II 

113TH CONGRESS 

2D SESSION S. 2139 

To amend the Internal Revenue Code of 1986 to extend the exclusion for 

small business stock, to provide incentives for small business high technology research investment, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

MARCH 13, 2014 

Mr. MENENDEZ (for himself and Mr. TOOMEY) 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 extend 

the exclusion for small business stock, to provide incentives for small business high technology research investment, 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. PERMANENT FULL EXCLUSION APPLICABLE TO 

4 QUALIFIED SMALL BUSINESS STOCK. 

5 (a) IN GENERAL.—Paragraph (4) of section 1202(a) 

6 of the Internal Revenue Code of 1986 is amended— 

7 (1) by striking ‘‘and before January 1, 2014’’, 

8 and 


tjames on DSK6SPTVN1PROD with BILLS
2 

•S 2139 IS

1 (2) by striking ‘‘CERTAIN PERIODS IN 2010, 

2 2011, 2012, AND 2013’’ in the heading and inserting 

3 ‘‘CERTAIN PERIODS AFTER 2009’’. 

4 (b) CONFORMING AMENDMENTS.— 

5 (1) The heading for section 1202 of the Inter6 nal Revenue Code of 1986 is amended by striking 

7 ‘‘PARTIAL’’. 

8 (2) The item relating to section 1202 in the 

9 table of sections for part I of subchapter P of chap10 ter 1 of such Code is amended by striking ‘‘Partial 

11 exclusion’’ and inserting ‘‘Exclusion’’. 

12 (3) Section 1223(13) of such Code is amended 

13 by striking ‘‘1202(a)(2),’’. 

14 (c) INCREASE IN GROSS ASSET THRESHOLD.— 

15 (1) IN GENERAL.—Paragraph (1) of section 

16 1202(d) of the Internal Revenue Code of 1986 is 

17 amended by striking ‘‘$50,000,000’’ each place it 

18 appears and inserting ‘‘$150,000,000’’. 

19 (2) ADJUSTMENT FOR INFLATION.—Subsection 

20 (d) of section 1202 of such Code is amended by add21 ing at the end the following new paragraph: 

22 ‘‘(4) ADJUSTMENT FOR INFLATION.—In the 

23 case of any taxable year beginning after December 

24 31, 2014, the $150,000,000 amount in subparaVerDate Mar 15 2010 06:57 Mar 18, 2014 Jkt 039200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\S2139.IS S2139

tjames on DSK6SPTVN1PROD with BILLS
3 

•S 2139 IS

1 graphs (A) and (B) of paragraph (1) shall be in2 creased by an amount equal to— 

3 ‘‘(A) such dollar amount, multiplied by 

4 ‘‘(B) the cost-of-living adjustment deter5 mined under section 1(f)(3) for the calendar 

6 year in which the taxable year begins, by sub7 stituting ‘calendar year 2013’ for ‘calendar year 

8 1992’ in subparagraph (B) thereof. 

9 If any amount as increased under the preceding sen10 tence is not a multiple of $1,000, such amount shall 

11 be rounded to the nearest multiple of $1,000.’’. 

12 (d) EFFECTIVE DATE.—The amendments made by 

13 this section shall apply to stock acquired after December 

14 31, 2013. 

15 SEC. 2. EXCEPTION FROM PASSIVE LOSS RULES FOR IN16 VESTMENTS IN HIGH TECHNOLOGY RE17 SEARCH SMALL BUSINESS PASS-THRU ENTI18 TIES. 

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

20 the Internal Revenue Code of 1986 is amended by redesig21 nating paragraphs (4) through (7) as paragraphs (5) 

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

23 (3) the following new paragraph: 

24 ‘‘(4) HIGH TECHNOLOGY RESEARCH ACTIVI25 TIES.— 


tjames on DSK6SPTVN1PROD with BILLS
4 

•S 2139 IS

1 ‘‘(A) IN GENERAL.—The term ‘passive ac2 tivity’ shall not include any qualified research 

3 activity of the taxpayer carried on by a high 

4 technology research small business pass-thru 

5 entity. 

6 ‘‘(B) TREATMENT OF LOSSES AND DEDUC7 TIONS.— 

8 ‘‘(i) IN GENERAL.—Losses or deduc9 tions of a taxpayer relating to qualified re10 search activities carried on by a high tech11 nology research small business pass-thru 

12 entity shall not be treated as losses or de13 ductions, respectively, from a passive activ14 ity except as provided in clause (ii) and 

15 subparagraph (C). 

