II 

112TH CONGRESS 

2D SESSION S. 3595 

To amend the Internal Revenue Code of 1986 to provide an exception from 

the passive loss rules for investments in high technology research small 

business pass-thru entities. 

IN THE SENATE OF THE UNITED STATES 

SEPTEMBER 20, 2012 

Mr. MENENDEZ (for himself and Ms. SNOWE) 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 

an exception from the passive loss rules for investments 

in high technology research small business pass-thru entities. 

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

3 SECTION 1. EXCEPTION FROM PASSIVE LOSS RULES FOR 

4 INVESTMENTS IN HIGH TECHNOLOGY RE5 SEARCH SMALL BUSINESS PASS-THRU ENTI6 TIES. 

7 (a) IN GENERAL.—Subsection (c) of section 469 of 

8 the Internal Revenue Code of 1986 is amended by redesigVerDate Mar 15 2010 06:56 Sep 26, 2012 Jkt 019200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\S3595.IS S3595

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1 nating paragraphs (4) through (7) as paragraphs (5) 

2 through (8), respectively, and by inserting after paragraph 

3 (3) the following new paragraph: 

4 ‘‘(4) HIGH TECHNOLOGY RESEARCH ACTIVI5 TIES.— 

6 ‘‘(A) IN GENERAL.—The term ‘passive ac7 tivity’ shall not include any activity of the tax8 payer carried on by a high technology research 

9 small business pass-thru entity. 

10 ‘‘(B) HIGH TECHNOLOGY RESEARCH

11 SMALL BUSINESS PASS-THRU ENTITY.—For 

12 purposes of this paragraph, the term ‘high tech13 nology research small business pass-thru entity’ 

14 means any domestic pass-thru entity for any 

15 taxable year if— 

16 ‘‘(i) either— 

17 ‘‘(I) more than 75 percent of the 

18 entity’s expenditures (including sala19 ries, rent and overhead) for such tax20 able year are paid or incurred in con21 nection with qualified research (within 

22 the meaning of section 41(d)(1)(B) 

23 taking into account section 41(d)(4) 

24 and constituting elements of a process 

25 of experimentation for a purpose deVerDate Mar 15 2010 06:56 Sep 26, 2012 Jkt 019200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\S3595.IS S3595

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1 scribed in paragraph (3) of section 

2 41(d)), or 

3 ‘‘(II) more than 50 percent of 

4 the entity’s expenditures for such tax5 able year constitute qualified research 

6 expenses (as defined in section 41(b), 

7 but determined without regard to the 

8 phrase ‘65 percent of’ in paragraph 

9 (3)(A) thereof), 

10 ‘‘(ii) such entity is a small business 

11 (within the meaning of section 

12 41(b)(3)(D)(iii) applied by substituting 

13 ‘250’ for ‘500’ in subclause (I) thereof), 

14 and 

15 ‘‘(iii) at no time during the taxable 

16 year does the entity have aggregate gross 

17 assets in excess of $150,000,000. 

18 ‘‘(C) PROVISIONS RELATED TO AGGREGATE

19 GROSS ASSETS LIMITATION.—For purposes of 

20 this paragraph— 

21 ‘‘(i) IN GENERAL.—Except as other22 wise provided in this subparagraph, the 

23 term ‘aggregate gross assets’ has the 

24 meaning given such term in section 

25 1202(d)(2). 


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1 ‘‘(ii) EXCEPTION FOR CERTAIN IN2 TANGIBLES.—Any section 197 intangible 

3 (as defined in section 197(d) and deter4 mined without regard to section 197(e)) 

5 which is used directly in connection with 

6 the research referred to in subparagraph 

7 (B)(i) shall not be taken into account in 

8 determining aggregate gross assets. 

9 ‘‘(iii) EXCEPTION FOR CERTAIN FOL10 LOW-ON INVESTMENTS.—Cash from a sale 

11 of equity interests shall not be taken into 

12 account in determining aggregate gross as13 sets if— 

14 ‘‘(I) the aggregate gross assets of 

15 such entity (determined immediately 

16 after such sale and without regard to 

17 this clause) do not exceed the sum of 

18 $150,000,000, plus 25 percent of the 

19 aggregate gross assets of such entity 

20 (determined immediately before such 

21 sale and without regard to this 

22 clause), and 

23 ‘‘(II) the aggregate gross assets 

24 of such entity (determined imme25 diately before such sale and without 


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1 regard to this clause) do not exceed 

2 $150,000,000. 

