligible donees: The needs and mission of community colleges are similar enough to those of grades K to 12 to warrant extending IRC Section 170(e)(6) to include technology donations made to such institutions. For example, in California, K to 12 is "responsible for academic and general vocational instruction" including preparing students for postsecondary instruction. The mission of the California community colleges is similar. Their "primary mission" is to "offer academic and vocational instruction at the lower division level," including offering support to help students succeed at the postsecondary level. On the other hand, the California state university system's goal is to offer undergraduate and graduate instruction.¹

Recommendation: Following "grades K-12" at IRC Section 170(e)(6)(B)(iv) add, "or community college." A similar change should be made to the title of Section 170(e)(6). A community college should be defined as an educational organization that does not offer Bachelor's or graduate degrees.

Joint Venture's Tax Policy Group's
Position on Technical Corrections and
Enhancements to IRC Section 170(e)(6)

Position

The addition of Section 170(e)(6) to the tax law in 1997 was welcome because it helps schools obtain necessary technology for instruction despite their limited resources. Joint Venture: Silicon Valley Network’s Tax Policy Group suggests some technical corrections and enhancements to clarify the provision and further promote its objectives. Specifically, we recommend that:

1. The term "donee" be used throughout Section 170(e)(6), rather than also "entity" and "educational organization;"

2. Section 170(e)(6)(B)(v) be split into two requirements;

3. Clarification be made that eligible property includes refurbished property;

4. Section 170(e)(6)(D) be repealed so that a tougher standard does not apply to manufacturers than to others donating identical equipment by requiring only manufacturers to meet the qualifications of section 170(e)(4)(C);

5. The incentive be made permanent; and

6. The incentive be expanded to include donations to community colleges.

Why this issue is important to Joint Venture's Council on Tax and Fiscal Policy

Joint Venture is a collaboration of public and private sectors. We view the public-private partnership approach of new Section 170(e)(6) as meeting an important need in assisting schools obtain necessary technology. For example, Joint Venture directs the 21st Century Education Initiative whose mission is to spark a local educational renaissance -- a new community commitment to build a world-class educational system that enables all students in Silicon Valley to be successful, productive citizens in the 21st century. As part of this program, we support the objectives of Section 170(e)(6) and want to work with members of Congress to ensure that the provision is understandable by schools and corporate donors, and available to all potential corporate donors with current technology to donate.

More information

The attached paper explains our specific comments and recommendations.

¹ California Education Code Sections 6610.3 and 6610.4