II 

108TH CONGRESS 

1ST SESSION S. 1773

To permit biomedical research corporations to engage in certain equity 

financings without incurring limitations on net operating loss 

carryforwards and certain built-in losses, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

OCTOBER 22, 2003

Mr. SANTORUM (for himself and Mr. CARPER) introduced the following bill; 

which was read twice and referred to the Committee on Finance 

A BILL

To permit biomedical research corporations to engage in 

certain equity financings without incurring limitations 

on net operating loss carryforwards and certain builtin losses, 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 ‘‘Biotechnology Future 

5 Investment Expansion Act of 2003’’. 

6 SEC. 2. FINDINGS AND PURPOSE. 

7 (a) FINDINGS.—Congress makes the following find8 ings: 
2

•S 1773 IS 

1 (1) American bioscience research corporations 

2 conduct long-term research and development on 

3 breakthrough medical technologies. This commercial 

4 bioscience research industry forms an irreplaceable 

5 link between pure scientific discovery and the devel6 opment of powerful biomedical products and tech7 nologies. It is critical to the maintenance of Amer8 ican competitiveness internationally that these long9 term research and development projects be encour10 aged. 

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

12 greatest potential to revolutionize whole fields of 

13 science and industry for the benefit of the standard 

14 of living of Americans; and to yield solutions for 

15 critical social needs, even though these solutions 

16 might not result in large sales and profits (such as 

17 ‘‘orphan’’ drugs and other treatments alleviating 

18 great suffering in their recipients). 

19 (3) Long-term biomedical research companies 

20 are among the most research-intensive and capital21 intensive companies in the world. 

22 (4) In addition to the scientific and technical 

23 risks attending their long-term research programs, 

24 many biomedical research companies must subject 

25 their technologies to lengthy and expensive regu-
3

•S 1773 IS 

1 latory reviews before they are permitted access to 

2 the marketplace. 

3 (5) Biomedical research companies typically op4 erate in financially challenging circumstances. These 

5 companies must engage in intensive research activity 

6 for many years in order to develop their products 

7 and earn profits. Many are small businesses lacking 

8 the internal cash flow, stability and borrowing ca9 pacity of large corporations. 

10 (6) The long-term commercial bioscience re11 search industry is heavily dependent on outside 

12 sources of equity capital to fund lengthy and inten13 sive research prior to earning any revenues. The in14 dustry’s long lead times and high levels of scientific 

15 and regulatory risk often impede access to capital. 

16 (7) The longstanding national policy of Govern17 ment support and tax incentives for breakthrough 

18 commercial research reflects a recognition that the 

19 capital marketplace tends to allocate insufficient re20 sources to sustain the Nation’s need for such 

21 foundational scientific research and development. 

22 (8) American long-term bioscience research 

23 companies constitute one of the core commercial sec24 tors which Congress intended to benefit from exist25 ing tax incentives for commercial research. 
4

•S 1773 IS 

1 (9) However, the current Federal income tax 

2 incentives are simply not working in the case of 

3 many bioscience companies focused on breakthrough 

4 medical technologies. 

5 (10) Current Federal income tax incentives do 

6 not work as intended for most high technology bio7 science companies because they typically incur net 

8 operating losses for a decade or more during their 

9 lengthy research and development phases and there10 fore receive no contemporaneous benefit from these 

11 tax incentives. 

12 (11) Further, Federal tax rules aimed chiefly at 

13 preventing corporate loss trafficking and tax-moti14 vated mergers and acquisitions penalize these com15 panies. The very process of raising successive incre16 ments of private capital through routine equity 

17 financings triggers these rules and subjects bio18 medical research companies to severe limitations on 

19 net operating loss and tax credit carryforwards. 

20 These limitations practically eliminate for the com21 mercial bioscience industry any economic benefit 

22 from these tax incentives. 

23 (12) These tax incentives instead tend to favor 

24 investment by large, profitable companies, often en25 gaged in secondary or tertiary research activities,
5

•S 1773 IS 

1 and thus to discriminate against and to cause under2 investment in longer-term breakthrough tech3 nologies, a bias which is harmful to American com4 petitiveness. 

5 (13) The inability to benefit from existing Fed6 eral income tax incentives for commercial research 

7 places long-term bioscience research companies at a 

8 substantial disadvantage in the capital marketplace 

9 where they must compete with other companies able 

10 to use these tax incentives currently. 

