To amend the Internal Revenue Code of 1986 to provide for a medical innovation tax credit for clinical testing research expenses attributable to academic medical centers and other qualified hospital research organizations.

SECTION 1. CREDIT FOR CLINICAL TESTING RESEARCH EXPENSES ATTRIBUTABLE 
              TO CERTAIN QUALIFIED ACADEMIC INSTITUTIONS INCLUDING 
              TEACHING HOSPITALS.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 (relating to business related 
credits) is amended by inserting after section 41 the following:

``SEC. 41A. CREDIT FOR MEDICAL INNOVATION EXPENSES.

    ``(a) General Rule.--For purposes of section 38, the medical 
innovation credit determined under this section for the taxable year 
shall be an amount equal to 20 percent of the excess (if any) of--
            ``(1) the qualified medical innovation expenses for the 
        taxable year, over
            ``(2) the medical innovation base period amount.
    ``(b) Qualified Medical Innovation Expenses.--For purposes of this 
section--
            ``(1) In general.--The term `qualified medical innovation 
        expenses' means the amounts which are paid or incurred by the 
        taxpayer during the taxable year directly or indirectly to any 
        qualified academic institution for clinical testing research 
        activities.
            ``(2) Clinical testing research activities.--
                    ``(A) In general.--The term `clinical testing 
                research activities' means human clinical testing 
                conducted at any qualified academic institution in the 
                development of any product, which occurs before--
                            ``(i) the date on which an application with 
                        respect to such product is approved under 
                        section 505(b), 506, or 507 of the Federal 
                        Food, Drug, and Cosmetic Act,
                            ``(ii) the date on which a license for such 
                        product is issued under section 351 of the 
                        Public Health Service Act, or
                            ``(iii) the date classification or approval 
                        of such product which is a device intended for 
                        human use is given under section 513, 514, or 
                        515 of the Federal Food, Drug, and Cosmetic 
                        Act.
                    ``(B) Product.--The term `product' means any drug, 
                biologic, or medical device.
            ``(3) Qualified academic institution.--The term `qualified 
        academic institution' means any of the following institutions:
                    ``(A) Educational institution.--A qualified 
                organization described in section 170(b)(1)(A)(iii) 
                which is owned or affiliated with an institution of 
higher education as described in section 3304(f).
                    ``(B) Teaching hospital.--A teaching hospital 
                which--
                            ``(i) is publicly supported or owned by an 
                        organization described in section 501(c)(3), 
                        and
                            ``(ii) is affiliated with an organization 
                        meeting the requirements of subparagraph (A).
                    ``(C) Foundation.--A medical research organization 
                described in section 501(c)(3) (other than a private 
                foundation) which is affiliated with, or owned by--
                            ``(i) an organization meeting the 
                        requirements of subparagraph (A), or
                            ``(ii) a teaching hospital meeting the 
                        requirements of subparagraph (B).
                    ``(D) Charitable research hospital.--A hospital 
                that is designated as a cancer center by the National 
                Cancer Institute.
            ``(4) Exclusion for amounts funded by grants, etc.--The 
        term `qualified medical innovation expenses' shall not include 
        any amount to the extent such amount is funded by any grant, 
        contract, or otherwise by another person (or any governmental 
        entity).
    ``(c) Medical Innovation Base Period Amount.--For purposes of this 
section, the term `medical innovation base period amount' means the 
average annual qualified medical innovation expenses paid by the 
taxpayer during the 3-taxable year period ending with the taxable year 
immediately preceding the first taxable year of the taxpayer beginning 
after December 31, 1998.
    ``(d) Special Rules.--
            ``(1) Limitation on foreign testing.--No credit shall be 
        allowed under this section with respect to any clinical testing 
        research activities conducted outside the United States.
            ``(2) Certain rules made applicable.--Rules similar to the 
        rules of subsections (f) and (g) of section 41 shall apply for 
        purposes of this section.
            ``(3) Election.--This section shall apply to any taxpayer 
        for any taxable year only if such taxpayer elects to have this 
        section apply for such taxable year.
            ``(4) Coordination with credit for increasing research 
        expenditures and with credit for clinical testing expenses for 
        certain drugs for rare diseases.--Any qualified medical 
        innovation expense for a taxable year to which an election 
        under this section applies shall not be taken into account for 
        purposes of determining the credit allowable under section 41 
        or 45C for such taxable year.
    ``(e) Termination.--This section shall not apply to any expense 
paid or incurred after the date specified in section 41(h)(1)(B).''.
    (b) Credit To Be Part of General Business Credit.--
            (1) In general.--Section 38(b) of such Code (relating to 
        current year business credits) is amended by striking ``plus'' 
        at the end of paragraph (11), by striking the period at the end 
        of paragraph (12) and inserting ``, plus'', and by adding at 
        the end the following:
            ``(13) the medical innovation expenses credit determined 
        under section 41A(a).''.
            (2) Transition rule.--Section 39(d) of such Code is amended 
        by adding at the end the following new paragraph:
            ``(9) No carryback of section 41a credit before 
        enactment.--No portion of the unused business credit for any 
        taxable year which is attributable to the medical innovation 
        credit determined under section 41A may be carried back to a 
        taxable year beginning before January 1, 1999.''.
    (c) Denial of Double Benefit.--Section 280C of such Code is amended 
by adding at the end the following new subsection:
    ``(d) Credit for Increasing Medical Innovation Expenses.--
            ``(1) In general.--No deduction shall be allowed for that 
        portion of the qualified medical innovation expenses (as 
        defined in section 41A(b)) otherwise allowable as a deduction 
        for the taxable year which is equal to the amount of the credit 
        determined for such taxable year under section 41A(a).
            ``(2) Certain rules to apply.--Rules similar to the rules 
        of paragraphs (2), (3), and (4) of subsection (c) shall apply 
        for purposes of this subsection.''
    (d) Deduction for Unused Portion of Credit.--Section 196(c) of such 
Code (defining qualified business credits) is amended by resdesignating 
paragraphs (5) through (8) as paragraphs (6) through (9), respectively, 
and by inserting after paragraph (4) the following new paragraph:
            ``(5) the medical innovation expenses credit determined 
        under section 41A(a) (other than such credit determined under 
        the rules of section 280C(d)(2)),''.
    (e) Clerical Amendment.--The table of sections for subpart D of 
part IV of subchapter A of chapter 1 of such Code is amended by adding 
after the item relating to section 41 the following:

                              ``Sec. 41A. Credit for medical innovation 
                                        expenses.''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1998.

Summary: Amends the Internal Revenue Code to establish a limited credit for qualified medical innovation expenses. Defines such expenses as amounts paid by a taxpayer to any qualified academic institution for clinical testing research activities.