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 cir-
cumstances, 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 pur-
poses.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘American Break-
through Research Act of 2001’’.
SEC. 2. FINDINGS AND PURPOSE.
(a) FINDINGS.—Congress finds the following:
(1) American high technology industries con-
duct long-term research and development on break-
through medical, industrial, and agricultural tech-
nologies. It is critical to the maintenance of Amer-
ican competitiveness internationally that these long-
term research and development projects be encour-
aged.
(2) Such long-term research projects have the
greatest potential to revolutionize whole fields of
science and industry for the benefit of the standard
of living of Americans and to yield solutions for crit-
ical social needs, even though these solutions might
not result in large sales and profits (such as ‘‘or-
phan’’ drugs and other treatments alleviating great
suffering in their recipients).
(3) High technology long-term research compa-
nies are among the most research intensive and cap-
ital-intensive companies in the world.
(4) High technology companies typically operate
in financially challenging circumstances. While con-
ducting their long-term breakthrough research these
companies must often seek to endure without prod-
ucts and little or no earnings. Many are small busi-
nesses lacking the resources and stability of large
corporations.
(5) In addition to the scientific and technical
risks attending their long-term breakthrough re-
search programs, many high technology companies
must subject their technologies through lengthy and
expensive regulatory reviews before they are per-
mitted access to the marketplace.
(6) The long-term research high technology in-
dustry is heavily dependent on outside sources of
capital for continued research funding. The indus-
try’s long lead times and high levels of scientific and
regulatory risk often impede access to capital.
(7) The longstanding national policy of Govern-
ment support and tax incentives for basic research
reflects a recognition that the capital marketplace
tends to allocate insufficient resources to sustain the
Nation’s need for such basic scientific research and
development.
(8) The current Federal income tax incentives
are not working as intended in the case of many
high technology companies whose research is focused
on breakthrough technologies.
(9) These high technology companies typically
incur net operating losses during their lengthy re-
search and development phases and therefore receive
no contemporaneous benefit from these tax incen-
tives.
(10) These tax incentives instead tend to favor
investment by large, profitable companies engaged in
secondary or tertiary research and development ac-
tivities, and thus to discriminate against and to
cause underinvestment in longer-term breakthrough
technologies, a bias which is harmful to American
competitiveness.
(11) For many research-intensive high tech-
nology companies, the unusable tax deductions and
credits can only be carried forward for potential use
in later years, which places them at a substantial
disadvantage in the capital marketplace where they
must compete for capital with other companies able
to use these tax incentives currently.
(12) A tax system that does not discriminate
would ensure that these tax incentives in favor of re-
search and experimentation have the same cost-re-
ducing impact on companies conducting both short-
term and long-term research and thus render this
tax incentive program neutral with regard to short-
term and long-term research objectives and minimize
marketplace distortions caused by differences in tax
and income status.
(13) Some States have recognized these short-
comings in their own tax incentive programs and
have adopted remedial amendments under which loss
high technology companies are permitted to transfer
or to exchange their State tax benefits for immediate
cash payments.
(b) PURPOSE.—The purpose of this Act is to provide
a remedy at the Federal level similar to that provided by
some States under which qualifying high technology com-
panies will be permitted to obtain current economic benefit
from research-related tax incentives.
SEC. 3. BREAKTHROUGH RESEARCH TAX INCENTIVE EX-
CHANGES.
(a) IN GENERAL.—The Internal Revenue Code of
1986 is amended by redesignating section 35 as section
36 and by inserting after section 34 the following new sec-
tion:
‘‘SEC. 35. BREAKTHROUGH RESEARCH CREDIT.
‘‘(a) GENERAL RULE.—There shall be allowed as a
credit against the tax imposed by this subtitle an amount
equal to the sum of a qualified research corporation’s dis-
counted research credits and discounted research NOL’s.
‘‘(b) QUALIFIED RESEARCH CORPORATION.—
‘‘(1) IN GENERAL.—For the purposes of this
section, the term ‘qualified research corporation’
means any domestic corporation subject to tax under
subchapter C of this chapter—
‘‘(A) which has not incurred regular tax li-
ability (as defined in section 55(c)) under this
chapter for a period of at least 3 consecutive
taxable years (other than short taxable years)
immediately prior to the commencement of the
taxable year as to which any election is made
under this section,
‘‘(B) which has not been controlled by, or
been under common control (as determined
under section 267(b)) with, a corporation which
has incurred regular tax liability (as so defined)
under this chapter for any taxable year com-
mencing during the period described in sub-
paragraph (A),
‘‘(C) at all times during the period de-
scribed in subparagraph (A) has met the re-
quirements of subsection (h), and
‘‘(D) which is not the subject of any pro-
ceeding under Federal or State bankruptcy or
insolvency laws.