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

17 apply to losses and deductions of a tax18 payer relating to a high technology small 

19 business pass-thru entity for a taxable year 

20 only to the extent that the aggregate losses 

21 and deductions of the taxpayer relating to 

22 qualified research activities of such entity 

23 for such taxable year do not exceed the 

24 portion of the taxpayer’s adjusted basis in 

25 the taxpayer’s ownership interest in such 


tjames on DSK6SPTVN1PROD with BILLS
5 

•S 2139 IS

1 entity that is attributable to money or 

2 other property contributed— 

3 ‘‘(I) in exchange for such owner4 ship interest, and 

5 ‘‘(II) specifically for use in con6 nection with qualified research activi7 ties. 

8 For purposes of the preceding sentence, 

9 the taxpayer’s basis shall not include any 

10 portion of such basis which is attributable 

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

12 liabilities of a partnership that is consid13 ered under section 752(a) as a contribution 

14 of money. 

15 ‘‘(C) TREATMENT OF CARRYOVERS.—Sub16 paragraph (B)(i) shall not apply to the portion 

17 of any loss or deduction that is carried over 

18 under subsection (b) into a taxable year other 

19 than the taxable year in which such loss or de20 duction arose. 

21 ‘‘(D) QUALIFIED RESEARCH ACTIVITY.— 

22 For purposes of this paragraph, the term 

23 ‘qualified research activity’ means any activity 

24 constituting qualified research (within the 

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


tjames on DSK6SPTVN1PROD with BILLS
6 

•S 2139 IS

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

2 41(d)) which involves a process of experimen3 tation. 

4 ‘‘(E) HIGH TECHNOLOGY RESEARCH

5 SMALL BUSINESS PASS-THRU ENTITY.—For 

6 purposes of this paragraph, the term ‘high tech7 nology research small business pass-thru entity’ 

8 means any domestic pass-thru entity for any 

9 taxable year if— 

10 ‘‘(i) either— 

11 ‘‘(I) more than 75 percent of the 

12 entity’s expenditures (including sala13 ries, rent and overhead) for such tax14 able year are paid or incurred in con15 nection with qualified research (within 

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

17 taking into account paragraphs (3) 

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

19 a process of experimentation con20 ducted by the entity, or 

21 ‘‘(II) more than 50 percent of 

22 the entity’s expenditures for such tax23 able year constitute qualified research 

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

25 but determined without regard to the 


tjames on DSK6SPTVN1PROD with BILLS
7 

•S 2139 IS

1 phrase ‘65 percent of’ in paragraph 

2 (3)(A) thereof), 

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

4 (within the meaning of section 

5 41(b)(3)(D)(iii), applied by substituting 

6 ‘250’ for ‘500’ in subclause (I) thereof), 

7 and 

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

9 year does the entity have aggregate gross 

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

11 ‘‘(F) PROVISIONS RELATED TO AGGRE12 GATE GROSS ASSETS LIMITATION.—For pur13 poses of this paragraph— 

14 ‘‘(i) IN GENERAL.—Except as other15 wise provided in this subparagraph, the 

16 term ‘aggregate gross assets’ has the 

17 meaning given such term in section 

18 1202(d)(2). 

19 ‘‘(ii) EXCEPTION FOR CERTAIN IN20 TANGIBLES.—Any section 197 intangible 

21 (as defined in section 197(d) and deter22 mined without regard to section 197(e)) 

23 which is used directly in connection with 

24 the research referred to in subparagraph 


tjames on DSK6SPTVN1PROD with BILLS
8 

•S 2139 IS

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

2 determining aggregate gross assets. 

3 ‘‘(iii) EXCEPTION FOR CERTAIN FOL4 LOW-ON INVESTMENTS.—Cash from a sale 

5 of equity interests shall not be taken into 

6 account in determining aggregate gross as7 sets if— 

8 ‘‘(I) the aggregate gross assets of 

9 such entity (determined immediately 

10 after such sale and without regard to 

11 this clause) do not exceed the sum of 

12 $150,000,000, plus 25 percent of the 

13 aggregate gross assets of such entity 

14 (determined immediately before such 

15 sale and without regard to this 

16 clause), and 

17 ‘‘(II) the aggregate gross assets 

18 of such entity (determined imme19 diately before such sale and without 

20 regard to this clause) do not exceed 

21 $150,000,000. 

