THE RESEARCH AND EXPERIMENTATION TAX CREDIT AND THE ALLOCATION OF RESEARCH EXPENSES UNDER INTERNAL REVENUE CODE SECTION 861 HEARING BEFORE THE SUBCOMMITTEE ON OVERSIGHT OF THE COMMITTEE ON WAYS AND MEANS HOUSE OF REPRESENTATIVES ONE HUNDRED FOURTH CONGRESS FIRST SESSION MAY 10, 1995 Serial 104-35 Printed for the use of the Committee on Ways and Means a U.S. GOVERNMENT PRINTING OFFICE 20-296 cc WASHINGTON : 1996 For sale by the U.S. Government Printing Office Superintendent of Documents, Congressional Sales Office, Washington, DC 20402, ISBN 0-16-052522-5COMMITTEE ON WAYS AND MEANS: BILL ARCHER, Texas, Chairman PHILIP M. CRANE, Ilinois SAM M. GIBBONS, Florida BILL THOMAS, California CHARLES B. RANGEL, New York E. CLAY SHAW, JR, Florida FORTNEY PETE STARK, California NANCY L. JOHNSON, Connecticut ANDY JACOBS, JR., Indiana JIM BUNNING, Kentucky HAROLD E. FORD, Tennessee ‘AMO HOUGHTON, New York ROBERT T. MATSUI, California WALLY HERGER, California BARBARA B. KENNELLY, Connecticut JIM McCRERY, Louisiana WILLIAM J. COYNE, Pennsytvai MEL HANCOCK, Missouri SANDER M. LEVIN, Michigan DAVE CAMP, Michigan BENJAMIN L. CARDIN, Maryland JIM RAMSTAD, Minnesota JIM McDERMOTT, Washington DICK ZIMMER, New Jersey GERALD D. KLECZKA, Wisconsin JIM NUSSLE, iowa JOHN LEWIS, Georgia SAM JOHNSON, Texas LF. PAYNE, Virginia JENNIFER DUNN, Washington RICHARD E. NEAL, Massachusetts MAC COLLINS, Georgia ROB PORTMAN, Ohio PHILIP 8. ENGLISH, Pennsylvania JOHN ENSIGN, Nevada JON CHRISTENSEN, Nebraska PHILLIP D. MOSLEY, Chief of Staff JANICE MAYS, Minority Chief Counsel SUBCOMMITTEE ON OVERSIGHT NANCY L. JOHNSON, Connecticut, Chairman WALLY HERGER, California ROBERT T. MATSUI, California MEL HANCOCK, Missouri SANDER M. LEVIN, Michigan SAM JOHNSON, Texas BENJAMIN L. CARDIN, Maryland ROB PORTMAN, Ohio JIM McDERMOTT, Washington JIM RAMSTAD, Minnesota DICK ZIMMER, New Jersey ayCONTENTS Advisory of April 19, 1995, announcing the hearing, WITNESSES US. General Accounting Office, Natwar M. Gandhi, Associate Director of Tax Policy and Administration Issues, General Government Division Advanced Micro Devices, Inc., Cliff Jernigan AlliedSignal, Inc., Ronald A. Sinaikin 185 Aerospace Industries Association of America, Inc., Douglas McPherson 91 Anderson, Christopher R., Massachusetts High Technology Council, Ine 51 Baltimore Gas & Electric Co., Judith K. Pensabene 31 Battelle Memorial Institute, Douglas E. Olesen 36 7m Biotechnology Industry Organization, Harry H. Penner, Jr Capps, R. Randall, Electronic, Data Systems, Corp. “and information chnology Association of America .. Chemical Manufacturers Association, Ronaid A. Sinaikin Conway, Kevin, United Technologies Cor Electronic Data Systems Corp., R. Randall Caj Electronic Industries Association, William A. Warren Electric Power Research Institute, Judith K. Pensabene Emergency Committee for American Trade, Raymond J. Wiacek Eshoo, Hon. Anna G., a Representative in Congress from the State of California Generic Pharmaceutical Industry Association, Hi Green, Robert H., National Foreign Trade Council, Ine Gutman, Harry’ L. King & Spalding, Generic Pharmaceutical Industry , National Associati ‘Association, jon of Pharmaceutical Manufacturers, and National Pharmaceutical Alliance .. 49 Hewlett-Packard Co., Daniel Kostenbauder 131 Hooker, Michael, University of Massachusetts and New England Council 41 Information Technology Association of America, R. Randall Cappe 102 Jernigan, Cliff, Advanced Micro Devices, Inc 138 Jones, Kendall C., KPMG Peat, Marwick 143 205 Kaye, Tracy Anne, Seton Hall University, Newark, Nt Kostenbauder, Daniel, Hewlett-Packard Co KPMG Peat Marwick: Kendall C. Jones Rudolph G. Penner .. Roger S. Siboni Lockheed Martin Corp. Dougias McPherson 91 Lotus Development Corp., Bill Sample . 192 Massachusetts High Technology Council Inc. Christopher R. Andereog 51 Mechan, Hon. Martin T., a Representative in Congress from the State of Massachusetts 8 Charles W. Rau .. 96 MCI Communications Corp. McPherson, Douglas, Lockheed Martin Corp. and Aerospace Industries Association of America, Inc National Association of Pharmaceutical Manufacturers, Harry L. Gutman .. National Foreign Trade Council, Inc., Robert H. Green National Pharmaceutical Alliance, Harry L. Gutman . am)