I

103D CONGRESS

2D SESSION H. R. 4212

To stimulate the research and development of biotechnologies.

IN THE HOUSE OF REPRESENTATIVES

APRIL 14, 1994

Mr. BLUTE (for himself and Ms. ESHOO) introduced the following bill; which

was referred to the Committee on Ways and Means

A BILL

To stimulate the research and development of

biotechnologies.

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 ‘‘Biotechnology Stimu5 lus Act of of 1994’’.

6 SEC. 2. BIOTECHNOLOGY RESEARCH CREDIT IMPROVE7 MENT.

8 (a) ALTERNATIVE CREDIT CALCULATION BASED ON

9 AGGREGATE RESEARCH EXPENSES.—
2

•HR 4212 IH

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

2 of the Internal Revenue Code of 1986 (relating to

3 general rule) is amended to read as follows:

4 ‘‘(a) GENERAL RULE.—For purposes of section 38,

5 the research credit determined under this section for the

6 taxable year shall be an amount equal to 1 of the following

7 amounts (as elected by the taxpayer for the taxable year):

8 ‘‘(1) 25 PERCENT OF INCREASED RESEARCH

9 EXPENSES.—The sum of—

10 ‘‘(A) 25 percent of the excess (if any) of—

11 ‘‘(i) the qualified biotechnology (as de12 fined in section 2(f) of the Biotechnology

13 Competitiveness Act of 1994) research ex14 penses, over

15 ‘‘(ii) the base amount, and

16 ‘‘(B) 25 percent of the basic research pay17 ments, determined under subsection (e)(1)(A).

18 ‘‘(2) 5 PERCENT OF AGGREGATE BIO19 TECHNOLOGY RESEARCH EXPENSES.—The sum of—

20 ‘‘(A) 5 percent of the qualified research ex21 penses, determined by substituting ‘100 per22 cent’ for ‘65 percent’ in subsection (b)(3)(A),

23 and

24 ‘‘(B) 5 percent of the basic research pay25 ments, determined under subsection (e)(2).’’.
3

•HR 4212 IH

1 (2) CONFORMING AMENDMENTS.—

2 (A) Paragraph (1) of section 41(e) of such

3 Code (relating to basic research credit) is

4 amended—

5 (i) by striking ‘‘subsection (a)(2)’’ and

6 inserting ‘‘subsection (a)(1)(B)’’, and

7 (ii) by striking ‘‘subsection (a)(1)’’

8 and inserting ‘‘subsection (a)(1)(A)’’.

9 (B) Subparagraph (C) of section 41(e)(7)

10 of such Code (relating to definitions and special

11 rules) is amended—

12 (i) by striking ‘‘INCREMENTAL’’ in the

13 subparagraph caption and inserting

14 ‘‘OTHER’’,

15 (ii) by striking ‘‘subsection (a)(1)’’

16 and inserting ‘‘paragraph (1)(A) or (2)(A)

17 of subsection (a)’’,

18 (iii) by striking ‘‘subsection (a)(2)’’

19 and inserting ‘‘paragraph (1)(B) or (2)(B)

20 of such subsection’’,

21 (iv) by striking ‘‘subsection (a)(1)(A)’’

22 and inserting ‘‘paragraph (1)(A)(i) or

23 (2)(A) of such subsection’’, and
4

•HR 4212 IH

1 (v) by striking ‘‘subsection (a)(1)(B)’’

2 and inserting ‘‘paragraph (1)(A)(ii) of

3 such subsection’’.

4 (C) Subparagraph (A) of section

5 280C(c)(2) of such Code (relating to disallow6 ance of deduction for expenses for which re7 search credit taken) is amended by striking

8 ‘‘section 41(a)(1)’’ and inserting ‘‘paragraph

9 (1)(A) or (2)(A) of section 41(a)’’.

10 (3) EFFECTIVE DATE.—The amendments made

11 by this subsection shall apply to taxable years begin12 ning after the date of the enactment of this Act.

13 (b) PERMANENT EXTENSION OF CREDIT.—

14 (1) IN GENERAL.—Section 41 of such Code is

15 amended by striking subsection (h) (relating to ter16 mination).

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

18 of section 28(b) of such Code (relating to qualified

19 clinical testing expenses) is amended by striking sub20 paragraph (D).

