II 

109TH CONGRESS 

2D SESSION S. 2720 

To amend the Internal Revenue Code of 1986 to provide incentives to improve 

America’s research competitiveness, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

MAY 4, 2006 

Mr. BAUCUS introduced the following bill; which was read twice and referred 

to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to provide 

incentives to improve America’s research competitiveness, 

and for other purposes. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Research Competitive5 ness Act of 2006’’. 

6 SEC. 2. SIMPLIFICATION OF RESEARCH AND DEVELOP7 MENT CREDIT. 

8 (a) SIMPLIFIED CREDIT FOR QUALIFIED RESEARCH

9 EXPENSES.— 


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1 (1) IN GENERAL.—Subsection (a) of section 41 

2 of the Internal Revenue Code of 1986 (relating to 

3 credit for increasing research activities) is amended 

4 to read as follows: 

5 ‘‘(a) DETERMINATION OF CREDIT.— 

6 ‘‘(1) IN GENERAL.—For purposes of section 38, 

7 the research credit determined under this section for 

8 the taxable year shall be equal to 20 percent of so 

9 much of the qualified research expenses for such 

10 taxable year as exceeds 50 percent of the average 

11 qualified research expenses for the 3 taxable years 

12 preceding the taxable year for which the credit is 

13 being determined. 

14 ‘‘(2) SPECIAL RULE IN CASE OF NO QUALIFIED

15 RESEARCH EXPENSES IN ANY OF 3 PRECEDING TAX16 ABLE YEARS.— 

17 ‘‘(A) TAXPAYERS TO WHICH PARAGRAPH

18 APPLIES.—The credit under this section shall 

19 be determined under this paragraph if the tax20 payer has no qualified research expenses in at 

21 least 1 of the 3 taxable years preceding the tax22 able year for which the credit is being deter23 mined. 

24 ‘‘(B) CREDIT RATE.—The credit deter25 mined under this paragraph shall be equal to 


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1 10 percent of the qualified research expenses 

2 for the taxable year.’’. 

3 (2) CONFORMING AMENDMENT.—Section 41 of 

4 such Code is amended by striking subsection (c). 

5 (b) UNIFORM REIMBURSEMENT RATES FOR ALL

6 CONTRACT RESEARCH EXPENSES OTHER THAN

7 AMOUNTS PAID FOR BASIC RESEARCH.— 

8 (1) IN GENERAL.—Section 41(b)(3) of the In9 ternal Revenue Code of 1986 (relating to contract 

10 research expenses) is amended— 

11 (A) by striking ‘‘65 percent’’ and inserting 

12 ‘‘80 percent’’, and 

13 (B) by striking subparagraphs (C) and 

14 (D). 

15 (2) BASIC RESEARCH PAYMENTS.—Section 

16 41(b) of such Code is amended by redesignating 

17 paragraph (4) as paragraph (5) and by inserting 

18 after paragraph (3) the following new paragraph: 

19 ‘‘(4) BASIC RESEARCH PAYMENTS.— 

20 ‘‘(A) IN GENERAL.—In the case of basic 

21 research payments by the taxpayer, paragraph 

22 (3)(A) shall be applied by substituting ‘100 per23 cent’ for ‘80 percent’. 

24 ‘‘(B) BASIC RESEARCH PAYMENTS DE25 FINED.—For purposes of this paragraph— 


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1 ‘‘(i) IN GENERAL.—The term ‘basic 

2 research payment’ means, with respect to 

3 any taxable year, any amount paid in cash 

4 during such taxable year by a corporation 

5 to any qualified organization for basic re6 search but only if— 

7 ‘‘(I) such payment is pursuant to 

8 a written agreement between such cor9 poration and such qualified organiza10 tion, and 

11 ‘‘(II) such basic research is to be 

12 performed by such qualified organiza13 tion. 

14 ‘‘(ii) EXCEPTION TO REQUIREMENT

15 THAT RESEARCH BE PERFORMED BY THE

16 ORGANIZATION.—In the case of a qualified 

17 organization described in clause (iii) or (iv) 

18 of subparagraph (C), subclause (II) of 

19 clause (i) shall not apply. 

