I

107TH CONGRESS

1ST SESSION H. R. 2153

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 HOUSE OF REPRESENTATIVES

JUNE 13, 2001

Mr. CRANE (for himself, Mr. MATSUI, Mrs. THURMAN, Mr. MCGOVERN, Mr.

HOLT, and Mr. CUNNINGHAM) introduced the following bill; which was

referred to the Committee on Ways and Means

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 projects be encour7 aged.

8 (2) Such long-term research projects have the

9 greatest potential to revolutionize whole fields of

10 science and industry for the benefit of the standard

11 of living of Americans and to yield solutions for crit12 ical social needs, even though these solutions might

13 not result in large sales and profits (such as ‘‘or14 phan’’ drugs and other treatments alleviating great

15 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 these

22 companies must often seek to endure without prod23 ucts and little or no earnings. Many are small busi24 nesses lacking the resources and stability of large

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

2 risks attending their long-term breakthrough re3 search programs, many high technology companies

4 must subject their technologies through lengthy and

5 expensive regulatory reviews before they are per6 mitted access to the marketplace.

7 (6) The long-term research high technology in8 dustry is heavily dependent on outside sources of

9 capital for continued research funding. The indus10 try’s long lead times and high levels of scientific and

11 regulatory risk often impede access to capital.

12 (7) The longstanding national policy of Govern13 ment support and tax incentives for basic research

14 reflects a recognition that the capital marketplace

15 tends to allocate insufficient resources to sustain the

16 Nation’s need for such basic scientific research and

17 development.

18 (8) The current Federal income tax incentives

19 are not working as intended in the case of many

20 high technology companies whose research is focused

21 on breakthrough technologies.

22 (9) These high technology companies typically

23 incur net operating losses during their lengthy re24 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 them at a substantial

14 disadvantage in the capital marketplace where they

15 must compete for capital with other companies able

16 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 experimentation have the same cost-re20 ducing impact on companies conducting both short21 term and long-term research and thus render this

22 tax incentive program neutral with regard to short23 term and long-term research objectives and minimize

24 marketplace distortions caused by differences in tax

25 and 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.—The Internal Revenue Code of

15 1986 is amended by redesignating section 35 as section

16 36 and by inserting after section 34 the following new sec17 tion:

18 ‘‘SEC. 35. BREAKTHROUGH RESEARCH CREDIT.

19 ‘‘(a) GENERAL RULE.—There shall be allowed as a

20 credit against the tax imposed by this subtitle an amount

21 equal to the sum of a qualified research corporation’s dis22 counted research credits and discounted research NOL’s.

23 ‘‘(b) QUALIFIED RESEARCH CORPORATION.—

24 ‘‘(1) IN GENERAL.—For the purposes of this

25 section, the term ‘qualified research corporation’
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1 means any domestic corporation subject to tax under

2 subchapter C of this chapter—

3 ‘‘(A) which has not incurred regular tax li4 ability (as defined in section 55(c)) under this

5 chapter for a period of at least 3 consecutive

6 taxable years (other than short taxable years)

7 immediately prior to the commencement of the

8 taxable year as to which any election is made

9 under this section,

10 ‘‘(B) which has not been controlled by, or

11 been under common control (as determined

12 under section 267(b)) with, a corporation which

13 has incurred regular tax liability (as so defined)

14 under this chapter for any taxable year com15 mencing during the period described in sub16 paragraph (A),

17 ‘‘(C) at all times during the period de18 scribed in subparagraph (A) has met the re19 quirements of subsection (h), and

20 ‘‘(D) which is not the subject of any pro21 ceeding under Federal or State bankruptcy or

22 insolvency laws.

23 ‘‘(2) SPECIAL RULE.—A qualified research cor24 poration, in claiming the credit provided for in this

25 section, shall not take into account any expenditures
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1 for which it is reimbursed by another taxpayer, ex2 cept to the extent that the reimbursing taxpayer

3 provides a certification to the qualified research cor4 poration that—

5 ‘‘(A) the reimbursing taxpayer would be

6 entitled to take such expenditures into account

7 in the same manner, and

8 ‘‘(B) the reimbursing taxpayer shall not

9 take such expenditures into account in claiming

10 any credits under this section.