21 SEC. 3. VARIABLE CAPITAL GAINS.

22 (a) IN GENERAL.—Part I of subchapter P of chapter

23 1 of the Internal Revenue Code of 1986 (relating to treat24 ment of capital gains) is amended by adding at the end

25 thereof the following new section:
5

•HR 4212 IH

1 ‘‘SEC. 1202. BIOTECHNOLOGY VARIABLE CAPITAL GAINS

2 DEDUCTION.

3 ‘‘(a) DEDUCTION ALLOWED.—If for any taxable year

4 a taxpayer other than a biotechnology (as defined in sec5 tion 2(f) of the Biotechnology Competitiveness Act of

6 1994) corporation has a net capital gain, there shall be

7 allowed as a deduction from gross income an amount equal

8 to the sum of—

9 ‘‘(1) 100 percent of the qualified 10-year net

10 capital gain,

11 ‘‘(2) 90 percent of the qualified 9-year net cap12 ital gain,

13 ‘‘(3) 80 percent of the qualified 8-year net cap14 ital gain,

15 ‘‘(4) 70 percent of the qualified 7-year net cap16 ital gain,

17 ‘‘(5) 60 percent of the qualified 6-year net cap18 ital gain,

19 ‘‘(6) 50 percent of the qualified 5-year net cap20 ital gain,

21 ‘‘(7) 40 percent of the qualified 4-year net cap22 ital gain,

23 ‘‘(8) 30 percent of the qualified 3-year net cap24 ital gain,

25 ‘‘(9) 20 percent of the qualified 2-year net cap26 ital gain, plus
6

•HR 4212 IH

1 ‘‘(10) 10 percent of the qualified 1-year net

2 capital gain.

3 ‘‘(b) QUALIFIED NET CAPITAL GAIN.—For purposes

4 of subsection (a)—

5 ‘‘(1) QUALIFIED 10-YEAR NET CAPITAL GAIN.—

6 The term ‘qualified 10-year net capital gain’ means

7 the amount of net long-term capital gain which

8 would be computed for the taxable year if only cap9 ital assets held by the taxpayer for at least 10 years

10 at the time of the sale or exchange were taken into

11 account. Such term shall not exceed the amount of

12 the net capital gain for such taxable year.

13 ‘‘(2) QUALIFIED 9-YEAR NET CAPITAL GAIN.—

14 The term ‘qualified 9-year net capital gain’ means

15 the amount of net long-term capital gain which

16 would be computed for the taxable year if only cap17 ital assets held by the taxpayer for at least 9 years

18 but less than 10 years at the time of the sale or ex19 change were taken into account. Such term shall not

20 exceed the amount of the net capital gain for such

21 taxable year reduced by the amount of the qualified

22 10-year net capital gain.

23 ‘‘(3) OTHER DEFINITIONS.—The amount of the

24 qualified 8-year net capital gain, 7-year net capital

25 gain, 6-year net capital gain, 5-year net capital gain,
7

•HR 4212 IH

1 4-year net capital gain, 3-year net capital gain,

2 qualified 2-year net capital gain, and qualified 1-

3 year net capital gain shall be determined under the

4 principles of paragraphs (1) and (2).

5 ‘‘(c) ESTATE AND TRUSTS.—In the case of an estate

6 or trust, the deduction shall be computed by excluding the

7 portion (if any) of the gains for the taxable year from sales

8 or exchanges of capital assets which, under sections 652

9 and 662 (relating to inclusions of amounts in gross income

10 of beneficiaries of trusts), is includible by the income bene11 ficiaries as gain derived from the sale or exchange of cap12 ital assets.’’.