11 (14) A tax system that does not discriminate 

12 would ensure that existing tax incentives in favor of 

13 research and experimentation have the same cost-re14 ducing impact on companies conducting both short15 term and long-term research and thus render this 

16 tax incentive program neutral with regard to short17 term and long-term research objectives, minimizing 

18 capital marketplace distortions caused by differences 

19 in tax and income status. 

20 (b) PURPOSE.—The purpose of this Act is to provide 

21 that long-term biomedical research corporations will not 

22 incur limitations on research-related tax incentive 

23 carryforwards simply because they engage in the routine 

24 equity financings that are the financial lifeblood of the in25 dustry. 
6

•S 1773 IS 

1 SEC. 3. RESTORING THE BENEFIT OF TAX INCENTIVES FOR 

2 BIOMEDICAL RESEARCH AND CLINICAL 

3 TRIALS. 

4 (a) IN GENERAL.—Subsection (l) of section 382 of 

5 the Internal Revenue Code of 1986 is amended by adding 

6 at the end the following new paragraph: 

7 ‘‘(9) CERTAIN FINANCING TRANSACTIONS OF

8 BIOMEDICAL RESEARCH CORPORATIONS.—

9 ‘‘(A) GENERAL RULE.—In the case of a 

10 biomedical research corporation, any owner 

11 shift involving a 5-percent shareholder which 

12 occurs as the result of a qualified investment 

13 during the testing period shall be treated for 

14 purposes of this section (other than this para15 graph) as occurring before the testing period. 

16 ‘‘(B) BIOMEDICAL RESEARCH CORPORA17 TION.—For purposes of this paragraph, the 

18 term ‘biomedical research corporation’ means, 

19 with respect to any qualified investment, any 

20 domestic corporation subject to tax under this 

21 subchapter which is not in bankruptcy and 

22 which, as of the time of the closing on such in23 vestment—

24 ‘‘(i) holds the rights to a drug or bio25 logic for which an investigational new drug 

26 application is in effect under section 505 
7

•S 1773 IS 

1 of the Federal Food, Drug, and Cosmetic 

2 Act, and 

3 ‘‘(ii) certifies that, as of the time of 

4 such closing, the drug or biologic is under 

5 study in phase II or phase III of a clinical 

6 investigation carried out under such sec7 tion. 

8 ‘‘(C) QUALIFIED INVESTMENT.—For pur9 poses of this paragraph, the term ‘qualified in10 vestment’ means any acquisition of stock in a 

11 biomedical research corporation if such stock is 

12 acquired at its original issue (directly or 

13 through an underwriter), solely in exchange for 

14 cash, and the closing thereon occurs after the 

15 date of the enactment of this paragraph. 

16 ‘‘(D) STOCK ISSUED IN EXCHANGE FOR

17 CONVERTIBLE DEBT.—For purposes of this 

18 paragraph, stock issued by a biomedical re19 search corporation in exchange for its convert20 ible debt (or stock deemed under this section to 

21 be so issued) shall be treated as stock acquired 

22 by the debt holder at its original issue and sole23 ly in exchange for cash if the debt holder pre24 viously acquired the convertible debt at its 

25 original issue and solely in exchange for cash. 
8

•S 1773 IS 

1 In the case of an acquisition of stock in ex2 change for convertible debt, the requirements of 

3 this paragraph shall be applied separately as of 

4 the time of closing on the investment in con5 vertible debt, and as of the time of actual con6 version (or deemed conversion under this sec7 tion) of the convertible debt for stock, except 

8 that the requirements of subparagraph (H) 

9 shall be applied only as of the time of closing 

10 on the issuance of the convertible debt. 

11 ‘‘(E) BIOMEDICAL RESEARCH CORPORA12 TION MUST MEET 5-YEAR EXPENDITURE TEST

13 WITH RESPECT TO ANY QUALIFIED INVEST14 MENT.—

15 ‘‘(i) IN GENERAL.—This paragraph 

16 shall not apply to a qualified investment in 

17 a biomedical research corporation unless 

18 such corporation meets the expenditure 

19 test for each year of the measuring period. 

20 ‘‘(ii) MEASURING PERIOD.—For pur21 poses of this subparagraph, the term 

22 ‘measuring period’ means, with respect to 

23 any qualified investment, the taxable year 

24 of the biomedical research corporation in 

25 which the closing on the investment occurs,
9

•S 1773 IS 

1 the 2 preceding taxable years, and the 2 

2 subsequent taxable years. 