11 ‘‘(c) DEFINITIONS.—For the purposes of this

12 section—

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

14 credit’ means the sum of those portions of a quali15 fied research corporation’s current year business

16 credit and business credit carryforwards, as deter17 mined under section 38(a), which are attributable to

18 the credit determined under section 41 (for increases

19 in research activities) and to the orphan drug credit

20 determined under section 45C (for clinical testing

21 expenses for certain drugs for rare diseases or condi22 tions).

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

24 NOL’ means that portion of a qualified research cor25 poration’s net operating loss (as defined in section
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1 172(c)) attributable to research expenditures allowed

2 as deductions for research or experimentation activi3 ties under section 174 (after the application of sec4 tion 280C).

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

6 term ‘discounted research credit’ shall mean the re7 search credit amounts subject to an election under

8 this section multiplied by 75 percent.

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

10 ‘discounted research NOL’ shall mean the research

11 NOL subject to an election under this section multi12 plied by 75 percent of the highest marginal tax rate

13 in effect under section 11.

14 ‘‘(5) ORDERING RULE.—For purposes of deter15 mining the portion of a taxpayer’s net operating loss

16 that is attributable to research expenditures (within

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

18 research expenditures shall be considered to be offset

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

20 basis with all other allowable expenses and charges

21 paid or incurred in the taxable year.

22 ‘‘(d) ELECTION TO RELINQUISH RESEARCH-RE23 LATED NET OPERATING LOSSES AND TAX CREDITS FOR

24 CASH REFUNDS.—
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1 ‘‘(1) GENERAL RULE; BENEFITS ARISING IN

2 CURRENT YEAR.—A qualified research corporation

3 may make an election under this section to relin4 quish all of its current year research NOL’s and re5 search credits in exchange for cash refunds. The cor6 poration shall make the election on its timely filed

7 tax return (including extensions) for the taxable year

8 in which the research NOL’s and research credits

9 arise.

10 ‘‘(2) SPECIAL RULE; NET OPERATING LOSS AND

11 UNUSED TAX CREDIT CARRYFORWARDS.—

12 ‘‘(A) IN GENERAL.—If a qualified research

13 corporation has unabsorbed research NOL’s or

14 research credits not subject to an election under

15 this section, which arose in a previous taxable

16 year and which the qualified research corpora17 tion would be entitled to carry forward to a tax18 able year for which it makes an election under

19 paragraph (1), then the taxpayer shall des20 ignate such research NOL carryforwards and

21 such research credit carryforwards to be cov22 ered by its election under this section.

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

24 the amount of research NOL carryforwards and

25 research credit carryforwards to the taxable
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1 year which may be designated as covered by an

2 election under this section shall be the greater

3 of—

4 ‘‘(i) the average of the annual

5 amounts of the qualified research corpora6 tion’s research NOL’s and research credits

7 arising in the 3 taxable years ending prior

8 to the taxable year of the election, or

9 ‘‘(ii) 20 percent of the qualified re10 search corporation’s research NOL

11 carryforwards and research credit

12 carryforwards.

13 ‘‘(3) PROCEDURES AND RECORDKEEPING BY

14 ELECTING CORPORATION.—An election under this

15 section may be revoked by the taxpayer only with

16 the consent of the Secretary. Qualified research cor17 porations making such an election shall provide such

18 information in connection with such election as may

19 be required by the Secretary and shall maintain

20 records sufficient to permit the Secretary to identify

21 and to audit the specific research credits and re22 search NOL’s that are subject to an election under

23 this section.

24 ‘‘(e) EXTINGUISHMENT OF RELINQUISHED TAX

25 BENEFITS.—
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1 ‘‘(1) DEDUCTIONS.—No deduction shall be al2 lowed to a qualified research corporation under the

3 alternative minimum tax provisions of section

4 56(a)(4) or the net operating loss provisions of sec5 tion 172 with respect to that portion of a net oper6 ating loss for which an election under this section is

7 in effect.

8 ‘‘(2) CREDITS.—No credit shall be allowed to a

9 qualified research corporation under section 38(a)

10 with respect to any credit amounts determined under

11 section 41 or 45C for which an election under this

12 section is in effect.