13 (b) TREATMENT OF COLLECTIBLES.—

14 (1) IN GENERAL.—Section 1222 of such Code

15 is amended by inserting after paragraph (11) the

16 following new paragraph:

17 ‘‘(12) SPECIAL RULE FOR COLLECTIBLES.—

18 ‘‘(A) IN GENERAL.—Any gain or loss from

19 the sale or exchange of a collectible shall be

20 treated as a short-term capital gain or loss (as

21 the case may be), without regard to the period

22 such asset was held. The preceding sentence

23 shall apply only to the extent the gain or loss

24 is taken into account in computing taxable in25 come.
8

•HR 4212 IH

1 ‘‘(B) TREATMENT OF CERTAIN SALES OF

2 INTEREST IN PARTNERSHIP, ETC.—For pur3 poses of subparagraph (A), any gain from the

4 sale or exchange of an interest in a partnership,

5 S corporation, or trust which is attributable to

6 unrealized appreciation in the value of collect7 ibles held by such entity shall be treated as gain

8 from the sale or exchange of a collectible. Rules

9 similar to the rules of section 751(f) shall apply

10 for purposes of the preceding sentence.

11 ‘‘(C) COLLECTIBLE.—For purposes of this

12 paragraph, the term ‘collectible’ means any cap13 ital asset which is a collectible (as defined in

14 section 408(m) without regard to paragraph (3)

15 thereof).’’.

16 (2) CHARITABLE DEDUCTION NOT AF17 FECTED.—

18 (A) Paragraph (1) of section 170(e) of

19 such Code is amended by adding at the end

20 thereof the following new sentence: ‘‘For pur21 poses of this paragraph, section 1222 shall be

22 applied without regard to paragraph (12) there23 of (relating to special rule for collectibles).’’.

24 (B) Clause (iv) of section 170(b)(1)(C) of

25 such Code is amended by inserting before the
9

•HR 4212 IH

1 period at the end thereof the following: ‘‘and

2 section 1222 shall be applied without regard to

3 paragraph (12) thereof (relating to special rule

4 for collectibles)’’.

5 (c) CONFORMING AMENDMENTS.—

6 (1) Section 1 of such Code is amended by strik7 ing subsection (h).

8 (2) Subsection (a) of section 62 of such Code

9 is amended by inserting after paragraph (13) the

10 following new paragraph:

11 ‘‘(14) LONG-TERM CAPITAL GAINS.—In the case

12 of a taxpayer other than a corporation, the deduc13 tion allowed by section 1202.’’.

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

15 this section shall apply to taxable years beginning after

16 the date of the enactment of this Act.

17 SEC. 4. CAPITAL GAINS EXCLUSION FOR BIOTECHNOLOGY

18 STARTUP BUSINESS STOCK.

19 (a) TAXPAYERS OTHER THAN CORPORATIONS.—

20 Part I of subchapter P of chapter 1 of the Internal Reve21 nue Code of 1986 (relating to treatment of capital gains)

22 is amended by adding at the end the following new section:
10

•HR 4212 IH

1 ‘‘SEC. 1203. DEDUCTION FOR CAPITAL GAINS ON CERTAIN

2 BIOTECHNOLOGY BUSINESS STOCK HELD

3 FOR MORE THAN 2 YEARS.

4 ‘‘(a) GENERAL RULE.—If for any taxable year a tax5 payer other than a corporation has a qualified business

6 net capital gain, there shall be allowed as a deduction from

7 gross income an amount equal to 50 percent of the quali8 fied business net capital gain.

9 ‘‘(b) QUALIFIED BUSINESS NET CAPITAL GAIN.—

10 For purposes of this section—

11 ‘‘(1) IN GENERAL.—The term ‘qualified busi12 ness net capital gain’ means the lesser of—

13 ‘‘(A) the net capital gain for the taxable

14 year, or

15 ‘‘(B) the net capital gain for the taxable

16 year determined by taking into account only

17 gain or loss from qualified business stock with

18 a holding period of at least 2 years at the time

19 of the disposition.

20 ‘‘(2) QUALIFIED BUSINESS STOCK.—

21 ‘‘(A) IN GENERAL.—The term ‘qualified

22 business stock’ means biotechnology (as defined

23 in section 2(f) of the Biotechnology Competi24 tiveness Act of 1994) business stock which—
11

•HR 4212 IH

1 ‘‘(i) is first acquired (whether directly

2 or through an underwriter) from the issuer

3 by the taxpayer, and

4 ‘‘(ii) is not issued in redemption of (or

5 otherwise exchanged for) stock.

6 ‘‘(B) EXCEPTION FOR PERSONAL SERVICE

7 CORPORATIONS.—The term ‘qualified business

8 stock’ does not include stock issued by a per9 sonal service corporation (within the meaning of

10 section 269A(b)(1)).

