[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2153 Introduced in House (IH)]







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 
                 circumstances, 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 purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``American Breakthrough Research Act 
of 2001''.

SEC. 2. FINDINGS AND PURPOSE.

    (a) Findings.--Congress finds the following:
            (1) American high technology industries conduct long-term 
        research and development on breakthrough medical, industrial, 
        and agricultural technologies. It is critical to the 
        maintenance of American competitiveness internationally that 
        these long-term research and development projects be 
        encouraged.
            (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 critical social needs, even though these 
        solutions might not result in large sales and profits (such as 
        ``orphan'' drugs and other treatments alleviating great 
        suffering in their recipients).
            (3) High technology long-term research companies are among 
        the most research intensive and capital-intensive companies in 
        the world.
            (4) High technology companies typically operate in 
        financially challenging circumstances. While conducting their 
        long-term breakthrough research these companies must often seek 
        to endure without products and little or no earnings. Many are 
        small businesses lacking the resources and stability of large 
        corporations.
            (5) In addition to the scientific and technical risks 
        attending their long-term breakthrough research programs, many 
        high technology companies must subject their technologies 
        through lengthy and expensive regulatory reviews before they 
        are permitted access to the marketplace.
            (6) The long-term research high technology industry is 
        heavily dependent on outside sources of capital for continued 
        research funding. The industry's long lead times and high 
        levels of scientific and regulatory risk often impede access to 
        capital.
            (7) The longstanding national policy of Government 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 research and development 
        phases and therefore receive no contemporaneous benefit from 
        these tax incentives.
            (10) These tax incentives instead tend to favor investment 
        by large, profitable companies engaged in secondary or tertiary 
        research and development activities, 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 technology 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 research and 
        experimentation have the same cost-reducing 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 shortcomings 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 companies will be permitted to obtain 
current economic benefit from research-related tax incentives.

SEC. 3. BREAKTHROUGH RESEARCH TAX INCENTIVE EXCHANGES.

    (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 section:

``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 discounted 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 liability 
                (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 commencing during the period described 
                in subparagraph (A),
                    ``(C) at all times during the period described in 
                subparagraph (A) has met the requirements of subsection 
                (h), and
                    ``(D) which is not the subject of any proceeding 
                under Federal or State bankruptcy or insolvency laws.
            ``(2) Special rule.--A qualified research corporation, in 
        claiming the credit provided for in this section, shall not 
        take into account any expenditures for which it is reimbursed 
        by another taxpayer, except to the extent that the reimbursing 
        taxpayer provides a certification to the qualified research 
        corporation that--
                    ``(A) the reimbursing taxpayer would be entitled to 
                take such expenditures into account in the same manner, 
                and
                    ``(B) the reimbursing taxpayer shall not take such 
                expenditures into account in claiming any credits under 
                this section.
    ``(c) Definitions.--For the purposes of this section--
            ``(1) Research credit.--The term `research credit' means 
        the sum of those portions of a qualified research corporation's 
        current year business credit and business credit carryforwards, 
        as determined under section 38(a), which are attributable to 
        the credit determined under section 41 (for increases in 
        research activities) and to the orphan drug credit determined 
        under section 45C (for clinical testing expenses for certain 
        drugs for rare diseases or conditions).
            ``(2) Research nol.--The term `research NOL' means that 
        portion of a qualified research corporation's net operating 
        loss (as defined in section 172(c)) attributable to research 
        expenditures allowed as deductions for research or 
        experimentation activities under section 174 (after the 
        application of section 280C).
            ``(3) Discounted research credit.--The term `discounted 
        research credit' shall mean the research 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 multiplied by 75 percent of the 
        highest marginal tax rate in effect under section 11.
            ``(5) Ordering rule.--For purposes of determining 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-Related 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 relinquish all of its current year research NOL's 
        and research credits in exchange for cash refunds. The 
        corporation 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 corporation would be entitled to 
                carry forward to a taxable year for which it makes an 
                election under paragraph (1), then the taxpayer shall 
                designate such research NOL carryforwards and such 
                research credit carryforwards to be covered 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 corporation'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 research 
                        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 corporations 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 research NOL's that are subject to an 
        election under this section.
    ``(e) Extinguishment of Relinquished Tax Benefits.--
            ``(1) Deductions.--No deduction shall be allowed to a 
        qualified research corporation under the alternative minimum 
        tax provisions of section 56(a)(4) or the net operating loss 
        provisions of section 172 with respect to that portion of a net 
        operating 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 qualified research corporation which has received 
refunds pursuant 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 utilized 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 previously 
received, less any underpayment amount determined under subsection (g).
    ``(g) Credit Proceeds From Exchange of Research 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 experimentation 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 
                        experimental expenditures (within the meaning 
                        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 experimental 
                expenditures paid or incurred by the qualified research 
                corporation during the taxable 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 underpayment of tax 
        imposed by this chapter for the election year without regard to 
        any credit otherwise allowable under this chapter.
            ``(2) Underpayment not subject to certain penalties.--An 
        underpayment of tax determined 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 received.--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 aggregate amounts paid 
        by a qualified research corporation to a person with whom the 
        corporation has a relationship specified in section 267(b) 
        shall be taken into account in determining the amount of any 
        excess under paragraph (1).
    ``(h) Additional Requirements for a Qualified Research 
Corporation.--
            ``(1) In general.--A corporation shall be considered as 
        meeting the requirements of this subsection 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 corporation in the 
                active conduct of 1 or more qualified trades or 
                businesses,
                    ``(B) such corporation is an eligible corporation, 
                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 activities.--For purposes of 
        paragraph (1), if, in connection 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 research 
                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 business. 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, actuarial 
                science, performing arts, consulting, athletics, 
                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 respect 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 enactment 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 subsidiaries.--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 subsidiary'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 period during which more than 10 
                percent of the value of its assets (in excess of 
                liabilities) consist 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 percent of the combined voting 
                power of all classes of stock entitled to vote, or more 
                than 50 percent 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 reasonably 
                expected to be used within 5 years to finance research 
                and experimentation in a qualified trade or business or 
                increases in working capital needs of a qualified trade 
                or business,
        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 
        active conduct of a qualified trade or business by reason of 
        this paragraph.
            ``(7) Maximum real estate holdings.--A corporation shall 
        not be treated as meeting the requirements 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 ownership 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 software which produces 
        active business computer software 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 purposes 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 striking the item relating to section 35 and 
inserting the following new items:

                              ``Sec. 35. Breakthrough research credit.
                              ``Sec. 36. Overpayments of tax.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.
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