A bill to permit biomedical research corporations to engage in certain equity financings without incurring limitations on net operating loss carryforwards and certain built-in losses, and for other purposes.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Biotechnology Future Investment 
Expansion Act of 2003''.

SEC. 2. FINDINGS AND PURPOSE.

    (a) Findings.--Congress makes the following findings:
            (1) American bioscience research corporations conduct long-
        term research and development on breakthrough medical 
        technologies. This commercial bioscience research industry 
        forms an irreplaceable link between pure scientific discovery 
        and the development of powerful biomedical products and 
        technologies. It is critical to the maintenance of American 
        competitiveness internationally that these long-term research 
        and development projects be encouraged.
            (2) Such long-term research projects have the greatest 
        potential to revolutionize whole fields of science and industry 
        for the benefit of the standard of living of Americans; and to 
        yield solutions for critical social needs, even though these 
        solutions might not result in large sales and profits (such as 
        ``orphan'' drugs and other treatments alleviating great 
        suffering in their recipients).
            (3) Long-term biomedical research companies are among the 
        most research-intensive and capital-intensive companies in the 
        world.
            (4) In addition to the scientific and technical risks 
        attending their long-term research programs, many biomedical 
        research companies must subject their technologies to lengthy 
        and expensive regulatory reviews before they are permitted 
        access to the marketplace.
            (5) Biomedical research companies typically operate in 
        financially challenging circumstances. These companies must 
        engage in intensive research activity for many years in order 
        to develop their products and earn profits. Many are small 
        businesses lacking the internal cash flow, stability and 
        borrowing capacity of large corporations.
            (6) The long-term commercial bioscience research industry 
        is heavily dependent on outside sources of equity capital to 
        fund lengthy and intensive research prior to earning any 
        revenues. The industry's long lead times and high levels of 
        scientific and regulatory risk often impede access to capital.
            (7) The longstanding national policy of Government support 
        and tax incentives for breakthrough commercial research 
        reflects a recognition that the capital marketplace tends to 
        allocate insufficient resources to sustain the Nation's need 
        for such foundational scientific research and development.
            (8) American long-term bioscience research companies 
        constitute one of the core commercial sectors which Congress 
        intended to benefit from existing tax incentives for commercial 
        research.
            (9) However, the current Federal income tax incentives are 
        simply not working in the case of many bioscience companies 
        focused on breakthrough medical technologies.
            (10) Current Federal income tax incentives do not work as 
        intended for most high technology bioscience companies because 
        they typically incur net operating losses for a decade or more 
        during their lengthy research and development phases and 
        therefore receive no contemporaneous benefit from these tax 
        incentives.
            (11) Further, Federal tax rules aimed chiefly at preventing 
        corporate loss trafficking and tax-motivated mergers and 
        acquisitions penalize these companies. The very process of 
        raising successive increments of private capital through 
        routine equity financings triggers these rules and subjects 
        biomedical research companies to severe limitations on net 
        operating loss and tax credit carryforwards. These limitations 
        practically eliminate for the commercial bioscience industry 
        any economic benefit from these tax incentives.
            (12) These tax incentives instead tend to favor investment 
        by large, profitable companies, often engaged in secondary or 
        tertiary research activities, and thus to discriminate against 
and to cause under-investment in longer-term breakthrough technologies, 
a bias which is harmful to American competitiveness.
            (13) The inability to benefit from existing Federal income 
        tax incentives for commercial research places long-term 
        bioscience research companies at a substantial disadvantage in 
        the capital marketplace where they must compete with other 
        companies able to use these tax incentives currently.
            (14) A tax system that does not discriminate would ensure 
        that existing tax incentives in favor of research and 
        experimentation have the same cost-reducing impact on companies 
        conducting both short-term and long-term research and thus 
        render this tax incentive program neutral with regard to short-
        term and long-term research objectives, minimizing capital 
        marketplace distortions caused by differences in tax and income 
        status.
    (b) Purpose.--The purpose of this Act is to provide that long-term 
biomedical research corporations will not incur limitations on 
research-related tax incentive carryforwards simply because they engage 
in the routine equity financings that are the financial lifeblood of 
the industry.

SEC. 3. RESTORING THE BENEFIT OF TAX INCENTIVES FOR BIOMEDICAL RESEARCH 
              AND CLINICAL TRIALS.