11 ‘‘(c) ESTATES AND TRUSTS.—In the case of an estate

12 or trust, the deduction under subsection (a) shall be com13 puted by excluding the portion (if any) of the gains for

14 the taxable year from sales or exchanges of capital assets

15 which, under sections 652 and 662 (relating to inclusions

16 of amounts in gross income of beneficiaries of trusts), is

17 includible by the income beneficiaries as gain derived from

18 the sale or exchange of capital assets.’’.

19 (b) CORPORATIONS.—Section 1201 of such Code (re20 lating to alternative tax for corporations) is amended by

21 redesignating subsection (b) as subsection (c) and by in22 serting after subsection (a) the following new subsection:

23 ‘‘(b) DEDUCTION FOR GAIN ON QUALIFIED BUSI24 NESS STOCK.—
12

•HR 4212 IH

1 ‘‘(1) IN GENERAL.—If for any taxable year a

2 corporation has a qualified business net capital gain,

3 there shall be allowed as a deduction from gross in4 come an amount equal to 50 percent of the qualified

5 business net capital gain.

6 ‘‘(2) QUALIFIED BUSINESS NET CAPITAL

7 GAIN.—For purposes of this subsection, the term

8 ‘qualified business net capital gain’ has the meaning

9 given such term in section 1203(b).’’.

10 (c) CONFORMING AMENDMENTS.—

11 (1) Subsection (a) of section 1201 of such Code

12 is amended by inserting after ‘‘net capital gain’’

13 each place it appears the following: ‘‘(other than

14 qualified business net capital gain (within the mean15 ing of section 1203(b))’’.

16 (2) Subsection (a) of section 62 of such Code

17 is amended by adding at the end the following new

18 paragraph:

19 ‘‘(15) QUALIFIED BUSINESS STOCK CAPITAL

20 GAINS.—The deduction allowed by section 1203.’’.

21 (3)(A) The heading for section 1201 of such

22 Code is amended to read as follows:
13

•HR 4212 IH

1 ‘‘SEC. 1201. ALTERNATIVE TAX FOR BIOTECHNOLOGY COR2 PORATIONS; DEDUCTION FOR GAIN ON

3 QUALIFIED BUSINESS STOCK.’’.

4 (B) The item relating to section 1201 in the

5 table of sections for part I of subchapter P of chap6 ter 1 of such Code is amended to read as follows:

‘‘Sec. 1201. Alternative tax for biotechnology corporations; deduction for gain on qualified business stock.’’.

7 (4) The table of sections for part I of sub8 chapter P of chapter 1 of such Code is amended by

9 adding at the end the following new item:

‘‘Sec. 1203. Deduction for capital gains on certain business stock

held for more than 2 years.’’.

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

11 this section shall apply to stock issued after the date of

12 the enactment of this Act.

13 SEC. 5. INDEXING OF CERTAIN CAPITAL ASSETS.

14 (a) IN GENERAL.—Part II of subchapter O of chap15 ter 1 of the Internal Revenue Code of 1986 (relating to

16 basis rules of general application) is amended by inserting

17 after section 1021 the following new section:

18 ‘‘SEC. 1022. INDEXING OF CERTAIN ASSETS FOR PURPOSES

19 OF DETERMINING GAIN OR LOSS.

20 ‘‘(a) GENERAL RULE.—

21 ‘‘(1) INDEXED BASIS SUBSTITUTED FOR AD22 JUSTED BASIS.—Except as provided in paragraph

23 (2), if an indexed asset which has been held for
14

•HR 4212 IH

1 more than 1 year is sold or otherwise disposed of,

2 for purposes of this title the indexed basis of the

3 asset shall be substituted for its adjusted basis.

4 ‘‘(2) EXCEPTION FOR DEPRECIATION, ETC.—

5 The deduction for depreciation, depletion, and amor6 tization shall be determined without regard to the

7 application of paragraph (1) to the taxpayer or any

8 other person.

9 ‘‘(b) INDEXED ASSET.—

10 ‘‘(1) IN GENERAL.—For purposes of this sec11 tion, the term ‘indexed asset’ means—

12 ‘‘(A) stock in a corporation, and

13 ‘‘(B) tangible property (or any interest

14 therein), which is a capital asset or property

15 used in the trade or business (as defined in sec16 tion 1231(b)).