22 Sales of equity interests which are part of 

23 the same plan or arrangement, or which 

24 are carried out with the principal purpose 

25 of increasing the amount of cash to which 


tjames on DSK6SPTVN1PROD with BILLS
9 

•S 2139 IS

1 this clause applies (determined without re2 gard to this sentence), shall be treated as 

3 a single sale for purposes of this clause. 

4 ‘‘(iv) INFLATION ADJUSTMENT.—In 

5 the case of any taxable year beginning 

6 after 2014, the $150,000,000 amount in 

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

8 and (II) of clause (iii) shall each be in9 creased by an amount equal to— 

10 ‘‘(I) such dollar amount, multi11 plied by 

12 ‘‘(II) the cost of living adjust13 ment determined under section 1(f)(3) 

14 for the calendar year in which the tax15 able year begins determined by sub16 stituting ‘calendar year 2013’ for ‘cal17 endar year 1992’ in subparagraph (B) 

18 thereof. 

19 Any increase determined under the pre20 ceding sentence shall be rounded to the 

21 nearest $100,000. 

22 ‘‘(G) CAPITAL EXPENDITURES TAKEN INTO

23 ACCOUNT FOR EXPENDITURES TEST.—An ex24 penditure shall not fail to be taken into account 


tjames on DSK6SPTVN1PROD with BILLS
10 

•S 2139 IS

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

2 expenditure is chargeable to capital account. 

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

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

5 means any partnership, S corporation, or other 

6 entity identified by the Secretary as a pass-thru 

7 entity for purposes of this paragraph. 

8 ‘‘(I) AGGREGATION RULES.— 

9 ‘‘(i) IN GENERAL.—All persons treat10 ed as a single employer under subsection 

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

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

13 single entity for purposes of subparagraphs 

14 (E) and (F)(iii). 

15 ‘‘(ii) LIMITATION WHERE ENTITY

16 WOULD NOT QUALIFY.—No entity shall be 

17 treated as a high technology research small 

18 business pass-thru entity unless such enti19 ty qualifies as such both with and without 

20 the application of clause (i). 

21 ‘‘(J) 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 


tjames on DSK6SPTVN1PROD with BILLS
11 

•S 2139 IS

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 the Internal Revenue 

6 Code of 1986, as redesignated by subsection (a), is amend7 ed by striking ‘‘and (3)’’ in the heading and text and in8 serting ‘‘, (3), and (4)’’. 

9 (c) CERTAIN RESEARCH-RELATED DEDUCTIONS AND

10 CREDITS OF HIGH TECHNOLOGY RESEARCH SMALL

11 BUSINESS PASS-THRU ENTITIES ALLOWED FOR PUR12 POSES OF DETERMINING ALTERNATIVE MINIMUM TAX.— 

13 (1) DEDUCTION FOR RESEARCH AND EXPERI14 MENTAL EXPENDITURES.—Paragraph (2) of section 

15 56(b) of the Internal Revenue Code of 1986 is 

16 amended by adding at the end the following new 

17 subparagraph: 

18 ‘‘(E) EXCEPTION FOR HIGH TECHNOLOGY

19 RESEARCH SMALL BUSINESS PASS-THRU ENTI20 TIES.—In the case of a high technology re21 search small business pass-thru entity (as de22 fined in section 469(c)(4)), this paragraph shall 

23 not apply to any amount allowable as a deduc24 tion under section 174(a).’’. 


tjames on DSK6SPTVN1PROD with BILLS
12 

•S 2139 IS

1 (2) ALLOWANCE OF CERTAIN RESEARCH-RE2 LATED CREDITS.—Subparagraph (B) of section 

3 38(c)(4) of such Code is amended by redesignating 

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

5 respectively, and by inserting after clause (i) the fol6 lowing new clause: 

7 ‘‘(ii) the credits of an individual tax8 payer determined under sections 41 and 

9 48D to the extent attributable to a high 

10 technology research small business pass11 thru entity (as defined in section 

12 469(c)(4)),’’. 

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

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

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

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

17 any high technology research small business pass-thru en18 tity (as defined in section 469(c)(4)).’’. 

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

20 this section shall apply to losses and credits arising in tax21 able years beginning on or after the date of the enactment 

22 of this Act. 

Æ 


tjames on DSK6SPTVN1PROD with BILLS