13 ‘‘(f) LIMITATION ON USE OF NONRELINQUISHED

14 TAX BENEFITS BY ELECTING CORPORATION.—A quali15 fied research corporation which has received refunds pur16 suant to an election under this section shall not be entitled

17 to utilize any carrybacks or carryforwards of net operating

18 losses or tax credits (which are not subject to an election

19 under this section and are otherwise available to be uti20 lized in the taxable year) to reduce taxable income or to

21 offset any tax liability for taxable years after the year of

22 such election, until such corporation has paid tax imposed

23 under this chapter for such taxable years in an aggregate

24 amount equal to the aggregate amount of the refunds pre-
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1 viously received, less any underpayment amount deter2 mined under subsection (g).

3 ‘‘(g) CREDIT PROCEEDS FROM EXCHANGE OF RE4 SEARCH CREDITS AND RESEARCH NOL’S MUST BE USED

5 EXCLUSIVELY FOR RESEARCH OR EXPERIMENTATION

6 PURPOSES; RECAPTURE.—

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

8 FAILURE TO INCREASE RESEARCH AND EXPERIMEN9 TATION ACTIVITY.—If—

10 ‘‘(A) the sum of—

11 ‘‘(i) the credit received by a qualified

12 research corporation from an election

13 under this section made on its tax return

14 for a taxable year (the election year), plus

15 ‘‘(ii) the amount of its research or ex16 perimental expenditures (within the mean17 ing of section 174, but prior to application

18 of section 280C) paid or incurred during

19 the election year, exceeds

20 ‘‘(B) the amount of such research or ex21 perimental expenditures paid or incurred by the

22 qualified research corporation during the tax23 able year immediately following the election

24 year,
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1 then the election shall be void to the extent of the

2 excess, and the excess shall be treated as an under3 payment of tax imposed by this chapter for the elec4 tion year without regard to any credit otherwise al5 lowable under this chapter.

6 ‘‘(2) UNDERPAYMENT NOT SUBJECT TO CER7 TAIN PENALTIES.—An underpayment of tax deter8 mined under paragraph (1) shall not be taken into

9 account in determining any penalties or additions to

10 tax under sections 6655 and 6662.

11 ‘‘(3) RECAPTURE PENALTY LIMITED TO THE

12 AMOUNT OF EXCHANGE ELECTION PAYMENTS RE13 CEIVED.—An underpayment of tax determined

14 under paragraph (1) shall not exceed the amount

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

16 ‘‘(4) EXCEPTION.—No increase in the aggre17 gate amounts paid by a qualified research corpora18 tion to a person with whom the corporation has a re19 lationship specified in section 267(b) shall be taken

20 into account in determining the amount of any ex21 cess under paragraph (1).

22 ‘‘(h) ADDITIONAL REQUIREMENTS FOR A QUALIFIED

23 RESEARCH CORPORATION.—

24 ‘‘(1) IN GENERAL.—A corporation shall be con25 sidered as meeting the requirements of this sub-
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1 section for any taxable year if during such taxable

2 year—

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

4 assets of such corporation are used by such cor5 poration in the active conduct of 1 or more

6 qualified trades or businesses,

7 ‘‘(B) such corporation is an eligible cor8 poration, and

9 ‘‘(C) such corporation has aggregate gross

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

11 more than $500,000,000.

12 ‘‘(2) SPECIAL RULE FOR CERTAIN ACTIVI13 TIES.—For purposes of paragraph (1), if, in connec14 tion with any future qualified trade or business, a

15 corporation is engaged in—

16 ‘‘(A) startup activities described in section

17 195(c)(1)(A),

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

19 incurring of expenditures which may be treated

20 as research and experimental expenditures

21 under section 174, or

22 ‘‘(C) activities with respect to in-house re23 search expenses described in section 41(b)(4),

24 assets used in such activities shall be treated as used

25 in the active conduct of a qualified trade or busi-
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1 ness. Any determination under this paragraph shall

2 be made without regard to whether a corporation

3 has any gross income from such activities at the

4 time of the determination.