20 ‘‘(C) QUALIFIED ORGANIZATION.—For 

21 purposes of this paragraph, the term ‘qualified 

22 organization’ means any of the following orga23 nizations: 

24 ‘‘(i) EDUCATIONAL INSTITUTIONS.— 

25 Any educational organization which— 


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1 ‘‘(I) is an institution of higher 

2 education (within the meaning of sec3 tion 3304(f)), and 

4 ‘‘(II) is described in section 

5 170(b)(1)(A)(ii). 

6 ‘‘(ii) CERTAIN SCIENTIFIC RESEARCH

7 ORGANIZATIONS.—Any organization not 

8 described in clause (i) which— 

9 ‘‘(I) is described in section 

10 501(c)(3) and is exempt from tax 

11 under section 501(a), 

12 ‘‘(II) is organized and operated 

13 primarily to conduct scientific re14 search, and 

15 ‘‘(III) is not a private founda16 tion. 

17 ‘‘(iii) SCIENTIFIC TAX-EXEMPT ORGA18 NIZATIONS.—Any organization which— 

19 ‘‘(I) is described in section 

20 501(c)(3) (other than a private foun21 dation) or section 501(c)(6), 

22 ‘‘(II) is exempt from tax under 

23 section 501(a), 

24 ‘‘(III) is organized and operated 

25 primarily to promote scientific reVerDate Aug 31 2005 19:11 May 06, 2006 Jkt 049200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\S2720.IS S2720

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1 search by qualified organizations de2 scribed in clause (i) pursuant to writ3 ten research agreements, and 

4 ‘‘(IV) currently expends substan5 tially all of its funds or substantially 

6 all of the basic research payments re7 ceived by it for grants to, or contracts 

8 for basic research with, an organiza9 tion described in clause (i). 

10 ‘‘(iv) CERTAIN GRANT ORGANIZA11 TIONS.—Any organization not described in 

12 clause (ii) or (iii) which— 

13 ‘‘(I) is described in section 

14 501(c)(3) and is exempt from tax 

15 under section 501(a) (other than a 

16 private foundation), 

17 ‘‘(II) is established and main18 tained by an organization established 

19 before July 10, 1981, which meets the 

20 requirements of subclause (I), 

21 ‘‘(III) is organized and operated 

22 exclusively for the purpose of making 

23 grants to organizations described in 

24 clause (i) pursuant to written research 


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1 agreements for purposes of basic re2 search, and 

3 ‘‘(IV) makes an election, rev4 ocable only with the consent of the 

5 Secretary, to be treated as a private 

6 foundation for purposes of this title 

7 (other than section 4940, relating to 

8 excise tax based on investment in9 come). 

10 ‘‘(D) DEFINITIONS AND SPECIAL RULES.— 

11 For purposes of this paragraph— 

12 ‘‘(i) BASIC RESEARCH.—The term 

13 ‘basic research’ means any original inves14 tigation for the advancement of scientific 

15 knowledge not having a specific commercial 

16 objective, except that such term shall not 

17 include— 

18 ‘‘(I) basic research conducted 

19 outside of the United States, and 

20 ‘‘(II) basic research in the social 

21 sciences, arts, or humanities. 

22 ‘‘(ii) TRADE OR BUSINESS QUALIFICA23 TION.—For purposes of applying para24 graph (1) to this paragraph, any basic re25 search payments shall be treated as an 


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1 amount paid in carrying on a trade or 

2 business of the taxpayer in the taxable 

3 year in which it is paid (without regard to 

4 the provisions of paragraph (3)(B)). 

5 ‘‘(iii) CERTAIN CORPORATIONS NOT

6 ELIGIBLE.—The term ‘corporation’ shall 

7 not include— 

8 ‘‘(I) an S corporation, 

9 ‘‘(II) a personal holding company 

10 (as defined in section 542), or 

11 ‘‘(III) a service organization (as 

12 defined in section 414(m)(3)).’’. 

13 (3) CONFORMING AMENDMENTS.— 

14 (A) Section 41 of such Code is amended by 

15 striking subsection (e). 

16 (B) Section 41(f) of such Code is amended 

17 by striking paragraph (6). 