‘‘(2) SPECIAL RULE.—A qualified research cor-
poration, in claiming the credit provided for in this
section, shall not take into account any expenditures
172(c)) attributable to research expenditures allowed
as deductions for research or experimentation activi-
ties under section 174 (after the application of sec-
tion 280C).
‘‘(3) DISCOUNTED
RESEARCH
CREDIT.—The
term ‘discounted research credit’ shall mean the re-
search credit amounts subject to an election under
this section multiplied by 75 percent.
‘‘(4) DISCOUNTED RESEARCH NOL.—The term
‘discounted research NOL’ shall mean the research
NOL subject to an election under this section multi-
plied by 75 percent of the highest marginal tax rate
in effect under section 11.
‘‘(5) ORDERING RULE.—For purposes of deter-
mining the portion of a taxpayer’s net operating loss
that is attributable to research expenditures (within
the meaning of paragraph (2)) for any taxable year,
research expenditures shall be considered to be offset
against the taxpayer’s gross income on a pro rata
basis with all other allowable expenses and charges
paid or incurred in the taxable year.
‘‘(d) ELECTION TO RELINQUISH RESEARCH-RE-
LATED NET OPERATING LOSSES AND TAX CREDITS FOR
CASH REFUNDS.—
‘‘(1) GENERAL
RULE; BENEFITS
ARISING
IN
CURRENT YEAR.—A qualified research corporation
may make an election under this section to relin-
quish all of its current year research NOL’s and re-
search credits in exchange for cash refunds. The cor-
poration shall make the election on its timely filed
tax return (including extensions) for the taxable year
in which the research NOL’s and research credits
arise.
‘‘(2) SPECIAL RULE; NET OPERATING LOSS AND
UNUSED TAX CREDIT CARRYFORWARDS.—
‘‘(A) IN GENERAL.—If a qualified research
corporation has unabsorbed research NOL’s or
research credits not subject to an election under
this section, which arose in a previous taxable
year and which the qualified research corpora-
tion would be entitled to carry forward to a tax-
able year for which it makes an election under
paragraph (1), then the taxpayer shall des-
ignate such research NOL carryforwards and
such research credit carryforwards to be cov-
ered by its election under this section.
‘‘(B) LIMITATION.—For any taxable year,
the amount of research NOL carryforwards and
research credit carryforwards to the taxable
year which may be designated as covered by an
election under this section shall be the greater
of—
‘‘(i) the average of the annual
amounts of the qualified research corpora-
tion’s research NOL’s and research credits
arising in the 3 taxable years ending prior
to the taxable year of the election, or
‘‘(ii) 20 percent of the qualified re-
search 
corporation’s 
research 
NOL
carryforwards 
and 
research 
credit
carryforwards.
‘‘(3) PROCEDURES
AND
RECORDKEEPING
BY
ELECTING
CORPORATION.—An election under this
section may be revoked by the taxpayer only with
the consent of the Secretary. Qualified research cor-
porations making such an election shall provide such
information in connection with such election as may
be required by the Secretary and shall maintain
records sufficient to permit the Secretary to identify
and to audit the specific research credits and re-
search NOL’s that are subject to an election under
this section.
‘‘(e) EXTINGUISHMENT
OF
RELINQUISHED
TAX
BENEFITS.—
‘‘(1) DEDUCTIONS.—No deduction shall be al-
lowed to a qualified research corporation under the
alternative minimum tax provisions of section
56(a)(4) or the net operating loss provisions of sec-
tion 172 with respect to that portion of a net oper-
ating loss for which an election under this section is
in effect.
‘‘(2) CREDITS.—No credit shall be allowed to a
qualified research corporation under section 38(a)
with respect to any credit amounts determined under
section 41 or 45C for which an election under this
section is in effect.
