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 enti-
ties. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. EXCEPTION FROM PASSIVE LOSS RULES FOR 
INVESTMENTS IN HIGH TECHNOLOGY RE-
SEARCH SMALL BUSINESS PASS-THRU ENTI-
TIES. 
(a) IN GENERAL.—Subsection (c) of section 469 of 
the Internal Revenue Code of 1986 is amended by redesig-
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and deductions of the taxpayer relating to 
qualified research activities of such entity 
for such taxable year do not exceed the 
portion of the taxpayer’s adjusted basis in 
the taxpayer’s ownership interest in such 
entity that is attributable to money or 
other property contributed— 
‘‘(I) in exchange for such owner-
ship interest, and 
‘‘(II) specifically for use in con-
nection with qualified research activi-
ties. 
For purposes of the preceding sentence, 
the taxpayer’s basis shall not include any 
portion of such basis which is attributable 
to an increase in a partner’s share of the 
liabilities of a partnership that is consid-
ered under section 752(a) as a contribution 
of money. 
‘‘(C) TREATMENT OF CARRYOVERS.—Sub-
paragraph (B)(i) shall not apply to the portion 
of any loss or deduction that is carried over 
under subsection (b) into a taxable year other 
than the taxable year in which such loss or de-
duction arose. 
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‘‘(D) QUALIFIED
RESEARCH
ACTIVITY.— 
For purposes of this paragraph, the term 
‘qualified research activity’ means any activity 
constituting qualified research (within the 
meaning of section 41(d)(1)(B) and taking into 
account paragraphs (3) and (4) of section 
41(d)) which involves a process of experimen-
tation. 
‘‘(E) 
HIGH
TECHNOLOGY
RESEARCH 
SMALL
BUSINESS
PASS-THRU
ENTITY.—For 
purposes of this paragraph, the term ‘high tech-
nology research small business pass-thru entity’ 
means any domestic pass-thru entity for any 
taxable year if— 
‘‘(i) either— 
‘‘(I) more than 75 percent of the 
entity’s expenditures (including sala-
ries, rent and overhead) for such tax-
able year are paid or incurred in con-
nection with qualified research (within 
the meaning of section 41(d)(1)(B), 
taking into account paragraphs (3) 
and (4) of section 41(d)) that involves 
a process of experimentation con-
ducted by the entity, or 
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‘‘(II) more than 50 percent of 
the entity’s expenditures for such tax-
able year constitute qualified research 
expenses (as defined in section 41(b), 
but determined without regard to the 
phrase ‘65 percent of’ in paragraph 
(3)(A) thereof), 
‘‘(ii) such entity is a small business 
(within 
the 
meaning 
of 
section 
41(b)(3)(D)(iii), applied by substituting 
‘250’ for ‘500’ in subclause (I) thereof), 
and 
‘‘(iii) at no time during the taxable 
year does the entity have aggregate gross 
assets in excess of $150,000,000. 
‘‘(F) PROVISIONS
RELATED
TO
AGGRE-
GATE
GROSS
ASSETS
LIMITATION.—For pur-
poses of this paragraph— 
‘‘(i) IN GENERAL.—Except as other-
wise provided in this subparagraph, the 
term ‘aggregate gross assets’ has the 
meaning given such term in section 
1202(d)(2). 
‘‘(ii) EXCEPTION
FOR
CERTAIN
IN-
TANGIBLES.—Any section 197 intangible 
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(as defined in section 197(d) and deter-
mined without regard to section 197(e)) 
which is used directly in connection with 
the research referred to in subparagraph 
(E)(i) shall not be taken into account in 
determining aggregate gross assets. 
‘‘(iii) EXCEPTION FOR CERTAIN FOL-
LOW-ON INVESTMENTS.—Cash from a sale 
of equity interests shall not be taken into 
account in determining aggregate gross as-
sets if— 
‘‘(I) the aggregate gross assets of 
such entity (determined immediately 
after such sale and without regard to 
this clause) do not exceed the sum of 
$150,000,000, plus 25 percent of the 
aggregate gross assets of such entity 
(determined immediately before such 
sale and without regard to this 
clause), and 
‘‘(II) the aggregate gross assets 
of such entity (determined imme-
diately before such sale and without 
regard to this clause) do not exceed 
$150,000,000. 
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Sales of equity interests which are part of 
the same plan or arrangement, or which 
are carried out with the principal purpose 
of increasing the amount of cash to which 
this clause applies (determined without re-
gard to this sentence), shall be treated as 
a single sale for purposes of this clause. 
