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107TH CONGRESS

1ST SESSION S. 1049

To provide for an election to exchange research-related tax benefits for a

refundable tax credit, for the recapture of refunds in certain circumstances, and for other purposes.

IN THE SENATE OF THE UNITED STATES

JUNE 14, 2001

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

referred to the Committee on Finance

A BILL

To provide for an election to exchange research-related tax

benefits for a refundable tax credit, for the recapture

of refunds in certain circumstances, 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 ‘‘American Break5 through Research Act of 2001’’.

6 SEC. 2. FINDINGS AND PURPOSE.

7 (a) FINDINGS.—Congress finds the following:
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1 (1) American high technology industries con2 duct long-term research and development on break3 through medical, industrial, and agricultural tech4 nologies. It is critical to the maintenance of Amer5 ican competitiveness internationally that these long6 term research and development programs be encour7 aged.

8 (2) Such long-term research and development

9 programs have the greatest potential to revolutionize

10 whole fields of science and industry for the benefit

11 of the standard of living of Americans and to yield

12 solutions for critical social needs, even though these

13 solutions might not result in large sales and profits

14 (such as ‘‘orphan’’ drugs and other treatments alle15 viating great suffering in their recipients).

16 (3) High technology long-term research compa17 nies are among the most research intensive and cap18 ital-intensive companies in the world.

19 (4) High technology companies typically operate

20 in financially challenging circumstances. While con21 ducting their long-term breakthrough research and

22 development, these companies must often seek to en23 dure without products and little or no earnings.

24 Many are small businesses lacking the resources and

25 stability of large corporations.
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1 (5) In addition to the scientific and technical

2 risks attending their long-term breakthrough re3 search and development programs, many high tech4 nology companies must subject their technologies

5 through lengthy and expensive regulatory reviews be6 fore such technologies are permitted access to the

7 marketplace.

8 (6) The long-term research high technology in9 dustry is heavily dependent on outside sources of

10 capital for continued research funding. The indus11 try’s long lead times and high levels of scientific and

12 regulatory risk often impede access to capital.

13 (7) The longstanding national policy of Govern14 ment support and tax incentives for basic research

15 reflects a recognition that the capital marketplace

16 tends to allocate insufficient resources to sustain the

17 Nation’s need for such basic scientific research and

18 development.

19 (8) The current Federal income tax incentives

20 are not working as intended in the case of many

21 high technology companies whose research and de22 velopment is focused on breakthrough technologies.

23 (9) These high technology companies typically

24 incur net operating losses during their lengthy re25 search and development phases and therefore receive
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1 no contemporaneous benefit from these tax incen2 tives.

3 (10) These tax incentives instead tend to favor

4 investment by large, profitable companies engaged in

5 secondary or tertiary research and development ac6 tivities, and thus to discriminate against and to

7 cause underinvestment in longer-term breakthrough

8 technologies, a bias which is harmful to American

9 competitiveness.

10 (11) For many research-intensive high tech11 nology companies, the unusable tax deductions and

12 credits can only be carried forward for potential use

13 in later years, which places such companies at a sub14 stantial disadvantage in the capital marketplace

15 where they must compete for capital with other com16 panies able to use these tax incentives currently.

17 (12) A tax system that does not discriminate

18 would ensure that these tax incentives in favor of re19 search and development have the same cost-reducing

20 impact on companies conducting both short-term

21 and long-term research and thus render this tax in22 centive program neutral with regard to short-term

23 and long-term research objectives and minimize mar24 ketplace distortions caused by differences in tax and

25 income status.
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1 (13) Some States have recognized these short2 comings in their own tax incentive programs and

3 have adopted remedial amendments under which loss

4 high technology companies are permitted to transfer

5 or to exchange their State tax benefits for immediate

6 cash payments.

7 (b) PURPOSE.—The purpose of this Act is to provide

8 a remedy at the Federal level similar to that provided by

9 some States under which qualifying high technology com10 panies will be permitted to obtain current economic benefit

11 from research-related tax incentives.

