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[Congressional Bills 112th Congress]
[From the U.S. Government Publishing Office]
[S. 3595 Introduced in Senate (IS)]

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.

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

SECTION 1. EXCEPTION FROM PASSIVE LOSS RULES FOR INVESTMENTS IN HIGH 
              TECHNOLOGY RESEARCH SMALL BUSINESS PASS-THRU ENTITIES.

    (a) In General.--Subsection (c) of section 469 of the Internal 
Revenue Code of 1986 is amended by redesignating paragraphs (4) through 
(7) as paragraphs (5) through (8), respectively, and by inserting after 
paragraph (3) the following new paragraph:
            ``(4) High technology research activities.--
                    ``(A) In general.--The term `passive activity' 
                shall not include any activity of the taxpayer carried 
                on by a high technology research small business pass-
                thru entity.
                    ``(B) High technology research small business pass-
                thru entity.--For purposes of this paragraph, the term 
                `high technology research small business pass-thru 
                entity' means any domestic pass-thru entity for any 
                taxable year if--
                            ``(i) either--
                                    ``(I) more than 75 percent of the 
                                entity's expenditures (including 
                                salaries, rent and overhead) for such 
                                taxable year are paid or incurred in 
                                connection with qualified research 
                                (within the meaning of section 
                                41(d)(1)(B) taking into account section 
                                41(d)(4) and constituting elements of a 
                                process of experimentation for a 
                                purpose described in paragraph (3) of 
                                section 41(d)), or
                                    ``(II) more than 50 percent of the 
                                entity's expenditures for such taxable 
                                year constitute qualified research 
                                expenses (as defined in section 41(b), 
                                but determined without regard to the 
                                phrase `65 percent of' in paragraph 
                                (3)(A) thereof),
                            ``(ii) such entity is a small business 
                        (within the meaning of section 41(b)(3)(D)(iii) 
                        applied by substituting `250' for `500' in 
                        subclause (I) thereof), and
                            ``(iii) at no time during the taxable year 
                        does the entity have aggregate gross assets in 
                        excess of $150,000,000.
                    ``(C) Provisions related to aggregate gross assets 
                limitation.--For purposes of this paragraph--
                            ``(i) In general.--Except as otherwise 
                        provided in this subparagraph, the term 
                        `aggregate gross assets' has the meaning given 
                        such term in section 1202(d)(2).
                            ``(ii) Exception for certain intangibles.--
                        Any section 197 intangible (as defined in 
                        section 197(d) and determined without regard to 
                        section 197(e)) which is used directly in 
                        connection with the research referred to in 
                        subparagraph (B)(i) shall not be taken into 
                        account in determining aggregate gross assets.
                            ``(iii) Exception for certain follow-on 
                        investments.--Cash from a sale of equity 
                        interests shall not be taken into account in 
                        determining aggregate gross assets if--
                                    ``(I) the aggregate gross assets of 
                                such entity (determined immediately 
                                after such sale and without regard to 
                                this clause) do not exceed the sum of 
                                $150,000,000, plus 25 percent of the 
                                aggregate gross assets of such entity 
                                (determined immediately before such 
                                sale and without regard to this 
                                clause), and
                                    ``(II) the aggregate gross assets 
                                of such entity (determined immediately 
                                before such sale and without regard to 
                                this clause) do not exceed 
                                $150,000,000.
                        Sales of equity interests which are part of the 
                        same plan or arrangement, or which are carried 
                        out with the principal purpose of increasing 
                        the amount of cash to which this clause applies 
                        (determined without regard to this sentence), 
                        shall be treated as a single sale for purposes 
                        of this clause.
                            ``(iv) Inflation adjustment.--In the case 
                        of any taxable year beginning after 2013, the 
                        $150,000,000 amount in subparagraph (B)(iii) 
                        and subclauses (I) and (II) of clause (iii) 
                        shall each be increased by an amount equal to--
                                    ``(I) such dollar amount, 
                                multiplied by
                                    ``(II) the cost of living 
                                adjustment determined under section 
                                1(f)(3) for the calendar year in which 
                                the taxable year begins determined by 
                                substituting `calendar year 2012' for 
                                `calendar year 1992' in subparagraph 
                                (B) thereof.
                        Any increase determined under the preceding 
                        sentence shall be rounded to the nearest 
                        $100,000.
                    ``(D) Capital expenditures taken into account for 
                expenditures test.--An expenditure shall not fail to be 
                taken into account under subparagraph (B)(i) merely 
                because such expenditure is chargeable to capital 
                account.
                    ``(E) Pass-thru entity.--For purposes of this 
                paragraph, the term `pass-thru entity' means any 
                partnership, S corporation, or other entity identified 
                by the Secretary as a pass-thru entity for purposes of 
                this paragraph.
                    ``(F) Aggregation rules.--All persons treated as a 
                single employer under subsection (a) or (b) of section 
                52, or subsection (m) or (o) of section 414, shall be 
                treated as a single entity for purposes of 
                subparagraphs (B) and (C)(iii).
                    ``(G) Activities not engaged in for profit and 
                economic substance rules.--Section 183 and the economic 
                substance rules of section 7701(o) shall not apply to 
                disallow the losses, deductions, and credits of a high 
                technology research small business pass-thru entity 
                solely as a result of losses incurred by such 
                entity.''.
    (b) Material Participation Not Required.--Paragraph (5) of section 
469(c) of such Code, as redesignated by subsection (a), is amended by 
striking ``and (3)'' in the heading and text and inserting ``, (3), and 
(4)''.
    (c) Certain Research-Related Deductions and Credits of High 
Technology Research Small Business Pass-Thru Entities Allowed for 
Purposes of Determining Alternative Minimum Tax.--
            (1) Deduction for research and experimental expenditures.--
        Paragraph (2) of section 56(b) of such Code is amended by 
        adding at the end the following new subparagraph:
                    ``(E) Exception for high technology research small 
                business pass-thru entities.--In the case of a high 
                technology research small business pass-thru entity (as 
                defined in section 469(c)(4)), this paragraph shall not 
                apply to any amount allowable as a deduction under 
                section 174(a).''.
            (2) Allowance of certain research-related credits.--
        Subparagraph (B) of section 38(c)(4) of such Code is amended by 
        redesignating clauses (ii) through (ix) as clauses (iii) 
        through (x), respectively, and by inserting after clause (i) 
        the following new clause:
                            ``(ii) the credits determined under 
                        sections 41 and 48D to the extent attributable 
                        to a high technology research small business 
                        pass-thru entity (as defined in section 
                        469(c)(4)),''.
    (d) Exception to Limitation on Pass-Thru of Research Credit.--
Subsection (g) of section 41 of such Code is amended by adding at the 
end the following: ``Paragraphs (2) and (4) shall not apply with 
respect to any high technology research small business pass-thru entity 
(as defined in section 469(c)(4)).''
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.
                                 <all>
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