[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[S. 1049 Introduced in Senate (IS)]







107th CONGRESS
  1st Session
                                S. 1049

 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 SENATE OF THE UNITED STATES

                             June 14, 2001

Mr. Torricelli introduced the following bill; which was read twice and 
                  referred to the Committee on Finance

_______________________________________________________________________

                                 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 programs be 
        encouraged.
            (2) Such long-term research and development programs 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 and development, 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 and development 
        programs, many high technology companies must subject their 
        technologies through lengthy and expensive regulatory reviews 
        before such technologies 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 and development 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 such 
        companies 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 development 
        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.--Subpart C of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 (relating to refundable credits) 
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.--In the case of a qualified research 
corporation, there shall be allowed as a credit against the tax imposed 
by this subtitle for the taxable year an amount equal to the sum of the 
discounted research credits and discounted research NOL's subject to an 
election in such taxable year by the taxpayer under subsection (d).
    ``(b) Qualified Research Corporation.--For the purposes of this 
section, the term `qualified research corporation' means any domestic 
corporation subject to tax under subchapter C of this chapter--
            ``(1) 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) preceding the taxable year in which an election is made 
        under subsection (d),
            ``(2) 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 beginning 
        during the period described in paragraph (1),
            ``(3) at all times during the period described in paragraph 
        (1) has met the requirements of subsection (h), and
            ``(4) which is not the subject of any proceeding under 
        Federal or State bankruptcy or insolvency laws.
    ``(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) for the taxable year, 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)) for the taxable year 
        attributable to qualified research expenses (as defined in 
        section 41(b)), basic research expenses (as defined in section 
        41(e)(2)), and qualified clinical testing expenses (as defined 
        in section 45C(b)) allowed as deductions for research or 
        experimentation activities under section 174 (after the 
        application of section 280C) for such taxable year.
            ``(3) Discounted research credit.--The term `discounted 
        research credit' means 75 percent of the amount of a qualified 
        research corporation's research credit for the taxable year 
        subject to an election under subsection (d).
            ``(4) Discounted research nol.--The term `discounted 
        research NOL' means 75 percent of the amount of a qualified 
        research corporation's research NOL for the taxable year 
        subject to an election under subsection (d), multiplied by the 
        highest marginal tax rate in effect under section 11 for such 
        taxable year.
            ``(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.
            ``(6) Allowable expenditures.--For purposes of determining 
        a qualified research corporation's research credit or research 
        NOL, no expenditure for which such corporation is reimbursed by 
        another taxpayer shall be taken into account, 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 chapter.
    ``(d) Election To Relinquish Research-Related Tax Credits and Net 
Operating Losses for Refundable Credit.--
            ``(1) General rule; benefits arising in current year.--A 
        qualified research corporation may make an election under this 
        subsection to relinquish all of its research credits and 
        research NOL's for the taxable year for the credit under 
        subsection (a). The corporation shall make the election on its 
        timely filed tax return (including extensions) for the taxable 
        year in which the research credits and research NOL's arise.
            ``(2) Special rule; unused tax credit and net operating 
        loss carryforwards.--
                    ``(A) In general.--The election under this 
                subsection for any taxable year may include any 
                research credits or research NOL's not subject to an 
                election under this subsection in any preceding taxable 
                year, which arose in such preceding taxable year and 
                with respect to which the qualified research 
                corporation is entitled to carry forward to the taxable 
                year of the election.
                    ``(B) Limitation.--For any taxable year, the sum of 
                research credit carryforwards and research NOL 
                carryforwards to the taxable year which may be 
                designated as covered by an election under this 
                subsection shall not exceed the greater of--
                            ``(i) the average of the annual amounts of 
                        the qualified research corporation's research 
                        credits and research NOL's arising in the 3-
                        taxable year period ending immediately before 
                        the taxable year of the election, or
                            ``(ii) 20 percent of the qualified research 
                        corporation's research credit carryforwards and 
                        research NOL carryforwards.
            ``(3) Procedures and recordkeeping by electing 
        corporation.--An election under this subsection may be revoked 
        by the taxpayer only with the consent of the Secretary. Any 
        qualified research corporation 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 
subsection.
    ``(e) Extinguishment of Relinquished Tax Benefits.--
            ``(1) Credits.--No credit shall be allowed for any taxable 
        year to a qualified research corporation under section 38(a) 
        with respect to any research credit determined under section 41 
        or 45C for which an election under subsection (d) is in effect.
            ``(2) Deductions.--No deduction shall be allowed for any 
        taxable year 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 
        any research NOL for which an election under subsection (d) is 
        in effect.
    ``(f) Limitation on Use of Nonrelinquished Tax Benefits by Electing 
Corporation.--A qualified research corporation which has claimed a 
credit under subsection (a) pursuant to an election under subsection 
(d) shall not be entitled to utilize any carrybacks or carryforwards of 
research credits or research NOL's (which are not subject to an 
election under subsection (d) and are otherwise available to be 
utilized in the taxable year) to reduce taxable income or to offset any 
tax liability for any taxable year after the year of such election, 
until such corporation has paid tax imposed under this chapter for all 
such taxable years in an aggregate amount equal to the aggregate amount 
of the credits allowed under subsection (a) for any preceding taxable 
year, 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 allowed under subsection 
                        (a) to a qualified research corporation 
                        pursuant to an election under subsection (d) 
                        for any taxable year, plus
                            ``(ii) the amount of such corporation's 
                        research or experimental expenditures (within 
                        the meaning of section 174, as modified by 
                        subsection (c)(2), but prior to application of 
                        section 280C) paid or incurred during such 
                        taxable year, exceeds
                    ``(B) the amount of such research or experimental 
                expenditures paid or incurred by the qualified research 
                corporation during the immediately succeeding taxable 
                year,
        then the election under subsection (d) 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 taxable 
        year of such election 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 regulated investment company, real estate 
                investment trust, REMIC, or FASIT, or
                    ``(D) 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 taxable 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 taxable 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 shall 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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