I 

110TH CONGRESS 

2D SESSION H. R. 5681 

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

America’s research competitiveness, and for other purposes. 

IN THE HOUSE OF REPRESENTATIVES 

APRIL 2, 2008 

Mr. MCNERNEY introduced the following bill; which was referred to the 

Committee on Ways and Means 

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 ‘‘Innovation Tax Credit 

5 Act of 2008’’. 

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

8 (a) TRANSITION TO FULLY-IMPLEMENTED SIM9 PLIFIED CREDIT FOR QUALIFIED RESEARCH EX10 PANSES.— 


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1 (1) PHASE-OUT OF TRADITIONAL CREDIT.— 

2 Section 41(a) of the Internal Revenue Code of 1986 

3 is amended— 

4 (A) by striking ‘‘20 percent’’ each place it 

5 appears and inserting ‘‘the applicable percent6 age’’, and 

7 (B) by adding at the end the following new 

8 flush sentence: 

9 ‘‘For purposes of this subsection, the term ‘applicable per10 centage’ means 20 percent with respect to taxable years 

11 beginning in 2008 and 2009.’’. 

12 (2) PHASE-IN OF SIMPLIFIED CREDIT.—Section 

13 41(c)(5)(A) of such Code is amended— 

14 (A) by striking ‘‘12 percent’’ and inserting 

15 ‘‘the applicable percentage’’, and 

16 (B) by adding at the end the following new 

17 sentence: ‘‘For purposes of the preceding sen18 tence, the term ‘applicable percentage’ means 

19 16 percent with respect to taxable years begin20 ning in 2008 and 18 percent with respect to 

21 taxable years beginning in 2009’’. 

22 (3) EFFECTIVE DATE.—The amendments made 

23 by this subsection shall apply to taxable years begin24 ning after December 31, 2007. 


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1 (b) FULLY-IMPLEMENTED SIMPLIFIED CREDIT FOR

2 QUALIFIED RESEARCH EXPENSES.— 

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

4 of the Internal Revenue Code of 1986 (relating to 

5 credit for increasing research activities) is amended 

6 to read as follows: 

7 ‘‘(a) DETERMINATION OF CREDIT.— 

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

9 the research credit determined under this section for 

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

11 much of the qualified research expenses for such 

12 taxable year as exceeds 50 percent of the average 

13 qualified research expenses for the 3 taxable years 

14 preceding the taxable year for which the credit is 

15 being determined. 

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

17 RESEARCH EXPENSES IN ANY OF 3 PRECEDING TAX18 ABLE YEARS.— 

19 ‘‘(A) TAXPAYERS TO WHICH PARAGRAPH

20 APPLIES.—The credit under this section shall 

21 be determined under this paragraph if the tax22 payer has no qualified research expenses in at 

23 least 1 of the 3 taxable years preceding the tax24 able year for which the credit is being deter25 mined. 


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1 ‘‘(B) CREDIT RATE.—The credit deter2 mined under this paragraph shall be equal to 

3 10 percent of the qualified research expenses 

4 for the taxable year.’’. 

5 (2) CONFORMING AMENDMENT.—Section 41 of 

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

7 (c) UNIFORM REIMBURSEMENT RATES FOR ALL

8 CONTRACT RESEARCH EXPENSES OTHER THAN

9 AMOUNTS PAID FOR BASIC RESEARCH.— 

10 (1) IN GENERAL.—Section 41(b)(3) of the In11 ternal Revenue Code of 1986 (relating to contract 

12 research expenses) is amended— 

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

14 ‘‘80 percent’’, and 

15 (B) by striking subparagraphs (C) and 

16 (D). 

17 (2) BASIC RESEARCH PAYMENTS.—Section 

18 41(b) of such Code is amended by redesignating 

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

20 after paragraph (3) the following new paragraph: 

21 ‘‘(4) BASIC RESEARCH PAYMENTS.— 

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

23 research payments by the taxpayer, paragraph 

24 (3)(A) shall be applied by substituting ‘100 per25 cent’ for ‘80 percent’. 


