such items are directly allocable to patent gross re-
ceipts. 
‘‘(5) SPECIAL RULES.— 
‘‘(A) DETERMINATION OF COSTS.— 
‘‘(i) IN GENERAL.—Cost shall be de-
termined in accordance with the principles 
of sections 263A and 471, as provided for 
by the Secretary under regulations or other 
guidance. 
‘‘(ii) ITEMS BROUGHT INTO UNITED 
STATES.—For purposes of determining 
cost of goods sold, any item or service 
brought into the United States shall be 
treated as acquired by purchase, and its 
cost shall be treated as not less than its 
value immediately after it entered the 
United States. A similar rule shall apply in 
determining the adjusted basis of leased or 
rented property where the lease or rental 
gives rise to patent gross receipts. 
‘‘(iii) EXPORTS FOR FURTHER MANU-
FACTURE.—In the case of any property de-
scribed in clause (ii) that had been ex-
ported by the taxpayer for further manu-
facture, the increase in cost or adjusted 
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basis under subparagraph (A) shall not ex-
ceed the difference between the value of 
the property when exported and the value 
of the property when brought back into the 
United States after the further manufac-
ture. 
‘‘(B) 5-YEAR
RESEARCH
AND
DEVELOP-
MENT
EXPENDITURES.—The term ‘5-year re-
search and development expenditures’ means 
with respect to a taxable year the research and 
development expenditures paid or incurred by 
the taxpayer for the performance of research 
and development in the United States for which 
a deduction is allowed under subsection (a) or 
(b) of section 174 (determined without regard 
to section 41) for the 5-taxable-year period end-
ing with the taxable year. 
‘‘(C) 5-YEAR TOTAL COSTS.—The term ‘5- 
year total costs’ means with respect to a taxable 
year the excess of— 
‘‘(i) all costs paid or incurred by the 
taxpayer for the 5-taxable year period end-
ing with such taxable year, over 
‘‘(ii) the sum of— 
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‘‘(I) the taxpayer’s cost of goods 
sold for such 5-taxable year period, 
‘‘(II) interest paid or accrued for 
such 5-taxable year period, 
‘‘(III) taxes paid or accrued for 
such 5-taxable year period, and 
‘‘(IV) the net gain or loss for 
such 5-taxable year period from the 
sale or exchange of capital assets. 
‘‘(D) RULES
RELATING
TO
5-YEAR
PE-
RIOD.—For purposes of this paragraph— 
‘‘(i) NOT IN EXISTENCE FOR ENTIRE 
5-YEAR PERIOD.—If the taxpayer was not 
in existence for the entire 5-year period re-
ferred to in subparagraphs (B) and (C), 
such subparagraphs shall be applied on the 
basis of the period during which such tax-
payer was in existence. 
‘‘(ii) 
TREATMENT
OF
PREDE-
CESSORS.—Any reference in this para-
graph to a taxpayer shall include a ref-
erence to any predecessor of such taxpayer. 
‘‘(6) PATENT GROSS RECEIPTS.— 
‘‘(A) IN
GENERAL.—The term ‘patent 
gross receipts’ means gross receipts of the tax-
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payer for the taxable year which are derived 
from the sale, lease, license, or other disposition 
of property in the ordinary course of a United 
States trade or business of the taxpayer in 
which qualified patent property is used directly 
or indirectly if more than a substantial percent-
age of the value of the such property is derived 
from the use of one or more qualified patents. 
‘‘(B) SPECIAL
RULES.—For purposes of 
this paragraph— 
‘‘(i) COMPENSATION
FOR
INFRINGE-
MENT
OF
A
PATENT.—The term ‘patent 
gross receipts’ includes compensation for 
the infringement of a qualified patent to 
the extent the compensation is included in 
gross income of the taxpayer. 
‘‘(ii) SALES TO RELATED PERSONS.— 
The term ‘patent gross receipts’ shall not 
include any gross receipts of the taxpayer 
derived from sales of a qualified patent to 
a related person. 
‘‘(iii) REGULATIONS.— 
‘‘(I) IN GENERAL.—Under regu-
lations or other guidance prescribed 
by the Secretary, such term shall not 
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include any transaction with a related 
person which the Secretary determines 
abuses the purposes of this para-
graph. 
‘‘(II) RELATED PERSON.—A per-
son shall be treated as related to an-
other person if such persons are treat-
ed as a single employer under sub-
section (a) or (b) of section 52 or sub-
section (m) or (o) of section 414, ex-
cept that determinations under sub-
sections (a) and (b) of section 52 shall 
be made without regard to section 
1563(b). 
‘‘(7) 
QUALIFIED
PATENT
PROPERTY.—The 
term ‘qualified patent property’ means property 
which is— 
‘‘(A) a qualified patent, or 
‘‘(B) a product which incorporates a quali-
fied patent or patents if more than a substan-
tial percentage of the value of the product is de-
rived from the use of one or more qualified pat-
ents. 
‘‘(8) QUALIFIED PATENT.— 
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‘‘(A) IN
GENERAL.—The term ‘qualified 
patent’ means a patent— 
‘‘(i) issued or extended by, or for 
which an application is pending before, the 
United States Patent and Trademark Of-
fice under title 35, United States Code, 
‘‘(ii) with respect to which— 
‘‘(I) the taxpayer is the patent 
owner or the holder of an exclusive li-
cense to exploit the patent within a 
specified territory or for a specific 
purpose, 
‘‘(II) the taxpayer is actively in-
volved in the decisionmaking con-
nected with exploiting the patent, and 
‘‘(III) either the taxpayer or a 
member of the affiliated group of 
which the taxpayer is a member per-
formed significant activity to develop 
the patented invention, its application, 
or a product incorporating the pat-
ented invention, and 
‘‘(iii) for any taxable year beginning 
after the third taxable year beginning after 
the date of the enactment of this section, 
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then the foreign patent described in clause (ii) 
shall be treated as a qualified patent for pur-
poses of this section. 