3 ‘‘(iii) CLINICAL TESTING.—For pur4 poses of this subparagraph, the term ‘clin5 ical testing’ means any human clinical test6 ing which is carried out under any inves7 tigational new drug application in effect 

8 under section 505 of the Federal Food, 

9 Drug, and Cosmetic Act. 

10 ‘‘(F) EFFECT OF CORPORATE REDEMP11 TIONS ON QUALIFIED INVESTMENTS.—Rules 

12 similar to the rules of section 1202(c)(3) shall 

13 apply to qualified investments under this para14 graph except that ‘stock acquired in a qualified 

15 investment’ shall be substituted for ‘qualified 

16 small business stock’ each place it appears 

17 therein. 

18 ‘‘(G) EFFECT OF OTHER TRANSACTIONS

19 BETWEEN BIOMEDICAL RESEARCH CORPORA20 TIONS AND INVESTORS MAKING QUALIFIED IN21 VESTMENTS.—

22 ‘‘(i) IN GENERAL.—If, during the 2-

23 year period beginning 1 year before any 

24 qualified investment, the biomedical re25 search corporation engages in another 
10

•S 1773 IS 

1 transaction with a member of its qualified 

2 investment group and such biomedical re3 search corporation receives any consider4 ation other than cash in such transaction, 

5 there shall be a presumption that stock re6 ceived in the otherwise qualified investment 

7 transaction was not received solely in ex8 change for cash. 

9 ‘‘(ii) QUALIFIED INVESTMENT

10 GROUP.—For purposes of this subpara11 graph, the term ‘qualified investment 

12 group’ means, with respect to any qualified 

13 investment, one or more persons who re14 ceive stock issued in exchange for the 

15 qualified investment, and any person re16 lated to such persons within the meaning 

17 of section 267(b) or section 707(b). 

18 ‘‘(iii) REGULATIONS.—The Secretary 

19 shall promulgate regulations exempting 

20 from this subparagraph transactions which 

21 are customary in the bioscience research 

22 industry and are of minor value relative to 

23 the amount of the qualified investment. 
11

•S 1773 IS 

1 ‘‘(H) PROCEEDS OF QUALIFIED INVEST2 MENTS SHALL BE DEVOTED TO RESEARCH ON

3 PREEXISTING TECHNOLOGY.—

4 ‘‘(i) IN GENERAL.—This paragraph 

5 shall not apply to any qualified investment 

6 unless the net proceeds of such qualified 

7 investment do not exceed the excess of—

8 ‘‘(I) the sum of the biomedical 

9 research corporation’s aggregate 

10 qualifying clinical expenditures for the 

11 3 years following the qualified invest12 ment, over 

13 ‘‘(II) three times the corpora14 tion’s qualifying clinical expenditures 

15 for the year preceding the qualified 

16 investment, plus the amount of the 

17 corporation’s cash and cash equiva18 lents immediately before the closing 

19 on the qualified investment. 

20 ‘‘(ii) QUALIFYING CLINICAL EXPENDI21 TURES.—For purposes of this subpara22 graph, the term ‘qualifying clinical expend23 itures’ means amounts described in section 

24 41(b) which are paid or incurred by a bio25 medical research corporation for clinical 
12

•S 1773 IS 

1 testing in connection with a drug or bio2 logic for which an investigational new drug 

3 application is in effect under section 505 

4 of the Federal Food, Drug, and Cosmetic 

5 Act and which is (at the time of the clos6 ing on the qualified investment) under 

7 study in phase II or phase III of a clinical 

8 investigation carried out under such sec9 tion. 

10 ‘‘(I) REGULATIONS.—The Secretary may 

11 issue such regulations as may be appropriate to 

12 achieve the purposes of this paragraph, to pre13 vent abuse, and to provide for treatment of bio14 medical research corporations under sections 

15 383 and 384 that is consistent with the pur16 poses of this paragraph.’’. 

17 (b) PROCEEDS OF EQUITY INVESTMENTS TO BE

18 TREATED AS WORKING CAPITAL.—Subparagraph (C) of 

19 section 382(l)(4) of such Code is amended by adding at 

20 the end the following: ‘‘Such term shall not include any 

21 assets reasonably expected to be used within 3 years to 

22 fund qualifying clinical expenditures (as defined in para23 graph (9)(H)(ii) without regard to the parenthetical there24 in).’’. 
13

•S 1773 IS 

1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2002.

Æ