‘‘(f) LIMITATION
ON USE
OF NONRELINQUISHED
TAX BENEFITS BY ELECTING CORPORATION.—A quali-
fied research corporation which has received refunds pur-
suant to an election under this section shall not be entitled
to utilize any carrybacks or carryforwards of net operating
losses or tax credits (which are not subject to an election
under this section and are otherwise available to be uti-
lized in the taxable year) to reduce taxable income or to
offset any tax liability for taxable years after the year of
such election, until such corporation has paid tax imposed
under this chapter for such taxable years in an aggregate
amount equal to the aggregate amount of the refunds pre-
viously received, less any underpayment amount deter-
mined under subsection (g).
‘‘(g) CREDIT PROCEEDS FROM EXCHANGE OF RE-
SEARCH CREDITS AND RESEARCH NOL’S MUST BE USED
EXCLUSIVELY
FOR RESEARCH
OR EXPERIMENTATION
PURPOSES; RECAPTURE.—
‘‘(1) RECAPTURE OF CREDIT IN THE EVENT OF
FAILURE TO INCREASE RESEARCH AND EXPERIMEN-
TATION ACTIVITY.—If—
‘‘(A) the sum of—
‘‘(i) the credit received by a qualified
research corporation from an election
under this section made on its tax return
for a taxable year (the election year), plus
‘‘(ii) the amount of its research or ex-
perimental expenditures (within the mean-
ing of section 174, but prior to application
of section 280C) paid or incurred during
the election year, exceeds
‘‘(B) the amount of such research or ex-
perimental expenditures paid or incurred by the
qualified research corporation during the tax-
able year immediately following the election
year,
then the election shall be void to the extent of the
excess, and the excess shall be treated as an under-
payment of tax imposed by this chapter for the elec-
tion year without regard to any credit otherwise al-
lowable under this chapter.
‘‘(2) UNDERPAYMENT NOT SUBJECT TO CER-
TAIN PENALTIES.—An underpayment of tax deter-
mined under paragraph (1) shall not be taken into
account in determining any penalties or additions to
tax under sections 6655 and 6662.
‘‘(3) RECAPTURE
PENALTY
LIMITED
TO
THE
AMOUNT OF EXCHANGE ELECTION PAYMENTS RE-
CEIVED.—An underpayment of tax determined
under paragraph (1) shall not exceed the amount
taken into account under paragraph (1)(A)(i).
‘‘(4) EXCEPTION.—No increase in the aggre-
gate amounts paid by a qualified research corpora-
tion to a person with whom the corporation has a re-
lationship specified in section 267(b) shall be taken
into account in determining the amount of any ex-
cess under paragraph (1).
‘‘(h) ADDITIONAL REQUIREMENTS FOR A QUALIFIED
RESEARCH CORPORATION.—
‘‘(1) IN GENERAL.—A corporation shall be con-
sidered as meeting the requirements of this sub-
section for any taxable year if during such taxable
year—
‘‘(A) at least 80 percent (by value) of the
assets of such corporation are used by such cor-
poration in the active conduct of 1 or more
qualified trades or businesses,
‘‘(B) such corporation is an eligible cor-
poration, and
‘‘(C) such corporation has aggregate gross
assets (as defined in section 1202(d)(2)) of not
more than $500,000,000.
‘‘(2) SPECIAL
RULE
FOR
CERTAIN
ACTIVI-
TIES.—For purposes of paragraph (1), if, in connec-
tion with any future qualified trade or business, a
corporation is engaged in—
‘‘(A) startup activities described in section
195(c)(1)(A),
‘‘(B) activities resulting in the payment or
incurring of expenditures which may be treated
as research and experimental expenditures
under section 174, or
‘‘(C) activities with respect to in-house re-
search expenses described in section 41(b)(4),
assets used in such activities shall be treated as used
in the active conduct of a qualified trade or busi-
ness. Any determination under this paragraph shall
be made without regard to whether a corporation
has any gross income from such activities at the
time of the determination.
‘‘(3) QUALIFIED
TRADE
OR
BUSINESS.—For
purposes of this subsection, the term ‘qualified trade
or business’ means any trade or business other
than—
‘‘(A) any trade or business involving the
performance of services in the fields of health,
law, engineering, architecture, accounting, actu-
arial science, performing arts, consulting, ath-
letics, financial services, brokerage services, or
any trade or business where the principal asset
of such trade or business is the reputation or
skill of 1 or more of its employees,
‘‘(B) any banking, insurance, financing,
leasing, investing, or similar business,
‘‘(C) any farming business (including the
business of raising or harvesting trees),
‘‘(D) any business involving the production
or extraction of products of a character with re-
spect to which a deduction is allowable under
section 613 or 613A, and
‘‘(E) any business of operating a hotel,
motel, restaurant, or similar business.
