Part Six 



Taxation and Research 



Federal corporate income taxes 

 have an important bearing on the 

 amount of scientific research and 

 new-product development undertaken 

 by private enterprises. An examina- 

 tion of the present treatment of re- 

 search and development expenditures 

 for tax purposes is therefore an im- 

 portant aspect of a study designed to 

 determine, as requested bv President 

 Roose\'elt, what the Government can 

 do to aid research acti\'ities conducted 

 by private organizations. 



A. Present Tax Treatment of Re- 

 search and Development 

 Expenditures 



The deduction of research and 

 development ex-penditiires as current 

 charges against net income is gener- 

 ally permitted bv the Bureau of In- 

 ternal Revenue. In broad terms the 

 policv of the Bureau appears to be 

 as follows: Firms that spend approxi- 

 matelv the same amount on research 

 and development work vear after 

 year and consistentlv claim these ex- 

 penditures as deductions from cur- 

 rent income seldom have substantial 

 amounts of their claims disallowed. 

 On the other hand, where the 

 amounts spent on research and devel- 

 opment fluctuate widelv from year 

 to year and where the taxpaver does 

 not follow a consistent accounting 

 practice in handling research and de- 

 \'elopment expenditures, the Bureau 

 tends to question more closelv the 

 taxpayer's treatment of such expendi- 

 tures. This policy may sometimes re- 



sult in a less favorable treatment for 

 new and small companies than for 

 large, established companies. 



1. Uncertainty in Minds of 

 Taxpayers 



Manv taxpavers believe that in re- 

 cent years the Bureau of Internal 

 Revenue has been adopting an in- 

 creasingly critical attitude toward the 

 deductibility of research and devel- 

 opment costs. This impression, so far 

 as the Committee can determine, is 

 not the result of any deliberate 

 change in the policv of the Bureau. 

 Rather, it has probablv arisen from 

 the justifiable tendency of the Bureau 

 to review more closelv all items af- 

 fecting taxable income in vears of 

 high tax rates. 



The uncertainty on the part of tax- 

 payers is heightened by the fact that 

 the tax law and Treasury regulations 

 do not clearlv specify the proper 

 treatment of research and develop- 

 ment costs. There are relativelv few 

 court cases on the problem; moreover, 

 existing cases seem to support the 

 view that many research and develop- 

 ment costs are capital expenditures. 

 Consequently, if the Bureau should 

 abandon its present liberal policv and 

 attempt to enforce the capitalization 

 of research and development costs 

 wherever possible, its action might 

 well be sustained in court. 



If research and development costs 

 were required to be capitalized, thev 

 could presumably be amortized over 

 their useful life. The task of de- 



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