12 SEC. 3. BREAKTHROUGH RESEARCH TAX INCENTIVE EX13 CHANGES.

14 (a) IN GENERAL.—Subpart C of part IV of sub15 chapter A of chapter 1 of the Internal Revenue Code of

16 1986 (relating to refundable credits) is amended by redes17 ignating section 35 as section 36 and by inserting after

18 section 34 the following new section:

19 ‘‘SEC. 35. BREAKTHROUGH RESEARCH CREDIT.

20 ‘‘(a) GENERAL RULE.—In the case of a qualified re21 search corporation, there shall be allowed as a credit

22 against the tax imposed by this subtitle for the taxable

23 year an amount equal to the sum of the discounted re24 search credits and discounted research NOL’s subject to
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1 an election in such taxable year by the taxpayer under sub2 section (d).

3 ‘‘(b) QUALIFIED RESEARCH CORPORATION.—For the

4 purposes of this section, the term ‘qualified research cor5 poration’ means any domestic corporation subject to tax

6 under subchapter C of this chapter—

7 ‘‘(1) which has not incurred regular tax liability

8 (as defined in section 55(c)) under this chapter for

9 a period of at least 3 consecutive taxable years

10 (other than short taxable years) preceding the tax11 able year in which an election is made under sub12 section (d),

13 ‘‘(2) which has not been controlled by, or been

14 under common control (as determined under section

15 267(b)) with, a corporation which has incurred reg16 ular tax liability (as so defined) under this chapter

17 for any taxable year beginning during the period de18 scribed in paragraph (1),

19 ‘‘(3) at all times during the period described in

20 paragraph (1) has met the requirements of sub21 section (h), and

22 ‘‘(4) which is not the subject of any proceeding

23 under Federal or State bankruptcy or insolvency

24 laws.
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1 ‘‘(c) DEFINITIONS.—For the purposes of this

2 section—

3 ‘‘(1) RESEARCH CREDIT.—The term ‘research

4 credit’ means the sum of those portions of a quali5 fied research corporation’s current year business

6 credit and business credit carryforwards, as deter7 mined under section 38(a) for the taxable year,

8 which are attributable to the credit determined

9 under section 41 (for increases in research activities)

10 and to the orphan drug credit determined under sec11 tion 45C (for clinical testing expenses for certain

12 drugs for rare diseases or conditions).

13 ‘‘(2) RESEARCH NOL.—The term ‘research

14 NOL’ means that portion of a qualified research cor15 poration’s net operating loss (as defined in section

16 172(c)) for the taxable year attributable to qualified

17 research expenses (as defined in section 41(b)), basic

18 research expenses (as defined in section 41(e)(2)),

19 and qualified clinical testing expenses (as defined in

20 section 45C(b)) allowed as deductions for research

21 or experimentation activities under section 174

22 (after the application of section 280C) for such tax23 able year.

24 ‘‘(3) DISCOUNTED RESEARCH CREDIT.—The

25 term ‘discounted research credit’ means 75 percent
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1 of the amount of a qualified research corporation’s

2 research credit for the taxable year subject to an

3 election under subsection (d).

4 ‘‘(4) DISCOUNTED RESEARCH NOL.—The term

5 ‘discounted research NOL’ means 75 percent of the

6 amount of a qualified research corporation’s re7 search NOL for the taxable year subject to an elec8 tion under subsection (d), multiplied by the highest

9 marginal tax rate in effect under section 11 for such

10 taxable year.

11 ‘‘(5) ORDERING RULE.—For purposes of deter12 mining the portion of a taxpayer’s net operating loss

13 that is attributable to research expenditures (within

14 the meaning of paragraph (2)) for any taxable year,

15 research expenditures shall be considered to be offset

16 against the taxpayer’s gross income on a pro rata

17 basis with all other allowable expenses and charges

18 paid or incurred in the taxable year.

19 ‘‘(6) ALLOWABLE EXPENDITURES.—For pur20 poses of determining a qualified research corpora21 tion’s research credit or research NOL, no expendi22 ture for which such corporation is reimbursed by an23 other taxpayer shall be taken into account, except to

24 the extent that the reimbursing taxpayer provides a
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1 certification to the qualified research corporation

2 that—

3 ‘‘(A) the reimbursing taxpayer would be

4 entitled to take such expenditures into account

5 in the same manner, and

6 ‘‘(B) the reimbursing taxpayer shall not

7 take such expenditures into account in claiming

8 any credits under this chapter.