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1 ‘‘(B) BASIC RESEARCH PAYMENTS DE2 FINED.—For purposes of this paragraph— 

3 ‘‘(i) IN GENERAL.—The term ‘basic 

4 research payment’ means, with respect to 

5 any taxable year, any amount paid in cash 

6 during such taxable year by a corporation 

7 to any qualified organization for basic re8 search but only if— 

9 ‘‘(I) such payment is pursuant to 

10 a written agreement between such cor11 poration and such qualified organiza12 tion, and 

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

14 performed by such qualified organiza15 tion. 

16 ‘‘(ii) EXCEPTION TO REQUIREMENT

17 THAT RESEARCH BE PERFORMED BY THE

18 ORGANIZATION.—In the case of a qualified 

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

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

21 clause (i) shall not apply. 

22 ‘‘(C) QUALIFIED ORGANIZATION.—For 

23 purposes of this paragraph, the term ‘qualified 

24 organization’ means any of the following orga25 nizations: 


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1 ‘‘(i) EDUCATIONAL INSTITUTIONS.— 

2 Any educational organization which— 

3 ‘‘(I) is an institution of higher 

4 education (within the meaning of sec5 tion 3304(f)), and 

6 ‘‘(II) is described in section 

7 170(b)(1)(A)(ii). 

8 ‘‘(ii) CERTAIN SCIENTIFIC RESEARCH

9 ORGANIZATIONS.—Any organization not 

10 described in clause (i) which— 

11 ‘‘(I) is described in section 

12 501(c)(3) and is exempt from tax 

13 under section 501(a), 

14 ‘‘(II) is organized and operated 

15 primarily to conduct scientific re16 search, and 

17 ‘‘(III) is not a private founda18 tion. 

19 ‘‘(iii) SCIENTIFIC TAX-EXEMPT ORGA20 NIZATIONS.—Any organization which— 

21 ‘‘(I) is described in section 

22 501(c)(3) (other than a private foun23 dation) or section 501(c)(6), 

24 ‘‘(II) is exempt from tax under 

25 section 501(a), 


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1 ‘‘(III) is organized and operated 

2 primarily to promote scientific re3 search by qualified organizations de4 scribed in clause (i) pursuant to writ5 ten research agreements, and 

6 ‘‘(IV) currently expends substan7 tially all of its funds or substantially 

8 all of the basic research payments re9 ceived by it for grants to, or contracts 

10 for basic research with, an organiza11 tion described in clause (i). 

12 ‘‘(iv) CERTAIN GRANT ORGANIZA13 TIONS.—Any organization not described in 

14 clause (ii) or (iii) which— 

15 ‘‘(I) is described in section 

16 501(c)(3) and is exempt from tax 

17 under section 501(a) (other than a 

18 private foundation), 

19 ‘‘(II) is established and main20 tained by an organization established 

21 before July 10, 1981, which meets the 

22 requirements of subclause (I), 

23 ‘‘(III) is organized and operated 

24 exclusively for the purpose of making 

25 grants to organizations described in 


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1 clause (i) pursuant to written research 

2 agreements for purposes of basic re3 search, and 

4 ‘‘(IV) makes an election, rev5 ocable only with the consent of the 

6 Secretary, to be treated as a private 

7 foundation for purposes of this title 

8 (other than section 4940, relating to 

9 excise tax based on investment in10 come). 

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

12 For purposes of this paragraph— 

13 ‘‘(i) BASIC RESEARCH.—The term 

14 ‘basic research’ means any original inves15 tigation for the advancement of scientific 

16 knowledge not having a specific commercial 

17 objective, except that such term shall not 

18 include— 

19 ‘‘(I) basic research conducted 

20 outside of the United States, and 

21 ‘‘(II) basic research in the social 

22 sciences, arts, or humanities. 

