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Polishing The Apple

Federal legislation might have given computer companies a tax break for giving equipment to schools. But the bill stirred up its share of controversy.
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Apple Computer Inc. has rung up another innovation. It is the first INC. major public policymaking. Steven Jobs, Apple's chairman, has been spearheading a drive to give special tax breaks to computer companies that donate their hardware to elementary and high schools.

If this move sounds merely self-serving, consider Jobs's rationale. He says: "We are now in the midst of a revolution that is of the same magnitude and power as the industrial revolution of the nineteenth century. It is changing our society, our skills, and the character of employment in the United States. This revolution is driven by advances in microelectronics, transforming the contemporary world from an industrial to an information society." This, of course, is hardly news to two generations raised on similar formulations, from Daniel Bell, through Alvin Toffler, to John Naisbitt.

For Steven Jobs it means we must push to make everyone in this country computer literate. If we don't, we will continue to lag in the international technology competition.

So far, Apple isn't batting 1.000 in its legislative efforts. A move at the federal level failed. The company is, however, batting.500 -- a handsome mark in any league -- by virtue of a parallel law it fought for in California and won. Like the federal law that got away, this measure gives tax credits to computer manufacturers for the units they donate to elementary and secondary schools.

Opinions differ about the value of Apple's approach to closing the technology gap. When I first read about its effort, it seemed to me naive at best, likely to boomerang at worst. But the more I have learned about it, the more it seems to me that, win or lose, Apple has exercised responsible entrepreneurial citizenship -- a regrettably rare quality. What matters most is that its action may force the entire computer industry -- and the rest of us -- to get moving much faster on the computer-literacy front.

Computer literacy was one of the central issues in the discussions of the California Commission on Industrial Innovation, which Jerry Brown, the former governor, set up in November 1981. Besides Jobs, the commission included such heavy hitters as David Packard, chairman and co-founder of Hewlett-Packard, Leland Prussia, chairman of BankAmerica, Charles Sporck, chairman and chief executive officer of National Semiconductor, and Don Gevirtz, chairman of Foothill Group. The commission also included five labor leaders, the chancellors of the University of California at Berkeley and San Diego, and the dean of Stanford University's Business School.

In its 60-page report, "Winning Technologies," the commission summed up the present position:

1. Internationally, we have entered a new era of fierce competition, in which U.S. companies find themselves competing against foreign governments that have targeted their domestic industries to excel over American technology leaders.

2. Domestically, the overall U.S. economy will grow far more slowly and unevenly in the 1980s than it has in the past, as the combined pressures of resource constraints, the maturing of American technological leaders, and tough international competition take their toll. U.S growth technologies and sectors will find it far more difficult than ever before to attract the capital they need.

3. At the state level, diminishing revenues make it more difficult for the needed investment in education and job training to occur [in order] for citizens to be prepared for work and life in a technological society.

The report concluded that national and state strategies should be aimed at accelerating the invention and utilization of winning technologies. One of the specific steps it recommended was the passage by Congress of legislation to offer tax benefits for donations of computers to elementary and high schools. These benefits are currently given for donations of scientific instruments to universities. Specifically, the commission suggested that Congress pass the "Technology Education Act of 1 982, " the Apple-sponsored bill then before it.

Apple then skillfully used both national and state governments to asstire that it made at least some gains. On September 29, 1982, six days after the House of Representatives in Washington approved what was now called the Computer Equipment Contribution Act, Gov. Jerry Brown signed California's own state law, giving Apple some insurance against congressional failure to enact a federal law.

The new state measure allows a credit against California corporate income tax of 25% of fair-market value for donations of computer equipment to schools. Apple is, of course, a California-based company and pays plenty of income tax in the state. If the credit is higher than the tax liability, the donor company may carry over the unused portion as a credit against future state taxes.

These provisions will take effect, because Congress didn't enact H.R. 5573 before January 1, 1983. Had a federal tax incentive been provided, a different section of the California act, which conformed with the federal statute, would have taken effect.

The state law allows the contributor to qualify for the credit within one year of the manufacture of the equipment, rather than within six months, as in the proposed federal bill. For California, the donation period will be 18 months, from January 1, 1983, until June 30, 1984. If H.R. 5573 had become law, California's statute, unlike the proposed federal legislation, would have expressly protected donor companies against disallowance on the basis of "intent." Contributions would have been sheItered from possible federal judicial attack. They would have been allowed even if "developing and maintaining a favorable public image" was found to be one of the company's purposes in making the gift.

The federal round began on February 23, 1982, when the Technology Education Act was introduced in the House by four Democrats -- Fortney H. "Pete" Stark, Don Edwards, and George Miller from California and James M. Shannon from Massachusetts. This was after the California commission began its work, but before it published its recommendations. By last August 10, more than 80 other representatives, most of them Democrats, had joined in sponsoring the bill. On September 17, it was reported out of the Ways and Means Committee with a number of changes. Now called The Computer Equipment Contribution Act, it sailed through the House 323 -- 62, with 47 abstentions.

In the Senate, John Danforth (D-Mo) introduced a parallel bill last March 26, and, on October 1, Robert Dole (R-Kans.), chairman of the Senate Finance Committee, reported out a Senate version of H.R. 5573. By then Congress was leaving Washington for the 1982 election.

When the lame-duck session opened on November 29, less than four weeks remained to pass urgently needed appropriation bills, the gas-tax increase measure, the enterprise-zone legislation, and more. The Apple bill was within steps of becoming law. Those steps weren't taken in the lame-duck session. So it is back to square one in the 98th Congress -- or Apple forgets about federal legislation and uses California as a showcase for what might have been nationally, and still may be California, after all, has nearly 9% of the country's elementary and seconclaryschool population. An experiment there will certainly be significant. And other states may follow California's lead.