9 ‘‘(d) ELECTION TO RELINQUISH RESEARCH-RE10 LATED TAX CREDITS AND NET OPERATING LOSSES FOR

11 REFUNDABLE CREDIT.—

12 ‘‘(1) GENERAL RULE; BENEFITS ARISING IN

13 CURRENT YEAR.—A qualified research corporation

14 may make an election under this subsection to relin15 quish all of its research credits and research NOL’s

16 for the taxable year for the credit under subsection

17 (a). The corporation shall make the election on its

18 timely filed tax return (including extensions) for the

19 taxable year in which the research credits and re20 search NOL’s arise.

21 ‘‘(2) SPECIAL RULE; UNUSED TAX CREDIT AND

22 NET OPERATING LOSS CARRYFORWARDS.—

23 ‘‘(A) IN GENERAL.—The election under

24 this subsection for any taxable year may include

25 any research credits or research NOL’s not
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1 subject to an election under this subsection in

2 any preceding taxable year, which arose in such

3 preceding taxable year and with respect to

4 which the qualified research corporation is enti5 tled to carry forward to the taxable year of the

6 election.

7 ‘‘(B) LIMITATION.—For any taxable year,

8 the sum of research credit carryforwards and

9 research NOL carryforwards to the taxable year

10 which may be designated as covered by an elec11 tion under this subsection shall not exceed the

12 greater of—

13 ‘‘(i) the average of the annual

14 amounts of the qualified research corpora15 tion’s research credits and research NOL’s

16 arising in the 3-taxable year period ending

17 immediately before the taxable year of the

18 election, or

19 ‘‘(ii) 20 percent of the qualified re20 search corporation’s research credit

21 carryforwards and research NOL

22 carryforwards.

23 ‘‘(3) PROCEDURES AND RECORDKEEPING BY

24 ELECTING CORPORATION.—An election under this

25 subsection may be revoked by the taxpayer only with
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1 the consent of the Secretary. Any qualified research

2 corporation making such an election shall provide

3 such information in connection with such election as

4 may be required by the Secretary and shall maintain

5 records sufficient to permit the Secretary to identify

6 and to audit the specific research credits and re7 search NOL’s that are subject to an election under

8 this subsection.

9 ‘‘(e) EXTINGUISHMENT OF RELINQUISHED TAX

10 BENEFITS.—

11 ‘‘(1) CREDITS.—No credit shall be allowed for

12 any taxable year to a qualified research corporation

13 under section 38(a) with respect to any research

14 credit determined under section 41 or 45C for which

15 an election under subsection (d) is in effect.

16 ‘‘(2) DEDUCTIONS.—No deduction shall be al17 lowed for any taxable year to a qualified research

18 corporation under the alternative minimum tax pro19 visions of section 56(a)(4) or the net operating loss

20 provisions of section 172 with respect to any re21 search NOL for which an election under subsection

22 (d) is in effect.

23 ‘‘(f) LIMITATION ON USE OF NONRELINQUISHED

24 TAX BENEFITS BY ELECTING CORPORATION.—A quali25 fied research corporation which has claimed a credit under
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1 subsection (a) pursuant to an election under subsection

2 (d) shall not be entitled to utilize any carrybacks or

3 carryforwards of research credits or research NOL’s

4 (which are not subject to an election under subsection (d)

5 and are otherwise available to be utilized in the taxable

6 year) to reduce taxable income or to offset any tax liability

7 for any taxable year after the year of such election, until

8 such corporation has paid tax imposed under this chapter

9 for all such taxable years in an aggregate amount equal

10 to the aggregate amount of the credits allowed under sub11 section (a) for any preceding taxable year, less any under12 payment amount determined under subsection (g).