18 (c) PERMANENT EXTENSION OF CREDIT.— 

19 (1) IN GENERAL.—Section 41 of the Internal 

20 Revenue Code of 1986 is amended by striking sub21 section (h). 

22 (2) CONFORMING AMENDMENT.—Paragraph (1) 

23 of section 45C(b) of such Code is amended by strik24 ing subparagraph (D). 

25 (d) CONFORMING AMENDMENTS.— 


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1 (1) Section 41 of the Internal Revenue Code of 

2 1986 is amended by redesignating subsections (d), 

3 (f), and (g) as subsections (c), (d), and (e), respec4 tively. 

5 (2) Paragraphs (2)(A) and (5) (as redesignated 

6 by subsection (b)(2)) of section 41(b) of such Code 

7 are each amended by striking ‘‘subsection (f)(1)’’ 

8 and inserting ‘‘subsection (d)(1)’’. 

9 (3) Sections 45C(d)(3), 45G(e)(2), and 

10 936(h)(5)(C)(i)(IV)(c) of such Code are each 

11 amended by striking ‘‘section 41(f)’’ and inserting 

12 ‘‘section 41(d)’’. 

13 (4) Section 54(l)(3)(A) of such Code is amend14 ed by striking ‘‘section 41(g)’’ and inserting ‘‘section 

15 41(e)’’. 

16 (5) Section 170(e)(4)(B)(i) of such Code is 

17 amended by striking ‘‘subparagraph (A) or subpara18 graph (B) of section 41(e)(6)’’ and inserting ‘‘clause 

19 (i) or (ii) of section 41(b)(4)(C)’’. 

20 (6) Sections 197(f)(1)(C), 197(f)(9)(C)(i)(II), 

21 and 280C(b)(3) of such Code are each amended by 

22 striking ‘‘section 41(f)(1)’’ and inserting ‘‘section 

23 41(d)(1)’’. 


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1 (7) Section 280C(b)(3) of such Code is amend2 ed by striking ‘‘section 41(f)(5)’’ and inserting ‘‘sec3 tion 41(d)(5)’’. 

4 (8) Section 280C(b)(3) of such Code is amend5 ed by striking ‘‘section 41(f)(1)(B)’’ and inserting 

6 ‘‘section 41(d)(1)(B)’’. 

7 (9) Section 280C(c)(1) of such Code is amend8 ed by striking ‘‘section 41(e)(2)’’ and inserting ‘‘sec9 tion 41(b)(4)(B)’’. 

10 (10) Section 280C(c)(2)(A) of such Code is 

11 amended by striking ‘‘section 41(a)(1)’’ and insert12 ing ‘‘section 41(a)’’. 

13 (11) Sections 936(j)(5)(D) and 965(c)(2)(C)(i) 

14 of such Code are each amended by striking ‘‘section 

15 41(f)(3)’’ and inserting ‘‘section 41(d)(3)’’. 

16 (e) EFFECTIVE DATE.—The amendments made by 

17 this section shall apply to taxable years beginning after 

18 December 31, 2007. 

19 SEC. 3. TAX CREDIT FOR INVESTMENTS IN SMALL TECH20 NOLOGY INNOVATION COMPANIES. 

21 (a) IN GENERAL.—Subpart D of part IV of sub22 chapter A of chapter 1 of the Internal Revenue Code of 

23 1986 is amended by adding at the end the following new 

24 section: 


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1 ‘‘SEC. 45N. RESEARCH INVESTMENT TAX CREDIT. 

2 ‘‘(a) ALLOWANCE OF CREDIT.— 

3 ‘‘(1) IN GENERAL.—For purposes of section 38, 

4 in the case of a taxpayer who holds a qualified eq5 uity investment on a credit allowance date of such 

6 investment which occurs during the taxable year, the 

7 research investment tax credit determined under this 

8 section for such taxable year is an amount equal to 

9 the 5 percent of the amount paid to the qualified re10 search entity for such investment at its original 

11 issue. 

12 ‘‘(2) CREDIT ALLOWANCE DATE.—For purposes 

13 of paragraph (1), the term ‘credit allowance date’ 

14 means, with respect to any qualified equity invest15 ment— 

16 ‘‘(A) the date on which such investment is 

17 initially made, and 

18 ‘‘(B) each of the 4 anniversary dates of 

19 such date thereafter. 