    (a) In General.--Subsection (l) of section 382 of the Internal 
Revenue Code of 1986 is amended by adding at the end the following new 
paragraph:
            ``(9) Certain financing transactions of biomedical research 
        corporations.--
                    ``(A) General rule.--In the case of a biomedical 
                research corporation, any owner shift involving a 5-
                percent shareholder which occurs as the result of a 
                qualified investment during the testing period shall be 
                treated for purposes of this section (other than this 
                paragraph) as occurring before the testing period.
                    ``(B) Biomedical research corporation.--For 
                purposes of this paragraph, the term `biomedical 
                research corporation' means, with respect to any 
                qualified investment, any domestic corporation subject 
                to tax under this subchapter which is not in bankruptcy 
                and which, as of the time of the closing on such 
                investment--
                            ``(i) holds the rights to a drug or 
                        biologic for which an investigational new drug 
                        application is in effect under section 505 of 
                        the Federal Food, Drug, and Cosmetic Act, and
                            ``(ii) certifies that, as of the time of 
                        such closing, the drug or biologic is under 
                        study in phase II or phase III of a clinical 
                        investigation carried out under such section.
                    ``(C) Qualified investment.--For purposes of this 
                paragraph, the term `qualified investment' means any 
                acquisition of stock in a biomedical research 
                corporation if such stock is acquired at its original 
                issue (directly or through an underwriter), solely in 
                exchange for cash, and the closing thereon occurs after 
                the date of the enactment of this paragraph.
                    ``(D) Stock issued in exchange for convertible 
                debt.--For purposes of this paragraph, stock issued by 
                a biomedical research corporation in exchange for its 
                convertible debt (or stock deemed under this section to 
                be so issued) shall be treated as stock acquired by the 
                debt holder at its original issue and solely in 
                exchange for cash if the debt holder previously 
                acquired the convertible debt at its original issue and 
                solely in exchange for cash. In the case of an 
                acquisition of stock in exchange for convertible debt, 
                the requirements of this paragraph shall be applied 
                separately as of the time of closing on the investment 
                in convertible debt, and as of the time of actual 
                conversion (or deemed conversion under this section) of 
                the convertible debt for stock, except that the 
                requirements of subparagraph (H) shall be applied only 
                as of the time of closing on the issuance of the 
                convertible debt.
                    ``(E) Biomedical research corporation must meet 5-
                year expenditure test with respect to any qualified 
                investment.--
                            ``(i) In general.--This paragraph shall not 
                        apply to a qualified investment in a biomedical 
                        research corporation unless such corporation 
                        meets the expenditure test for each year of the 
                        measuring period.
                            ``(ii) Measuring period.--For purposes of 
                        this subparagraph, the term `measuring period' 
                        means, with respect to any qualified 
                        investment, the taxable year of the biomedical 
                        research corporation in which the closing on 
                        the investment occurs, the 2 preceding taxable 
years, and the 2 subsequent taxable years.
                            ``(iii) Clinical testing.--For purposes of 
                        this subparagraph, the term `clinical testing' 
                        means any human clinical testing which is 
                        carried out under any investigational new drug 
                        application in effect under section 505 of the 
                        Federal Food, Drug, and Cosmetic Act.
                    ``(F) Effect of corporate redemptions on qualified 
                investments.--Rules similar to the rules of section 
                1202(c)(3) shall apply to qualified investments under 
                this paragraph except that `stock acquired in a 
                qualified investment' shall be substituted for 
                `qualified small business stock' each place it appears 
                therein.
                    ``(G) Effect of other transactions between 
                biomedical research corporations and investors making 
                qualified investments.--
                            ``(i) In general.--If, during the 2-year 
                        period beginning 1 year before any qualified 
                        investment, the biomedical research corporation 
                        engages in another transaction with a member of 
                        its qualified investment group and such 
                        biomedical research corporation receives any 
                        consideration other than cash in such 
                        transaction, there shall be a presumption that 
                        stock received in the otherwise qualified 
                        investment transaction was not received solely 
                        in exchange for cash.
                            ``(ii) Qualified investment group.--For 
                        purposes of this subparagraph, the term 
                        `qualified investment group' means, with 
                        respect to any qualified investment, one or 
                        more persons who receive stock issued in 
                        exchange for the qualified investment, and any 
                        person related to such persons within the 
                        meaning of section 267(b) or section 707(b).
                            ``(iii) Regulations.--The Secretary shall 
                        promulgate regulations exempting from this 
                        subparagraph transactions which are customary 
                        in the bioscience research industry and are of 
                        minor value relative to the amount of the 
                        qualified investment.
                    ``(H) Proceeds of qualified investments shall be 
                devoted to research on preexisting technology.--
                            ``(i) In general.--This paragraph shall not 
                        apply to any qualified investment unless the 
                        net proceeds of such qualified investment do 
                        not exceed the excess of--
                                    ``(I) the sum of the biomedical 
                                research corporation's aggregate 
                                qualifying clinical expenditures for 
                                the 3 years following the qualified 
                                investment, over
                                    ``(II) three times the 
                                corporation's qualifying clinical 
                                expenditures for the year preceding the 
                                qualified investment, plus the amount 
                                of the corporation's cash and cash 
                                equivalents immediately before the 
                                closing on the qualified investment.
                            ``(ii) Qualifying clinical expenditures.--
                        For purposes of this subparagraph, the term 
                        `qualifying clinical expenditures' means 
                        amounts described in section 41(b) which are 
                        paid or incurred by a biomedical research 
                        corporation for clinical testing in connection 
                        with a drug or biologic for which an 
                        investigational new drug application is in 
                        effect under section 505 of the Federal Food, 
                        Drug, and Cosmetic Act and which is (at the 
                        time of the closing on the qualified 
                        investment) under study in phase II or phase 
                        III of a clinical investigation carried out 
                        under such section.
                    ``(I) Regulations.--The Secretary may issue such 
                regulations as may be appropriate to achieve the 
                purposes of this paragraph, to prevent abuse, and to 
                provide for treatment of biomedical research 
                corporations under sections 383 and 384 that is 
                consistent with the purposes of this paragraph.''.
    (b) Proceeds of Equity Investments To Be Treated as Working 
Capital.--Subparagraph (C) of section 382(l)(4) of such Code is amended 
by adding at the end the following: ``Such term shall not include any 
assets reasonably expected to be used within 3 years to fund qualifying 
clinical expenditures (as defined in paragraph (9)(H)(ii) without 
regard to the parenthetical therein).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

Summary: Biotechnology Future Investment Expansion Act of 2003 - Amends the Internal Revenue Code to provide that in the case of a biomedical research corporation, any owner shift involving a five-percent shareholder which occurs as the result of a qualified investment during the testing period shall be treated as occurring before the testing period. Defines: (1) biomedical research corporation as a domestic corporation not in bankruptcy which has a drug or biologic in certain clinical trials. And (2) qualified investment as a stock acquisition in a biomedical research corporation acquired in cash at its original issue. Requires a biomedical research corporation to meet a five-year expenditure test with respect to any qualified investment.