13 ‘‘(g) CREDIT PROCEEDS FROM EXCHANGE OF RE14 SEARCH CREDITS AND RESEARCH NOL’S MUST BE USED

15 EXCLUSIVELY FOR RESEARCH OR EXPERIMENTATION

16 PURPOSES; RECAPTURE.—

17 ‘‘(1) RECAPTURE OF CREDIT IN THE EVENT OF

18 FAILURE TO INCREASE RESEARCH AND EXPERIMEN19 TATION ACTIVITY.—If—

20 ‘‘(A) the sum of—

21 ‘‘(i) the credit allowed under sub22 section (a) to a qualified research corpora23 tion pursuant to an election under sub24 section (d) for any taxable year, plus
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1 ‘‘(ii) the amount of such corporation’s

2 research or experimental expenditures

3 (within the meaning of section 174, as

4 modified by subsection (c)(2), but prior to

5 application of section 280C) paid or in6 curred during such taxable year, exceeds

7 ‘‘(B) the amount of such research or ex8 perimental expenditures paid or incurred by the

9 qualified research corporation during the imme10 diately succeeding taxable year,

11 then the election under subsection (d) shall be void

12 to the extent of the excess, and the excess shall be

13 treated as an underpayment of tax imposed by this

14 chapter for the taxable year of such election without

15 regard to any credit otherwise allowable under this

16 chapter.

17 ‘‘(2) UNDERPAYMENT NOT SUBJECT TO CER18 TAIN PENALTIES.—An underpayment of tax deter19 mined under paragraph (1) shall not be taken into

20 account in determining any penalties or additions to

21 tax under sections 6655 and 6662.

22 ‘‘(3) RECAPTURE PENALTY LIMITED TO THE

23 AMOUNT OF EXCHANGE ELECTION PAYMENTS RE24 CEIVED.—An underpayment of tax determined
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1 under paragraph (1) shall not exceed the amount

2 taken into account under paragraph (1)(A)(i).

3 ‘‘(4) EXCEPTION.—No increase in the aggre4 gate amounts paid by a qualified research corpora5 tion to a person with whom the corporation has a re6 lationship specified in section 267(b) shall be taken

7 into account in determining the amount of any ex8 cess under paragraph (1).

9 ‘‘(h) ADDITIONAL REQUIREMENTS FOR A QUALIFIED

10 RESEARCH CORPORATION.—

11 ‘‘(1) IN GENERAL.—A corporation shall be con12 sidered as meeting the requirements of this sub13 section for any taxable year if during such taxable

14 year—

15 ‘‘(A) at least 80 percent (by value) of the

16 assets of such corporation are used by such cor17 poration in the active conduct of 1 or more

18 qualified trades or businesses,

19 ‘‘(B) such corporation is an eligible cor20 poration, and

21 ‘‘(C) such corporation has aggregate gross

22 assets (as defined in section 1202(d)(2)) of not

23 more than $500,000,000.

24 ‘‘(2) SPECIAL RULE FOR CERTAIN ACTIVI25 TIES.—For purposes of paragraph (1), if, in connec-
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1 tion with any future qualified trade or business, a

2 corporation is engaged in—

3 ‘‘(A) startup activities described in section

4 195(c)(1)(A),

5 ‘‘(B) activities resulting in the payment or

6 incurring of expenditures which may be treated

7 as research and experimental expenditures

8 under section 174, or

9 ‘‘(C) activities with respect to in-house re10 search expenses described in section 41(b)(4),

11 assets used in such activities shall be treated as used

12 in the active conduct of a qualified trade or busi13 ness. Any determination under this paragraph shall

14 be made without regard to whether a corporation

15 has any gross income from such activities at the

16 time of the determination.

17 ‘‘(3) QUALIFIED TRADE OR BUSINESS.—For

18 purposes of this subsection, the term ‘qualified trade

19 or business’ means any trade or business other

20 than—

21 ‘‘(A) any trade or business involving the

22 performance of services in the fields of health,

23 law, engineering, architecture, accounting, actu24 arial science, performing arts, consulting, ath25 letics, financial services, brokerage services, or
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1 any trade or business where the principal asset

2 of such trade or business is the reputation or

3 skill of 1 or more of its employees,

4 ‘‘(B) any banking, insurance, financing,

5 leasing, investing, or similar business,

6 ‘‘(C) any farming business (including the

7 business of raising or harvesting trees),

8 ‘‘(D) any business involving the production

9 or extraction of products of a character with re10 spect to which a deduction is allowable under

11 section 613 or 613A, and

12 ‘‘(E) any business of operating a hotel,

13 motel, restaurant, or similar business.