20 ‘‘(b) QUALIFIED EQUITY INVESTMENT.—For pur21 poses of this section— 

22 ‘‘(1) IN GENERAL.—The term ‘qualified equity 

23 investment’ means any equity investment in a quali24 fied research entity if— 

25 ‘‘(A) such investment is acquired by the 

26 taxpayer at its original issue (directly or 


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1 through an underwriter) solely in exchange for 

2 cash, 

3 ‘‘(B) substantially all of such cash is used 

4 by the qualified research entity to make quali5 fied research investments, and 

6 ‘‘(C) such investment is designated for 

7 purposes of this section by the qualified re8 search entity. 

9 Such term shall not include any equity investment 

10 issued by a qualified research entity more than 5 

11 years after the date that such entity receives an allo12 cation under subsection (e). Any allocation not used 

13 within such 5-year period may be reallocated by the 

14 Secretary under subsection (e). 

15 ‘‘(2) LIMITATION.—The maximum amount of 

16 equity investments issued by a qualified research en17 tity which may be designated under paragraph 

18 (1)(C) by such entity shall not exceed the portion of 

19 the limitation amount allocated under subsection (f) 

20 to such entity. 

21 ‘‘(3) SAFE HARBOR FOR DETERMINING USE OF

22 CASH.—The requirement of paragraph (1)(B) shall 

23 be treated as met if at least 85 percent of the aggre24 gate gross assets of the qualified research entity are 

25 invested in qualified research investments. 


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1 ‘‘(4) TREATMENT OF SUBSEQUENT PUR2 CHASERS.—The term ‘qualified research investment’ 

3 includes any equity investment which would (but for 

4 paragraph (1)(A)) be a qualified equity investment 

5 in the hands of the taxpayer if such investment was 

6 a qualified equity investment in the hands of a prior 

7 holder. 

8 ‘‘(5) REDEMPTIONS.—A rule similar to the rule 

9 of section 1202(c)(3) shall apply for purposes of this 

10 subsection. 

11 ‘‘(6) EQUITY INVESTMENT.—The term ‘equity 

12 investment’ means— 

13 ‘‘(A) any stock (other than nonqualified 

14 preferred stock as defined in section 351(g)(2)) 

15 in an entity which is a corporation, and 

16 ‘‘(B) any capital interest in an entity 

17 which is a partnership. 

18 ‘‘(c) QUALIFIED RESEARCH ENTITY.—For purposes 

19 of this section, the term ‘qualified research entity’ means 

20 any domestic corporation or partnership if— 

21 ‘‘(1) the primary mission of the entity is serv22 ing, or providing investment capital for, qualifying 

23 small business innovation companies, 

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1 sionals through their representation on any gov2 erning board of the entity or on any advisory board 

3 to the entity, and 

4 ‘‘(3) the entity is certified by the Secretary for 

5 purposes of this section as being a qualified research 

6 entity. 

7 ‘‘(d) QUALIFIED RESEARCH INVESTMENTS.—For 

8 purposes of this section— 

9 ‘‘(1) IN GENERAL.—The term ‘qualified re10 search investment’ means— 

11 ‘‘(A) any capital or equity investment in, 

12 or loan to, any qualifying small business inno13 vation company, which when added to any other 

14 such investment in or loan to such company 

15 taken into account for purposes of this section 

16 for any taxable year does not exceed 

17 $10,000,000, and 

18 ‘‘(B) the purchase from another qualified 

19 research entity of any loan made by such entity 

20 which is a qualified research investment. 

21 ‘‘(2) QUALIFYING SMALL BUSINESS INNOVA22 TION COMPANY.— 

23 ‘‘(A) IN GENERAL.—For purposes of para24 graph (1), the term ‘qualifying small business 

25 innovation company’ means, with respect to any 


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1 taxable year, any corporation (including a non2 profit corporation) or partnership if for such 

3 year— 

4 ‘‘(i) the gross receipts of such entity 

5 do not exceed $10,000,000, 

6 ‘‘(ii) the aggregate gross assets of 

7 such entity do not exceed $25,000,000, 

8 and 

9 ‘‘(iii) at least 50 percent of the gross 

10 expenditures of such entity would qualify 

11 as research or experimental expenditures 

12 under section 174. 