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

6 purposes of this subsection, the term ‘qualified trade

7 or business’ means any trade or business other

8 than—

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

10 performance of services in the fields of health,

11 law, engineering, architecture, accounting, actu12 arial science, performing arts, consulting, ath13 letics, financial services, brokerage services, or

14 any trade or business where the principal asset

15 of such trade or business is the reputation or

16 skill of 1 or more of its employees,

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

18 leasing, investing, or similar business,

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

20 business of raising or harvesting trees),

21 ‘‘(D) any business involving the production

22 or extraction of products of a character with re23 spect to which a deduction is allowable under

24 section 613 or 613A, and
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1 ‘‘(E) any business of operating a hotel,

2 motel, restaurant, or similar business.

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

4 of this subsection, the term ‘eligible corporation’

5 means any domestic corporation, except that such

6 term shall not include—

7 ‘‘(A) a DISC or former DISC,

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

9 an election under section 936 is in effect or

10 which has a direct or indirect subsidiary with

11 respect to which such an election is in effect,

12 ‘‘(C) a FSC (as defined in section 922, as

13 in effect on the day before the date of the en14 actment of the FSC Repeal and Extraterritorial

15 Income Exclusion Act of 2000),

16 ‘‘(D) a regulated investment company, real

17 estate investment trust, REMIC, or FASIT, or

18 ‘‘(E) a cooperative.

19 ‘‘(5) STOCK IN OTHER CORPORATIONS.—

20 ‘‘(A) LOOK-THRU IN CASE OF SUBSIDI21 ARIES.—For purposes of this subsection, stock

22 and debt in any subsidiary corporation shall be

23 disregarded and the parent corporation shall be

24 deemed to own its ratable share of the subsidi-
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1 ary’s assets, and to conduct its ratable share of

2 the subsidiary’s activities.

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

4 A corporation shall be treated as failing to meet

5 the requirements of paragraph (1) for any pe6 riod during which more than 10 percent of the

7 value of its assets (in excess of liabilities) con8 sist of stock or securities in other corporations

9 which are not subsidiaries of such corporation

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

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

12 paragraph, a corporation shall be considered a

13 subsidiary if the parent owns more than 50 per14 cent of the combined voting power of all classes

15 of stock entitled to vote, or more than 50 per16 cent in value of all outstanding stock, of such

17 corporation.

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

19 paragraph (2)(A), any assets which—

20 ‘‘(A) are held as a part of the reasonably

21 required working capital needs of a qualified

22 trade or business of the corporation, or

23 ‘‘(B) are held for investment and are rea24 sonably expected to be used within 5 years to

25 finance research and experimentation in a
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1 qualified trade or business or increases in work2 ing capital needs of a qualified trade or busi3 ness,

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

5 qualified trade or business. For periods after the

6 corporation has been in existence for at least 5

7 years, in no event may more than 50 percent of the

8 assets of the corporation qualify as used in the ac9 tive conduct of a qualified trade or business by rea10 son of this paragraph.

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

12 corporation shall not be treated as meeting the re13 quirements of paragraph (2) for any period during

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

15 assets consists of real property which is not used in

16 the active conduct of a qualified trade or business.

17 For purposes of the preceding sentence, the owner18 ship of, dealing in, or renting of real property shall

19 not be treated as the active conduct of a qualified

20 trade or business.

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

22 purposes of paragraph (2), rights to computer soft23 ware which produces active business computer soft24 ware royalties (within the meaning of section
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1 543(d)(1)) shall be treated as an asset used in the

2 active conduct of a trade or business.

3 ‘‘(i) REGULATIONS.—The Secretary may prescribe

4 such regulations as may be necessary to carry out the pur5 poses of this section, including regulations coordinating

6 the application of this section with the consolidated return

7 regulations and regulations providing for the application

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

9 (b) CONFORMING AMENDMENTS.—

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

11 Code of 1986 is amended by striking ‘‘section

12 49(b)’’ and inserting ‘‘section 35(g), 49(b),’’.

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

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

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

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

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

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

19 of the Internal Revenue Code of 1986 is amended by strik20 ing the item relating to section 35 and inserting the fol21 lowing new items:

‘‘Sec. 35. Breakthrough research credit.

‘‘Sec. 36. Overpayments of tax.’’.
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1 (d) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to taxable years beginning after

3 December 31, 2001.

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