14 ‘‘(4) ELIGIBLE CORPORATION.—For purposes

15 of this subsection, the term ‘eligible corporation’

16 means any domestic corporation, except that such

17 term shall not include—

18 ‘‘(A) a DISC or former DISC,

19 ‘‘(B) a corporation with respect to which

20 an election under section 936 is in effect or

21 which has a direct or indirect subsidiary with

22 respect to which such an election is in effect,

23 ‘‘(C) a regulated investment company, real

24 estate investment trust, REMIC, or FASIT, or

25 ‘‘(D) a cooperative.
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1 ‘‘(5) STOCK IN OTHER CORPORATIONS.—

2 ‘‘(A) LOOK-THRU IN CASE OF SUBSIDI3 ARIES.—For purposes of this subsection, stock

4 and debt in any subsidiary corporation shall be

5 disregarded and the parent corporation shall be

6 deemed to own its ratable share of the subsidi7 ary’s assets, and to conduct its ratable share of

8 the subsidiary’s activities.

9 ‘‘(B) PORTFOLIO STOCK OR SECURITIES.—

10 A corporation shall be treated as failing to meet

11 the requirements of paragraph (1) for any pe12 riod during which more than 10 percent of the

13 value of its assets (in excess of liabilities) con14 sist of stock or securities in other corporations

15 which are not subsidiaries of such corporation

16 (other than assets described in paragraph (7)).

17 ‘‘(C) SUBSIDIARY.—For purposes of this

18 paragraph, a corporation shall be considered a

19 subsidiary if the parent owns more than 50 per20 cent of the combined voting power of all classes

21 of stock entitled to vote, or more than 50 per22 cent in value of all outstanding stock, of such

23 corporation.

24 ‘‘(6) WORKING CAPITAL.—For purposes of

25 paragraph (2)(A), any assets which—
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1 ‘‘(A) are held as a part of the reasonably

2 required working capital needs of a qualified

3 trade or business of the corporation, or

4 ‘‘(B) are held for investment and are rea5 sonably expected to be used within 5 taxable

6 years to finance research and experimentation

7 in a qualified trade or business or increases in

8 working capital needs of a qualified trade or

9 business,

10 shall be treated as used in the active conduct of a

11 qualified trade or business. For periods after the

12 corporation has been in existence for at least 5 tax13 able years, in no event may more than 50 percent

14 of the assets of the corporation qualify as used in

15 the active conduct of a qualified trade or business by

16 reason of this paragraph.

17 ‘‘(7) MAXIMUM REAL ESTATE HOLDINGS.—A

18 corporation shall not be treated as meeting the re19 quirements of paragraph (2) for any period during

20 which more than 10 percent of the total value of its

21 assets consists of real property which is not used in

22 the active conduct of a qualified trade or business.

23 For purposes of the preceding sentence, the owner24 ship of, dealing in, or renting of real property shall
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1 not be treated as the active conduct of a qualified

2 trade or business.

3 ‘‘(8) COMPUTER SOFTWARE ROYALTIES.—For

4 purposes of paragraph (2), rights to computer soft5 ware which produces active business computer soft6 ware royalties (within the meaning of section

7 543(d)(1)) shall be treated as an asset used in the

8 active conduct of a trade or business.

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

10 such regulations as may be necessary to carry out the pur11 poses of this section, including regulations coordinating

12 the application of this section with the consolidated return

13 regulations and regulations providing for the application

14 of this section to short taxable years.’’.

15 (b) CONFORMING AMENDMENTS.—

16 (1) Section 55(c)(1) of the Internal Revenue

17 Code of 1986 is amended by striking ‘‘section

18 49(b)’’ and inserting ‘‘section 35(g), 49(b),’’.

19 (2) Section 1324(b)(2) of title 31, United

20 States Code, is amended by striking ‘‘or’’ before

21 ‘‘enacted’’ and by inserting before the period at the

22 end ‘‘, or from section 35 of such Code’’.

23 (c) CLERICAL AMENDMENT.—The table of sections

24 for subpart C of part IV of subchapter A of chapter 1

25 of the Internal Revenue Code of 1986 is amended by strik-
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1 ing the item relating to section 35 and inserting the fol2 lowing new items:

‘‘Sec. 35. Breakthrough research credit.

‘‘Sec. 36. Overpayments of tax.’’.

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

4 this section shall apply to taxable years beginning after

5 December 31, 2001.

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