17 ‘‘(2) CERTAIN PROPERTY EXCLUDED.—For

18 purposes of this section, the term ‘indexed asset’

19 does not include stock in a foreign corporation.

20 ‘‘(c) INDEXED BASIS.—For purposes of this section:

21 ‘‘(1) INDEXED BASIS.—The indexed basis for

22 any asset is—

23 ‘‘(A) the adjusted basis of the asset, multi24 plied by

25 ‘‘(B) the applicable inflation ratio.
15

•HR 4212 IH

1 ‘‘(2) APPLICABLE INFLATION RATIO.—The ap2 plicable inflation ratio for any asset is the percent3 age arrived at by dividing—

4 ‘‘(A) the gross national product deflator

5 the calendar quarter in which the disposition

6 takes place, by

7 ‘‘(B) the gross national product deflator

8 for the calendar quarter in which the asset was

9 acquired by the taxpayer (or, if later, the cal10 endar quarter ending December 31, 1991).

11 The applicable inflation ratio shall not be taken into

12 account unless it is greater than 1. The applicable

13 inflation ratio for any asset shall be rounded to the

14 nearest one-tenth of 1 percent.

15 ‘‘(3) GROSS NATIONAL PRODUCT DEFLATOR.—

16 The gross national product deflator for any calendar

17 quarter is the implicit price deflator for the gross

18 national product for such quarter (as shown in the

19 first revision thereof).

20 ‘‘(d) SPECIAL RULES.—For purposes of this section:

21 ‘‘(1) TREATMENT AS SEPARATE ASSET.—In the

22 case of any asset, the following shall be treated as

23 a separate asset:

24 ‘‘(A) a substantial improvement to prop25 erty,
16

•HR 4212 IH

1 ‘‘(B) in the case of stock of a corporation,

2 a substantial contribution to capital, and

3 ‘‘(C) any other portion of an asset to the

4 extent that separate treatment of such portion

5 is appropriate to carry out the purposes of this

6 section.

7 ‘‘(2) ASSETS WHICH ARE NOT INDEXED ASSETS

8 THROUGHOUT HOLDING PERIOD.—

9 ‘‘(A) IN GENERAL.—The applicable infla10 tion ratio shall be appropriately reduced for cal11 endar months at any time during which the

12 asset was not an indexed asset.

13 ‘‘(B) CERTAIN SHORT SALES.—For pur14 poses of applying subparagraph (A), an asset

15 shall be treated as not an indexed asset for any

16 short sale period during which the taxpayer or

17 the taxpayer’s spouse sells short property sub18 stantially identical to the asset. For purposes of

19 the preceding sentence, the short sale period be20 gins on the day after the substantially identical

21 property is sold and ends on the closing date

22 for the sale.

23 ‘‘(3) ACQUISITION DATE WHERE THERE HAS

24 BEEN PRIOR APPLICATION OF SUBSECTION (a)(1)

25 WITH RESPECT TO THE TAXPAYER.—If there has
17

•HR 4212 IH

1 been a prior application of subsection (a)(1) to an

2 asset while such asset was held by the taxpayer, the

3 date of acquisition of such asset by the taxpayer

4 shall be treated as not earlier than the date of the

5 most recent such prior application.

6 ‘‘(e) CERTAIN CONDUIT ENTITIES.—

7 ‘‘(1) REGULATED INVESTMENT COMPANIES;

8 REAL ESTATE INVESTMENT TRUSTS; COMMON TRUST

9 FUNDS.—

10 ‘‘(A) IN GENERAL.—Stock in a qualified

11 investment entity shall be an indexed asset for

12 any calendar month in the same ratio as the

13 fair market value of the assets held by such en14 tity at the close of such month which are in15 dexed assets bears to the fair market value of

16 all assets of such entity at the close of such

17 month.

18 ‘‘(B) RATIO OF 90 PERCENT OR MORE.—If

19 the ratio for any calendar month determined

20 under subparagraph (A) would (but for this

21 subparagraph) be 90 percent or more, such

22 ratio for such month shall be 100 percent.