‘‘(4) ELIGIBLE
CORPORATION.—For purposes
of this subsection, the term ‘eligible corporation’
means any domestic corporation, except that such
term shall not include—
‘‘(A) a DISC or former DISC,
‘‘(B) a corporation with respect to which
an election under section 936 is in effect or
which has a direct or indirect subsidiary with
respect to which such an election is in effect,
‘‘(C) a FSC (as defined in section 922, as
in effect on the day before the date of the en-
actment of the FSC Repeal and Extraterritorial
Income Exclusion Act of 2000),
‘‘(D) a regulated investment company, real
estate investment trust, REMIC, or FASIT, or
‘‘(E) a cooperative.
‘‘(5) STOCK IN OTHER CORPORATIONS.—
‘‘(A) LOOK-THRU
IN
CASE
OF
SUBSIDI-
ARIES.—For purposes of this subsection, stock
and debt in any subsidiary corporation shall be
disregarded and the parent corporation shall be
deemed to own its ratable share of the subsidi-
ary’s assets, and to conduct its ratable share of
the subsidiary’s activities.
‘‘(B) PORTFOLIO STOCK OR SECURITIES.—
A corporation shall be treated as failing to meet
the requirements of paragraph (1) for any pe-
riod during which more than 10 percent of the
value of its assets (in excess of liabilities) con-
sist of stock or securities in other corporations
which are not subsidiaries of such corporation
(other than assets described in paragraph (7)).
‘‘(C) SUBSIDIARY.—For purposes of this
paragraph, a corporation shall be considered a
subsidiary if the parent owns more than 50 per-
cent of the combined voting power of all classes
of stock entitled to vote, or more than 50 per-
cent in value of all outstanding stock, of such
corporation.
‘‘(6) WORKING
CAPITAL.—For purposes of
paragraph (2)(A), any assets which—
‘‘(A) are held as a part of the reasonably
required working capital needs of a qualified
trade or business of the corporation, or
‘‘(B) are held for investment and are rea-
sonably expected to be used within 5 years to
finance research and experimentation in a
qualified trade or business or increases in work-
ing capital needs of a qualified trade or busi-
ness,
shall be treated as used in the active conduct of a
qualified trade or business. For periods after the
corporation has been in existence for at least 5
years, in no event may more than 50 percent of the
assets of the corporation qualify as used in the ac-
tive conduct of a qualified trade or business by rea-
son of this paragraph.
‘‘(7) MAXIMUM
REAL
ESTATE
HOLDINGS.—A
corporation shall not be treated as meeting the re-
quirements of paragraph (2) for any period during
which more than 10 percent of the total value of its
assets consists of real property which is not used in
the active conduct of a qualified trade or business.
For purposes of the preceding sentence, the owner-
ship of, dealing in, or renting of real property shall
not be treated as the active conduct of a qualified
trade or business.
‘‘(8) COMPUTER
SOFTWARE
ROYALTIES.—For
purposes of paragraph (2), rights to computer soft-
ware which produces active business computer soft-
ware royalties (within the meaning of section
543(d)(1)) shall be treated as an asset used in the
active conduct of a trade or business.
‘‘(i) REGULATIONS.—The Secretary may prescribe
such regulations as may be necessary to carry out the pur-
poses of this section, including regulations coordinating
the application of this section with the consolidated return
regulations and regulations providing for the application
of this section to short taxable years.’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 55(c)(1) of the Internal Revenue
Code of 1986 is amended by striking ‘‘section
49(b)’’ and inserting ‘‘section 35(g), 49(b),’’.
(2) Section 1324(b)(2) of title 31, United
States Code, is amended by striking ‘‘or’’ before
‘‘enacted’’ and by inserting before the period at the
end ‘‘, or from section 35 of such Code’’.
(c) CLERICAL AMENDMENT.—The table of sections
for subpart C of part IV of subchapter A of chapter 1
of the Internal Revenue Code of 1986 is amended by strik-
ing the item relating to section 35 and inserting the fol-
lowing new items:
‘‘Sec. 35. Breakthrough research credit.
‘‘Sec. 36. Overpayments of tax.’’.