I 

113TH CONGRESS 

2D SESSION H. R. 4855 

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 HOUSE OF REPRESENTATIVES 

JUNE 12, 2014 

Mr. GERLACH (for himself, Mr. NEAL, Mr. KELLY of Pennsylvania, and Mr. 

KIND) 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 

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 23:55 Jun 16, 2014 Jkt 039200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\H4855.IH H4855

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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 qualified research 

8 activity of the taxpayer carried on by a high 

9 technology research small business pass-thru 

10 entity. 

11 ‘‘(B) TREATMENT OF LOSSES AND DEDUC12 TIONS.— 

13 ‘‘(i) IN GENERAL.—Losses or deduc14 tions of a taxpayer relating to qualified re15 search activities carried on by a high tech16 nology research small business pass-thru 

17 entity shall not be treated as losses or de18 ductions, respectively, from a passive activ19 ity except as provided in clause (ii) and 

20 subparagraph (C). 

21 ‘‘(ii) LIMITATION.—Clause (i) shall 

22 apply to losses and deductions of a tax23 payer relating to a high technology small 

24 business pass-thru entity for a taxable year 

25 only to the extent that the aggregate losses 


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1 and deductions of the taxpayer relating to 

2 qualified research activities of such entity 

3 for such taxable year do not exceed the 

4 portion of the taxpayer’s adjusted basis in 

5 the taxpayer’s ownership interest in such 

6 entity that is attributable to money or 

7 other property contributed— 

8 ‘‘(I) in exchange for such owner9 ship interest, and 

10 ‘‘(II) specifically for use in con11 nection with qualified research activi12 ties. 

13 For purposes of the preceding sentence, 

14 the taxpayer’s basis shall not include any 

15 portion of such basis which is attributable 

16 to an increase in a partner’s share of the 

17 liabilities of a partnership that is consid18 ered under section 752(a) as a contribution 

19 of money. 

20 ‘‘(C) TREATMENT OF CARRYOVERS.—Sub21 paragraph (B)(i) shall not apply to the portion 

22 of any loss or deduction that is carried over 

23 under subsection (b) into a taxable year other 

24 than the taxable year in which such loss or de25 duction arose. 


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1 ‘‘(D) QUALIFIED RESEARCH ACTIVITY.— 

2 For purposes of this paragraph, the term 

3 ‘qualified research activity’ means any activity 

4 constituting qualified research (within the 

5 meaning of section 41(d)(1)(B) and taking into 

6 account paragraphs (3) and (4) of section 

7 41(d)) which involves a process of experimen8 tation. 

9 ‘‘(E) HIGH TECHNOLOGY RESEARCH

10 SMALL BUSINESS PASS-THRU ENTITY.—For 

11 purposes of this paragraph, the term ‘high tech12 nology research small business pass-thru entity’ 

13 means any domestic pass-thru entity for any 

14 taxable year if— 

15 ‘‘(i) either— 

16 ‘‘(I) more than 75 percent of the 

17 entity’s expenditures (including sala18 ries, rent and overhead) for such tax19 able year are paid or incurred in con20 nection with qualified research (within 

21 the meaning of section 41(d)(1)(B), 

22 taking into account paragraphs (3) 

23 and (4) of section 41(d)) that involves 

24 a process of experimentation con25 ducted by the entity, or 


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1 ‘‘(II) more than 50 percent of 

2 the entity’s expenditures for such tax3 able year constitute qualified research 

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

5 but determined without regard to the 

6 phrase ‘65 percent of’ in paragraph 

7 (3)(A) thereof), 

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

9 (within the meaning of section 

10 41(b)(3)(D)(iii), applied by substituting 

11 ‘250’ for ‘500’ in subclause (I) thereof), 

12 and 

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

14 year does the entity have aggregate gross 

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

16 ‘‘(F) PROVISIONS RELATED TO AGGRE17 GATE GROSS ASSETS LIMITATION.—For pur18 poses of this paragraph— 

19 ‘‘(i) IN GENERAL.—Except as other20 wise provided in this subparagraph, the 

21 term ‘aggregate gross assets’ has the 

22 meaning given such term in section 

23 1202(d)(2). 

24 ‘‘(ii) EXCEPTION FOR CERTAIN IN25 TANGIBLES.—Any section 197 intangible 


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1 (as defined in section 197(d) and deter2 mined without regard to section 197(e)) 

3 which is used directly in connection with 

4 the research referred to in subparagraph 

5 (E)(i) shall not be taken into account in 

6 determining aggregate gross assets. 

7 ‘‘(iii) EXCEPTION FOR CERTAIN FOL8 LOW-ON INVESTMENTS.—Cash from a sale 

9 of equity interests shall not be taken into 

10 account in determining aggregate gross as11 sets if— 

12 ‘‘(I) the aggregate gross assets of 

13 such entity (determined immediately 

14 after such sale and without regard to 

15 this clause) do not exceed the sum of 

16 $150,000,000, plus 25 percent of the 

17 aggregate gross assets of such entity 

18 (determined immediately before such 

19 sale and without regard to this 

20 clause), and 

21 ‘‘(II) the aggregate gross assets 

22 of such entity (determined imme23 diately before such sale and without 

24 regard to this clause) do not exceed 

25 $150,000,000. 