‘‘(iv) INFLATION
ADJUSTMENT.—In 
the case of any taxable year beginning 
after 2015, the $150,000,000 amount in 
subparagraph (E)(iii) and subclauses (I) 
and (II) of clause (iii) shall each be in-
creased by an amount equal to— 
‘‘(I) such dollar amount, multi-
plied by 
‘‘(II) the cost of living adjust-
ment determined under section 1(f)(3) 
for the calendar year in which the tax-
able year begins determined by sub-
stituting ‘calendar year 2014’ for ‘cal-
endar year 1992’ in subparagraph (B) 
thereof. 
Any increase determined under the pre-
ceding sentence shall be rounded to the 
nearest $100,000. 
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‘‘(G) CAPITAL EXPENDITURES TAKEN INTO 
ACCOUNT FOR EXPENDITURES TEST.—An ex-
penditure shall not fail to be taken into account 
under subparagraph (E)(i) merely because such 
expenditure is chargeable to capital account. 
‘‘(H) PASS-THRU ENTITY.—For purposes 
of this paragraph, the term ‘pass-thru entity’ 
means any partnership, S corporation, or other 
entity identified by the Secretary as a pass-thru 
entity for purposes of this paragraph. 
‘‘(I) AGGREGATION RULES.— 
‘‘(i) IN GENERAL.—All persons treat-
ed as a single employer under subsection 
(a) or (b) of section 52, or subsection (m) 
or (o) of section 414, shall be treated as a 
single entity for purposes of subparagraphs 
(E) and (F)(iii). 
‘‘(ii) 
LIMITATION
WHERE
ENTITY 
WOULD NOT QUALIFY.—No entity shall be 
treated as a high technology research small 
business pass-thru entity unless such enti-
ty qualifies as such both with and without 
the application of clause (i). 
‘‘(J) ACTIVITIES
NOT
ENGAGED
IN
FOR 
PROFIT AND ECONOMIC SUBSTANCE RULES.— 
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Section 183 and the economic substance rules 
of section 7701(o) shall not apply to disallow 
the losses, deductions, and credits of a high 
technology research small business pass-thru 
entity solely as a result of losses incurred by 
such entity.’’. 
(b) MATERIAL PARTICIPATION NOT REQUIRED.— 
Paragraph (5) of section 469(c) of the Internal Revenue 
Code of 1986, as redesignated by subsection (a), is amend-
ed by striking ‘‘and (3)’’ in the heading and text and in-
serting ‘‘, (3), and (4)’’. 
(c) CERTAIN RESEARCH-RELATED DEDUCTIONS AND 
CREDITS
OF HIGH TECHNOLOGY RESEARCH SMALL 
BUSINESS PASS-THRU ENTITIES ALLOWED
FOR PUR-
POSES OF DETERMINING ALTERNATIVE MINIMUM TAX.— 
(1) DEDUCTION FOR RESEARCH AND EXPERI-
MENTAL EXPENDITURES.—Paragraph (2) of section 
56(b) of the Internal Revenue Code of 1986 is 
amended by adding at the end the following new 
subparagraph: 
‘‘(E) EXCEPTION FOR HIGH TECHNOLOGY 
RESEARCH SMALL BUSINESS PASS-THRU ENTI-
TIES.—In the case of a high technology re-
search small business pass-thru entity (as de-
fined in section 469(c)(4)), this paragraph shall 
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not apply to any amount allowable as a deduc-
tion under section 174(a).’’. 
(2) ALLOWANCE
OF
CERTAIN
RESEARCH-RE-
LATED
CREDITS.—Subparagraph (B) of section 
38(c)(4) of such Code is amended by redesignating 
clauses (ii) through (ix) as clauses (iii) through (x), 
respectively, and by inserting after clause (i) the fol-
lowing new clause: 
‘‘(ii) the credits of an individual tax-
payer determined under sections 41 and 
48D to the extent attributable to a high 
technology research small business pass- 
thru 
entity 
(as 
defined 
in 
section 
469(c)(4)),’’. 
(d) EXCEPTION TO LIMITATION ON PASS-THRU OF 
RESEARCH CREDIT.—Subsection (g) of section 41 of such 
Code is amended by adding at the end the following: 
‘‘Paragraphs (2) and (4) shall not apply with respect to 
any high technology research small business pass-thru en-
tity (as defined in section 469(c)(4)).’’. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to losses and credits arising in tax-
able years beginning on or after the date of the enactment 
of this Act. 
Æ 
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