13 All persons treated as a single employer under 

14 subsection (a) or (b) of section 52 or subsection 

15 (m) or (o) of section 414 shall be treated as one 

16 person for purposes of this subparagraph. 

17 ‘‘(B) AGGREGATE GROSS ASSETS.—For 

18 purposes of subparagraph (A)(ii), the term ‘ag19 gregate gross assets’ shall have meaning given 

20 such term by section 1202(d)(2), except such 

21 term shall not include intangibles and goodwill. 

22 ‘‘(e) NATIONAL LIMITATION ON AMOUNT OF INVEST23 MENTS DESIGNATED.— 


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1 ‘‘(1) IN GENERAL.—There is a research invest2 ment tax credit limitation for each calendar year. 

3 Such limitation is— 

4 ‘‘(A) $500,000,000 for 2007, 

5 ‘‘(B) $750,000,000 for 2008 and 2009, 

6 and 

7 ‘‘(C) $1,000,000,000 for 2010 and 2011. 

8 ‘‘(2) ALLOCATION OF LIMITATION.—The limita9 tion under paragraph (1) shall be allocated by the 

10 Secretary among qualified research entities selected 

11 by the Secretary, with not more than $25,000,000 

12 allocated to any 1 qualified research entity in any 

13 calendar year. In making allocations under the pre14 ceding sentence, the Secretary shall give priority to 

15 any entity— 

16 ‘‘(A) with a record of having successfully 

17 provided capital or technical assistance to quali18 fying small business innovation companies, or 

19 ‘‘(B) which intends to satisfy the require20 ment under subsection (b)(1)(B) by making 

21 qualified research investments in 1 or more 

22 companies in which persons unrelated to such 

23 entity (within the meaning of section 267(b) or 

24 707(b)(1)) hold the majority equity interest, 

25 and 


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1 if more than 1 qualified research entity meets sub2 paragraph (A) or (B), the Secretary shall give pri3 ority to the entity with the earliest investment. If in4 sufficient allocations are available for all qualified 

5 applicants in any calendar year, the priorities estab6 lished for such applicants without allocations shall 

7 be carried over to the succeeding calendar year. 

8 ‘‘(3) CARRYOVER OF UNUSED LIMITATION.—If 

9 the research investment tax credit limitation for any 

10 calendar year exceeds the aggregate amount allo11 cated under paragraph (2) for such year, such limi12 tation for the succeeding calendar year shall be in13 creased by the amount of such excess. No amount 

14 may be carried under the preceding sentence to any 

15 calendar year after 2018. 

16 ‘‘(f) RECAPTURE OF CREDIT IN CERTAIN CASES.— 

17 ‘‘(1) IN GENERAL.—If, at any time during the 

18 7-year period beginning on the date of the original 

19 issue of a qualified equity investment in a qualified 

20 research entity, there is a recapture event with re21 spect to such investment, then the tax imposed by 

22 this chapter for the taxable year in which such event 

23 occurs shall be increased by the credit recapture 

24 amount. 


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1 ‘‘(2) CREDIT RECAPTURE AMOUNT.—For pur2 poses of paragraph (1), the credit recapture amount 

3 is an amount equal to the sum of— 

4 ‘‘(A) the aggregate decrease in the credits 

5 allowed to the taxpayer under section 38 for all 

6 prior taxable years which would have resulted if 

7 no credit had been determined under this sec8 tion with respect to such investment, plus 

9 ‘‘(B) interest at the underpayment rate es10 tablished under section 6621 on the amount de11 termined under subparagraph (A) for each 

12 prior taxable year for the period beginning on 

13 the due date for filing the return for the prior 

14 taxable year involved. 

15 No deduction shall be allowed under this chapter for 

16 interest described in subparagraph (B). 

17 ‘‘(3) RECAPTURE EVENT.—For purposes of 

18 paragraph (1), there is a recapture event with re19 spect to an equity investment in a qualified research 

20 entity if— 

21 ‘‘(A) such entity ceases to be a qualified 

22 research entity, 

23 ‘‘(B) the proceeds of the investment cease 

24 to be used as required of subsection (b)(1)(B), 

25 or 


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1 ‘‘(C) such investment is redeemed by such 

2 entity. 