Had the bill passed the Senate, it would have gone to a House/Senate Conference Committee and then on to the President, who was reportedly ready to approve it. That was, at least, the signal from the Treasury Department, which filed a generally favorable report on the bill. It seemed that time ran out on the measure -- but in Congress that never happens without help from opponents.

The transformations the bill had already undergone since its introduction in Congress illustrate the difficuIty of achieving cooperation between government and private enterprise, particularly where business interests are themselves divided. The Apple bill asked for two federal tax breaks. A corporation cannot claim more than 10% of its annual federal taxable income as a charitable deduction, regardless of how much it contributes to eligible nonprofit causes. On the ground that donations of computers and related hardware to elementary and secondary schools met a pressing national need, Steve Jobs urged that this limit be upped to 30%. Both the House Ways and Means Committee and the Senate Finance Comrnittee refused to go beyond 10%.

The House did go along with a second request, although the Senate Finance Committee would go only part way. Here the issue centered on how much of the value of each computer donated to a school could be deducted from taxable income. Normally, a corporation can deduct only its direct cost of making the donated goods. It cannot deduct the additional amount above cost that would be part of the price the goods would bring if sold. There are two exceptions. One is when essential goods (food and medical supplies) are given to charitable organizations. The other is when scientific equipment is donated to a U S. college or university for research or research training in the physical or biological sciences (Sec. 170 [e] [4] of the Internal Revenue Code). For either of these gifts, the donor may deduct cost plus half the added amount the goods would bring in the marketplace. The special rule has a further limit: The cost plus the added half of the difference between cost and fair market value may not exceed twice the cost. (If you are dizzy, bear up; that is why tax lawyers and tax accountants are so well paid. They spend their lives inventing and keeping up with stuff like that.)

Apple asked for this same "special rule" treatment for computer equipment. The Senate Finance Committee compromised by setting a limit of 150% of the cost. The House also provided for only one year in which the contribution would be eligible -- 1983. The Senate Finance Committee allowed the deduction to be taken in 1983, 1984, or 1985.

There were other changes. Donated equipment couldn't be more than six months old. That requirement was to counter the argument that the entire proposal was really a scheme to dump excess and stale inventory.

Two other provisions were even more serious obstacles to Apple's plans. The House version required that donors have a "written plan of distribution" in order Senate version specified that no one to avoid "undue concentration" either geographically or in terms of the relative economic status of different areas. The Senate version specified that no one state's schools could have gotten more than 15% of the contributions from any one company and added that no more than one-third of the computers given could go to "donees where the median income of families with school age children exceeds the national average." Moreover, at least one-third of the computers would have had to go to schools where the median family income is below the national average.

If you have had no experience with what the Internal Revenue Service or the courts can do with language like that, you are lucky. It can be particularly troublesome when, as in this case, the language went on to give the Treasury the right to vary the percentages "based on the facts and circumstances of such cases."

These restrictions -- and the death of the bill -- were due to mistrust of Apple's motives. While Jobs hammered away at national need, others suggested the bill was simply a clever ploy to hook teachers and students on Apple software by tying them to Apple hardware. Jobs argued that the bill would let any computer maker do the same thing.

Some industry opposition was surely rooted in a reluctance to give up the schools -- even for a short time -- as a lucrative market. Some companies other than Apple have entirely different strategies for the school market. It simply doesn't make sense to them, for example, to give machines to schools rather than sell the hardware at a discount. Still others think they are doing better in the marketplace than if the bill forced them -- and allowed others -- to donate machines in order to keep a competitive position.

Jobs pointed out that Apple would have gotten no free ride; the bill would have left the company with a "monumental indirect cost burden" and an unrecovered cost of at least $100 per computer. Apple could have paid more than $10 million if it had given a computer to each of the more than 100,000 eligible schools in the country. To counter the argument that the bill would have given Apple an inside track, Jobs simply invited "IBM, Digital, Xerox, and Commodore to join with us. If these and other microcomputer manufacturers will undertake their share of the responsibility to insure computer literacy in this country, Apple's goal will be achieved at a much lower cost to our company."

"This brings me," Jobs told the House Ways and Means Committee on June 14, "to what is truly important about H.R. 5573. While the bill may someday benefit any company that donates computers under its provisions, the important point is that the bill is clearly good for the United States. Hopefully we have not come to the point in this country where any law that may be even remotely good for business automatically is perceived as bad for the country. In the area of technology particularly, that perception is fatal to the long-term well-being of America. "

It may be true that everyone's motives, including Apple's, are somewhat mixed. But the late Charles Abrams, scholar-lawyer-businessperson, used to explain to his students at Massachusetts lnstitute of Technology that businesspeople are moved by the "prophet motive" as often as other people are. One of Jobs's colleagues told me that on this issue Jobs's motives were probably "75% prophet ancl 25% profit." Maybe I'm getting soft, but after reviewing the entire controversy, that seems about right to me.

One fair question to ask now is whether any single company can take on this big an initiative by itself. And, if it does, can it really expect to win it?

But what Jobs attempted raises far broader questions than one company's efforts can resolve. Can the nation leave computer-literacy decisions to the school administrators of the 50 states and to thousands of school boards, particularly when schools are strapped for money? Can it leave the issue to 900-odd hardware makers -- or to the 20 or so largest -- when each of these manufacturers is struggling for market share? Can it leave it to education lobbyists who allegedly want teachers and administrators to agree unanimously on appropriate school software before any hardware makers get a chance to lock schools into one way of doing things?

These are the questions the Apple bill raises. All of us must now face them. How we do so will govern how we move into a rapidly changing era.

Last updated: Feb 1, 1983




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