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1 Sales of equity interests which are part of 

2 the same plan or arrangement, or which 

3 are carried out with the principal purpose 

4 of increasing the amount of cash to which 

5 this clause applies (determined without re6 gard to this sentence), shall be treated as 

7 a single sale for purposes of this clause. 

8 ‘‘(iv) INFLATION ADJUSTMENT.—In 

9 the case of any taxable year beginning 

10 after 2015, the $150,000,000 amount in 

11 subparagraph (E)(iii) and subclauses (I) 

12 and (II) of clause (iii) shall each be in13 creased by an amount equal to— 

14 ‘‘(I) such dollar amount, multi15 plied by 

16 ‘‘(II) the cost of living adjust17 ment determined under section 1(f)(3) 

18 for the calendar year in which the tax19 able year begins determined by sub20 stituting ‘calendar year 2014’ for ‘cal21 endar year 1992’ in subparagraph (B) 

22 thereof. 

23 Any increase determined under the pre24 ceding sentence shall be rounded to the 

25 nearest $100,000. 


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1 ‘‘(G) CAPITAL EXPENDITURES TAKEN INTO

2 ACCOUNT FOR EXPENDITURES TEST.—An ex3 penditure shall not fail to be taken into account 

4 under subparagraph (E)(i) merely because such 

5 expenditure is chargeable to capital account. 

6 ‘‘(H) PASS-THRU ENTITY.—For purposes 

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

8 means any partnership, S corporation, or other 

9 entity identified by the Secretary as a pass-thru 

10 entity for purposes of this paragraph. 

11 ‘‘(I) AGGREGATION RULES.— 

12 ‘‘(i) IN GENERAL.—All persons treat13 ed as a single employer under subsection 

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

15 or (o) of section 414, shall be treated as a 

16 single entity for purposes of subparagraphs 

17 (E) and (F)(iii). 

18 ‘‘(ii) LIMITATION WHERE ENTITY

19 WOULD NOT QUALIFY.—No entity shall be 

20 treated as a high technology research small 

21 business pass-thru entity unless such enti22 ty qualifies as such both with and without 

23 the application of clause (i). 

24 ‘‘(J) ACTIVITIES NOT ENGAGED IN FOR

25 PROFIT AND ECONOMIC SUBSTANCE RULES.— 


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1 Section 183 and the economic substance rules 

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

3 the losses, deductions, and credits of a high 

4 technology research small business pass-thru 

5 entity solely as a result of losses incurred by 

6 such entity.’’. 

7 (b) MATERIAL PARTICIPATION NOT REQUIRED.— 

8 Paragraph (5) of section 469(c) of the Internal Revenue 

9 Code of 1986, as redesignated by subsection (a), is amend10 ed by striking ‘‘and (3)’’ in the heading and text and in11 serting ‘‘, (3), and (4)’’. 

12 (c) CERTAIN RESEARCH-RELATED DEDUCTIONS AND

13 CREDITS OF HIGH TECHNOLOGY RESEARCH SMALL

14 BUSINESS PASS-THRU ENTITIES ALLOWED FOR PUR15 POSES OF DETERMINING ALTERNATIVE MINIMUM TAX.— 

16 (1) DEDUCTION FOR RESEARCH AND EXPERI17 MENTAL EXPENDITURES.—Paragraph (2) of section 

18 56(b) of the Internal Revenue Code of 1986 is 

19 amended by adding at the end the following new 

20 subparagraph: 

21 ‘‘(E) EXCEPTION FOR HIGH TECHNOLOGY

22 RESEARCH SMALL BUSINESS PASS-THRU ENTI23 TIES.—In the case of a high technology re24 search small business pass-thru entity (as de25 fined in section 469(c)(4)), this paragraph shall 


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1 not apply to any amount allowable as a deduc2 tion under section 174(a).’’. 

3 (2) ALLOWANCE OF CERTAIN RESEARCH-RE4 LATED CREDITS.—Subparagraph (B) of section 

5 38(c)(4) of such Code is amended by redesignating 

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

7 respectively, and by inserting after clause (i) the fol8 lowing new clause: 

9 ‘‘(ii) the credits of an individual tax10 payer determined under sections 41 and 

11 48D to the extent attributable to a high 

12 technology research small business pass13 thru entity (as defined in section 

14 469(c)(4)),’’. 

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

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

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

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

19 any high technology research small business pass-thru en20 tity (as defined in section 469(c)(4)).’’. 

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

22 this section shall apply to losses and credits arising in tax23 able years beginning on or after the date of the enactment 

24 of this Act. 

Æ 


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