3 ‘‘(4) SPECIAL RULES.— 

4 ‘‘(A) TAX BENEFIT RULE.—The tax for 

5 the taxable year shall be increased under para6 graph (1) only with respect to credits allowed 

7 by reason of this section which were used to re8 duce tax liability. In the case of credits not so 

9 used to reduce tax liability, the carryforwards 

10 and carrybacks under section 39 shall be appro11 priately adjusted. 

12 ‘‘(B) NO CREDITS AGAINST TAX.—Any in13 crease in tax under this subsection shall not be 

14 treated as a tax imposed by this chapter for 

15 purposes of determining the amount of any 

16 credit under this chapter or for purposes of sec17 tion 55. 

18 ‘‘(g) REGULATIONS.—The Secretary shall prescribe 

19 such regulations as may be appropriate to carry out this 

20 section, including regulations— 

21 ‘‘(1) which prevent the abuse of the purposes of 

22 this section, 

23 ‘‘(2) which provide rules for determining wheth24 er the requirement of subsection (b)(1)(B) is treated 

25 as met, 


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1 ‘‘(3) which impose appropriate reporting re2 quirements, and 

3 ‘‘(4) which apply the provisions of this section 

4 to newly formed entities.’’. 

5 (b) CREDIT TREATED AS BUSINESS CREDIT.—Sec6 tion 38(b) of the Internal Revenue Code of 1986 (relating 

7 to current year business credit) is amended by striking 

8 ‘‘and’’ at the end of paragraph (29), by striking the period 

9 at the end of paragraph (30) and inserting ‘‘, plus’’, and 

10 by adding at the end the following new paragraph: 

11 ‘‘(31) the credit determined under section 

12 45N(a).’’. 

13 (c) CONFORMING AMENDMENT.—The table of sec14 tions for subpart D of part IV of subchapter A of chapter 

15 1 of the Internal Revenue Code of 1986 is amended by 

16 adding at the end the following new item: 

‘‘Sec. 45N. Research investment tax credit.’’. 

17 (d) EFFECTIVE DATE.—The amendments made by 

18 this section shall apply to investments made after Decem19 ber 31, 2006. 

20 SEC. 4. TAX-EXEMPT FINANCING OF RESEARCH PARK FA21 CILITIES. 

22 (a) IN GENERAL.—Subsection (a) of section 142 is 

23 amended— 

24 (1) by striking ‘‘or’’ at the end of paragraph 

25 (14), 


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1 (2) by striking the period at the end of para2 graph (15) and inserting ‘‘, or’’, and 

3 (3) by inserting at the end the following new 

4 paragraph: 

5 ‘‘(16) research park facility.’’. 

6 (b) DEFINITION.—Section 142 is amended by insert7 ing at the end the following new subsection: 

8 ‘‘(n) RESEARCH PARK FACILITY.—For purposes of 

9 subsection (a)(15), the term ‘research park facility’ means 

10 a facility (including buildings, land, or other structures) 

11 which is used in connection with research and experimen12 tation (as defined in section 168(i)(11)). For purposes of 

13 the preceding sentence, such term includes facilities which 

14 are directly related and ancillary to a research park facil15 ity (determined without regard to this sentence) if— 

16 ‘‘(1) such facilities are located on the same site 

17 as the research park facility, and 

18 ‘‘(2) not more than 25 percent of the net pro19 ceeds of the issue are used to provide such facili20 ties.’’. 

21 (c) EFFECTIVE DATE.—The amendments made by 

22 this section shall apply with respect to bonds issued on 

23 or after the date of the enactment of this Act. 


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1 SEC. 5. CLARIFICATION OF APPLICATION OF PRIVATE AC2 TIVITY BOND RULES WITH RESPECT TO 

3 FUNDING OF FEDERAL RESEARCH AGREE4 MENTS. 

5 Not later than June 30, 2007, the Secretary of the 

6 Treasury shall prescribe guidance identifying the cir7 cumstances, if any, in which the rights of the Federal Gov8 ernment granted under chapter 18 of title 35, United 

9 States Code (commonly known as the Bayh-Dole Act 

10 (Pub. Law No. 96–517)) constitute private business use 

11 under the private activity bond rules in section 141 of the 

12 Internal Revenue Code of 1986. 

Æ 


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