3 Sales of equity interests which are part of 

4 the same plan or arrangement, or which 

5 are carried out with the principal purpose 

6 of increasing the amount of cash to which 

7 this clause applies (determined without re8 gard to this sentence), shall be treated as 

9 a single sale for purposes of this clause. 

10 ‘‘(iv) INFLATION ADJUSTMENT.—In 

11 the case of any taxable year beginning 

12 after 2013, the $150,000,000 amount in 

13 subparagraph (B)(iii) and subclauses (I) 

14 and (II) of clause (iii) shall each be in15 creased by an amount equal to— 

16 ‘‘(I) such dollar amount, multi17 plied by 

18 ‘‘(II) the cost of living adjust19 ment determined under section 1(f)(3) 

20 for the calendar year in which the tax21 able year begins determined by sub22 stituting ‘calendar year 2012’ for ‘cal23 endar year 1992’ in subparagraph (B) 

24 thereof. 


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1 Any increase determined under the pre2 ceding sentence shall be rounded to the 

3 nearest $100,000. 

4 ‘‘(D) CAPITAL EXPENDITURES TAKEN

5 INTO ACCOUNT FOR EXPENDITURES TEST.—An 

6 expenditure shall not fail to be taken into ac7 count under subparagraph (B)(i) merely be8 cause such expenditure is chargeable to capital 

9 account. 

10 ‘‘(E) PASS-THRU ENTITY.—For purposes 

11 of this paragraph, the term ‘pass-thru entity’ 

12 means any partnership, S corporation, or other 

13 entity identified by the Secretary as a pass-thru 

14 entity for purposes of this paragraph. 

15 ‘‘(F) AGGREGATION RULES.—All persons 

16 treated as a single employer under subsection 

17 (a) or (b) of section 52, or subsection (m) or 

18 (o) of section 414, shall be treated as a single 

19 entity for purposes of subparagraphs (B) and 

20 (C)(iii). 

21 ‘‘(G) ACTIVITIES NOT ENGAGED IN FOR

22 PROFIT AND ECONOMIC SUBSTANCE RULES.— 

23 Section 183 and the economic substance rules 

24 of section 7701(o) shall not apply to disallow 

25 the losses, deductions, and credits of a high 


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1 technology research small business pass-thru 

2 entity solely as a result of losses incurred by 

3 such entity.’’. 

4 (b) MATERIAL PARTICIPATION NOT REQUIRED.— 

5 Paragraph (5) of section 469(c) of such Code, as redesig6 nated by subsection (a), is amended by striking ‘‘and (3)’’ 

7 in the heading and text and inserting ‘‘, (3), and (4)’’. 

8 (c) CERTAIN RESEARCH-RELATED DEDUCTIONS AND

9 CREDITS OF HIGH TECHNOLOGY RESEARCH SMALL

10 BUSINESS PASS-THRU ENTITIES ALLOWED FOR PUR11 POSES OF DETERMINING ALTERNATIVE MINIMUM TAX.— 

12 (1) DEDUCTION FOR RESEARCH AND EXPERI13 MENTAL EXPENDITURES.—Paragraph (2) of section 

14 56(b) of such Code is amended by adding at the end 

15 the following new subparagraph: 

16 ‘‘(E) EXCEPTION FOR HIGH TECHNOLOGY

17 RESEARCH SMALL BUSINESS PASS-THRU ENTI18 TIES.—In the case of a high technology re19 search small business pass-thru entity (as de20 fined in section 469(c)(4)), this paragraph shall 

21 not apply to any amount allowable as a deduc22 tion under section 174(a).’’. 

23 (2) ALLOWANCE OF CERTAIN RESEARCH-RE24 LATED CREDITS.—Subparagraph (B) of section 

25 38(c)(4) of such Code is amended by redesignating 


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1 clauses (ii) through (ix) as clauses (iii) through (x), 

2 respectively, and by inserting after clause (i) the fol3 lowing new clause: 

4 ‘‘(ii) the credits determined under sec5 tions 41 and 48D to the extent attrib6 utable to a high technology research small 

7 business pass-thru entity (as defined in 

8 section 469(c)(4)),’’. 

9 (d) EXCEPTION TO LIMITATION ON PASS-THRU OF

10 RESEARCH CREDIT.—Subsection (g) of section 41 of such 

11 Code is amended by adding at the end the following: 

12 ‘‘Paragraphs (2) and (4) shall not apply with respect to 

13 any high technology research small business pass-thru en14 tity (as defined in section 469(c)(4)).’’ 

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

16 this section shall apply to taxable years beginning after 

17 the date of the enactment of this Act. 

Æ 


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