23 ‘‘(ii) TRADE OR BUSINESS QUALIFICA24 TION.—For purposes of applying para25 graph (1) to this paragraph, any basic reVerDate Aug 31 2005 23:28 Apr 04, 2008 Jkt 069200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\H5681.IH H5681

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1 search payments shall be treated as an 

2 amount paid in carrying on a trade or 

3 business of the taxpayer in the taxable 

4 year in which it is paid (without regard to 

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

6 ‘‘(iii) CERTAIN CORPORATIONS NOT

7 ELIGIBLE.—The term ‘corporation’ shall 

8 not include— 

9 ‘‘(I) an S corporation, 

10 ‘‘(II) a personal holding company 

11 (as defined in section 542), or 

12 ‘‘(III) a service organization (as 

13 defined in section 414(m)(3)).’’. 

14 (3) CONFORMING AMENDMENTS.— 

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

16 striking subsection (e). 

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

18 by striking paragraph (6). 

19 (C) Section 45C(b)(1(B)(ii) of such Code 

20 is amended by striking ‘‘65 percent’’ and insert21 ing ‘‘80 percent’’. 

22 (d) PERMANENT EXTENSION OF CREDIT.— 

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

24 Revenue Code of 1986 is amended by striking sub25 section (h). 


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

2 of section 45C(b) of such Code is amended by strik3 ing subparagraph (D). 

4 (3) EFFECTIVE DATE.—The amendments made 

5 by this subsection shall apply to taxable years begin6 ning after December 31, 2006. 

7 (e) CONFORMING AMENDMENTS.— 

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

9 1986 is amended by redesignating subsections (d), 

10 (f), and (g) as subsections (c), (d), and (e), respec11 tively. 

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

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

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

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

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

17 936(h)(5)(C)(i)(IV)(c) of such Code are each 

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

19 ‘‘section 41(d)’’. 

20 (4) Section 54(l)(3)(A) of such Code is amend21 ed by striking ‘‘section 41(g)’’ and inserting ‘‘section 

22 41(e)’’. 

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

24 amended by striking ‘‘subparagraph (A) or subparaVerDate Aug 31 2005 23:28 Apr 04, 2008 Jkt 069200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\H5681.IH H5681

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1 graph (B) of section 41(e)(6)’’ and inserting ‘‘clause 

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

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

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

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

6 41(d)(1)’’. 

7 (7) Section 280C(b)(3) of such Code is amend8 ed by striking ‘‘section 41(f)(5)’’ and inserting ‘‘sec9 tion 41(d)(5)’’. 

10 (8) Section 280C(b)(3) of such Code is amend11 ed by striking ‘‘section 41(f)(1)(B)’’ and inserting 

12 ‘‘section 41(d)(1)(B)’’. 

13 (9) Section 280C(c)(1) of such Code is amend14 ed by striking ‘‘section 41(e)(2)’’ and inserting ‘‘sec15 tion 41(b)(4)(B)’’. 

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

17 amended by striking ‘‘section 41(a)(1)’’ and insert18 ing ‘‘section 41(a)’’. 

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

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

21 41(f)(3)’’ and inserting ‘‘section 41(d)(3)’’. 

22 (f) EFFECTIVE DATE.—Except as otherwise provided 

23 in this section, the amendments made by this section shall 

24 apply to taxable years beginning after December 31, 2009. 


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1 (g) STUDY OF COMPLIANCE WITH SUBSTANTIATION

2 REQUIREMENTS.—The Secretary of the Treasury or his 

3 delegate shall, not later than 1 year after the date of the 

4 enactment of this Act, conduct a study of taxpayer compli5 ance with the substantiation requirements for claiming the 

6 credit allowed under section 41 of the Internal Revenue 

7 Code of 1986, including a study of— 

8 (1) whether taxpayers maintain adequate record 

9 keeping to determine eligibility for, and correct 

10 amount of, the credit, 

11 (2) the impact of failure to comply with such 

12 requirements on the oversight and enforcement re13 sponsibilities of the Internal Revenue Service, and 

14 (3) the burdens imposed on other taxpayers by 

15 failure to comply with such requirements. 

16 The Secretary shall report the results of such study to 

17 the Committee on Ways and Means of the House of Rep18 resentatives and the Committee on Finance of the Senate, 

19 including any recommendations for administrative or leg20 islative actions which could be taken to improve compli21 ance with such requirements. 

Æ 


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