23 ‘‘(C) RATIO OF 10 PERCENT OR LESS.—If

24 the ratio for any calendar month determined

25 under subparagraph (A) would (but for this
18

•HR 4212 IH

1 subparagraph) be 10 percent or less, such ratio

2 for such month shall be zero.

3 ‘‘(D) VALUATION OF ASSETS IN CASE OF

4 REAL ESTATE INVESTMENT TRUSTS.—Nothing

5 in this paragraph shall require a real estate in6 vestment trust to value its assets more fre7 quently than once each 36 months (except

8 where such trust ceases to exist). The ratio

9 under subparagraph (A) for any calendar

10 month for which there is no valuation shall be

11 the trustee’s good faith judgment as to such

12 valuation.

13 ‘‘(E) QUALIFIED INVESTMENT ENTITY.—

14 For purposes of this paragraph, the term

15 ‘qualified investment entity’ means—

16 ‘‘(i) a regulated investment company

17 (within the meaning of section 851),

18 ‘‘(ii) a real estate investment trust

19 (within the meaning of section 856), and

20 ‘‘(iii) a common trust fund (within the

21 meaning of section 584).

22 ‘‘(2) PARTNERSHIPS.—In the case of a partner23 ship, the adjustment made under subsection (a) at

24 the partnership level shall be passed through to the

25 partners.
19

•HR 4212 IH

1 ‘‘(f) DISPOSITIONS BETWEEN RELATED PERSONS.—

2 ‘‘(1) IN GENERAL.—This section shall not apply

3 to any sale or other disposition of property between

4 related persons except to the extent that the basis

5 of such property in the hands of the transferee is a

6 substituted basis.

7 ‘‘(2) RELATED PERSONS DEFINED.—For pur8 poses of this section, the term ‘related persons’

9 means—

10 ‘‘(A) persons bearing a relationship set

11 forth in section 267(b), and

12 ‘‘(B) persons treated as single employer

13 under subsection (b) or (c) of section 414.

14 ‘‘(g) TRANSFERS TO INCREASE INDEXING ADJUST15 MENT.—If any person transfers cash, debt, or any other

16 property to another person and the principal purpose of

17 such transfer is to secure or increase an adjustment under

18 subsection (a), the Secretary may disallow part or all of

19 such adjustment or increase.

20 ‘‘(h) DEFINITION OF STOCK.—For purposes of this

21 section, the term ‘stock in a corporation’ includes any in22 terest in a common trust fund (as defined in section

23 584(a)).
20

•HR 4212 IH

1 ‘‘(i) REGULATIONS.—The Secretary shall prescribe

2 such regulations as may be necessary or appropriate to

3 carry out the purposes of this section.’’.

4 (b) CONFORMING AMENDMENTS.—

5 (1) Subsection (f) of section 312 of such Code

6 is amended by adding at the end the following new

7 paragraph:

8 ‘‘(3) EFFECT ON EARNINGS AND PROFITS OF

9 INDEXED BASIS.—

‘‘For substitution of indexed basis for adjusted

basis in the case of the disposition of certain assets,

see section 1022(a)(1).’’.

10 (2) The table of sections for part II of sub11 chapter O of chapter 1 of such Code is amended by

12 inserting after the item relating to section 1021 the

13 following new item:

‘‘Sec. 1022. Indexing of certain assets for purposes of determining

gain or loss.’’.

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

15 this section shall apply to dispositions after the date of

16 the enactment of this Act.

17 SEC. 6. SENSE OF CONGRESS REGARDING EFFECT OF CER18 TAIN NEW ACCOUNTING STANDARDS ON BIO19 TECHNOLOGY BUSINESSES.

20 It is the sense of the Congress that—

21 (1) the accounting standards proposed by the

22 Financial Accounting Standards Board will have
21

•HR 4212 IH

1 grave economic consequences, particularly for bio2 technology businesses in new-growth sectors, which

3 rely heavily on entrepreneurship; and

4 (2) the Financial Accounting Standards Board

5 should not change the accounting rules in effect on

6 the date of the enactment of this Act under Ac7 counting Principles Board Decision 25 by requiring

8 that biotechnology businesses deduct the value of

9 stock options from their profits.

Æ

HR 4212 IH——2