‘‘(C) SPECIAL
RULES
RELATING
TO
LI-
CENSING.— 
‘‘(i) QUALIFIED PATENT.—In the case 
of a license of a patent, the patent shall 
not be treated as a qualified patent unless 
the licensor— 
‘‘(I) certifies to the licensee (in 
such form and manner as the Sec-
retary may prescribe) that the patent 
is a qualified patent, and 
‘‘(II) provides to the licensee 
such information as the Secretary 
may require to determine whether the 
patent is a qualified patent. 
‘‘(ii) ROYALTIES.—Royalties, profit 
shares, and similar amounts received from 
the license or use of a qualified patent 
shall be treated as qualified patent gross 
receipts if the licensor meets the require-
ments of clause (i) and has developed or 
has acquired and added substantial value 
to the qualified patent, but only so long as 
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the licensor is regularly engaged in the de-
velopment and addition of substantial 
value to property of such kind. 
‘‘(D) SPECIAL RULES RELATING TO PAT-
ENT CLAIMS DENIED OR RULED INVALID.— 
‘‘(i) RECAPTURE.—If— 
‘‘(I) there is a recapture event 
with respect to any claim contained in 
a qualified patent, and 
‘‘(II) a deduction was allowed 
under subsection (a) for any taxable 
year with respect to such claim, 
the tax imposed by this chapter for the 
taxable year in which such recapture event 
occurs shall be increased by the recapture 
amount. 
‘‘(ii) RECAPTURE
EVENT.—For pur-
poses of clause (i), the term ‘recapture 
event’ means, with respect to a claim 
that— 
‘‘(I) the patent does not issue on 
the basis (in whole or in part) of such 
claim, or 
‘‘(II) such claim is determined by 
the United States Patent and Trade-
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mark Office or a court of competent 
jurisdiction not to be valid. 
‘‘(iii) 
RECAPTURE
AMOUNT.—For 
purposes of clause (i), the recapture 
amount with respect to a claim is the sum 
of— 
‘‘(I) the excess of the amount by 
which— 
‘‘(aa) the total tax (deter-
mined without regard to sub-
section (a)) that would be shown 
on returns of tax of the taxpayer 
for all taxable years for which a 
deduction was allowed under sub-
section (a) with respect to such 
claim, exceeds 
‘‘(bb) the total tax shown on 
all returns of tax of the taxpayer 
for all taxable years for which a 
deduction was allowed under sub-
section (a) with respect to such 
claim, determined with regard to 
subsection (a), plus 
‘‘(II) in the case of a recapture 
event described in clause (ii)(I), inter-
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est at the underpayment rate estab-
lished under section 6621 on the 
amount determined under subclause 
(I) for each prior taxable year for the 
period beginning on the due date for 
filing the return for the prior taxable 
year involved. 
‘‘(9) ALTERNATIVE
DETERMINATION
OF
PAT-
ENT BOX PROFIT.— 
‘‘(A) IN
GENERAL.—In accordance with 
regulations or other guidance provided by the 
Secretary, the taxpayer may elect to determine 
patent box profit as the amount equal to the 
net income derived from patent gross receipts 
related to exploitation of the qualified patent 
that would be received for the taxable year if all 
transactions of the taxpayer for the taxable 
year were conducted at arm’s length under the 
principles of section 482. 
‘‘(B) ELECTION.—An election under sub-
paragraph (A) for a taxable year shall apply 
with respect to all qualified patents. Such elec-
tion, once made, may be revoked only with the 
consent of the Secretary. 
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‘‘(c) ALTERNATIVE METHOD
FOR CERTAIN TAX-
PAYERS.—In the case of a taxpayer which meets the 
$5,000,000 gross receipts test of section 448(c) for the 
taxable year, patent box profit shall be the greater of the 
amount determined under subsection (b) or 50 percent of 
IP profit. 
‘‘(d) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section— 
‘‘(1) APPLICATION OF SECTION TO PASS-THRU 
ENTITIES.— 
‘‘(A) PARTNERSHIPS
AND
S
CORPORA-
TIONS.—In the case of a partnership or S cor-
poration— 
‘‘(i) the deduction under subsection 
(a) shall be determined at the partner or 
shareholder level, 
‘‘(ii) except as provided in clause (i), 
all determinations relating to receipts, ex-
penses, and whether a patent is a qualified 
patent shall be made at the entity level, 
and 
‘‘(iii) each partner or shareholder 
shall take into account such person’s allo-
cable share of each item described in 
clause (i) or (ii) of subsection (b)(2)(A) 
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(determined without regard to whether the 
items described in such clause (i) exceed 
the items described in such clause (ii)). 
‘‘(B) TRUSTS AND ESTATES.—In the case 
of a trust or estate— 
‘‘(i) the items referred to in subpara-
graph (A)(ii) (as determined therein) shall 
be apportioned between the beneficiaries 
and the fiduciary (and among the bene-
ficiaries) under regulations prescribed by 
the Secretary, and 
‘‘(ii) for purposes of paragraph (2), 
adjusted gross income of the trust or es-
tate shall be determined as provided in sec-
tion 67(e) with the adjustments described 
in such paragraph. 
‘‘(C) APPLICATION
TO
INDIVIDUALS.—In 
the case of an individual, subsection (a)(2) shall 
be applied by substituting ‘adjusted gross in-
come’ for ‘taxable income’. For purposes of the 
preceding sentence, adjusted gross income shall 
be determined— 
‘‘(i) after application of sections 86, 
135, 137, 199, 219, 221, 222, and 469, 
and 
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