Restoring the benefit of tax incentives for biomedical research and clinical trials

(a)

In general

Subsection (l) of section 382 of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:

(9)

Certain financing transactions of biomedical research corporations

(A)

General rule

In the case of a biomedical research corporation, any owner shift involving a 5-percent shareholder which occurs as the result of a qualified investment or qualified transaction during the testing period shall be treated for purposes of this section (other than this paragraph) as occurring before the testing period. (B)

Biomedical research corporation

For purposes of this paragraph, the term biomedical research corporation means, with respect to any qualified investment, any domestic corporation subject to tax under this subchapter which is not in bankruptcy and which, as of the time of the closing on such investment— (i)holds the rights to a drug or biologic for which an investigational new drug application is in effect under section 505 of the Federal Food, Drug, and Cosmetic Act, and (ii)certifies that, as of the time of such closing, the drug or biologic is, or in the 3 month period before and after such closing has been, under study pursuant to an investigational use exemption under section 505(i) of the Federal Food, Drug, and Cosmetic Act. (C)

Qualified investment

For purposes of this paragraph, the term qualified investment means any acquisition of stock by a shareholder (who after such acquisition is a less than 50 percent shareholder) in a biomedical research corporation if such stock is acquired at its original issue (directly or through an underwriter) solely in exchange for cash. (D)

Qualified transaction

For purposes of this paragraph, the term qualified transaction means any acquisition of stock in a biomedical research corporation if such stock is acquired as part of a merger or acquisition by another biomedical research corporation that is a loss corporation. If the acquiring loss corporation is a member of a controlled group of corporations under section 1563(a), the group must be a loss group. (E)

Stock issued in exchange for convertible debt

For purposes of this paragraph, stock issued by a biomedical research corporation in exchange for its convertible debt (or stock deemed under this section to be so issued) shall be treated as stock acquired by the debt holder at its original issue and solely in exchange for cash if the debt holder previously acquired the convertible debt at its original issue and solely in exchange for cash. In the case of an acquisition of stock in exchange for convertible debt, the requirements of this paragraph shall be applied separately as of the time of closing on the investment in convertible debt, and as of the time of actual conversion (or deemed conversion under this section) of the convertible debt for stock. (F)

Biomedical research corporation must meet 3-year expenditure and continuity of business tests with respect to any qualified investment

(i)

In general

This paragraph shall not apply to a qualified investment or transaction in a biomedical research corporation unless such corporation meets the expenditure test for each year of the measuring period and the continuity of business test. (ii)

Measuring period

For purposes of this subparagraph, the term measuring period means, with respect to any qualified investment or transaction, the taxable year of the biomedical research corporation in which the closing on the investment occurs, and the 2 preceding taxable years. (iii)

Expenditure test

A biomedical research corporation meets the expenditure test of this subparagraph for a taxable year if at least 35 percent of its expenditures for the taxable year (including, for purposes of this clause, payments in redemption of its stock) are expenditures described in section 41(b) or clinical and preclinical expenditures. (iv)

Continuity of business test

A biomedical research corporation meets the continuity of business test if, at all times during the 2-year period following a qualified investment or transaction, such corporation continues the business enterprise of such corporation. (G)

Effect of corporate redemptions on qualified investments

Rules similar to the rules of section 1202(c)(3) shall apply to qualified investments under this paragraph except that stock acquired in a qualified investment shall be substituted for qualified small business stock each place it appears therein. (H)

Effect of other transactions between biomedical research corporations and investors making qualified investments

(i)

In general

If, during the 2-year period beginning 1 year before any qualified investment, the biomedical research corporation engages in another transaction with a member of its qualified investment group and such biomedical research corporation receives any consideration other than cash in such transaction, there shall be a presumption that stock received in the otherwise qualified investment transaction was not received solely in exchange for cash. (ii)

Qualified investment group

For purposes of this subparagraph, the term qualified investment group means, with respect to any qualified investment, one or more persons who receive stock issued in exchange for the qualified investment, and any person related to such persons within the meaning of section 267(b) or section 707(b). (iii)

Regulations

The Secretary shall promulgate regulations exempting from this subparagraph transactions which are customary in the bioscience research industry and are of minor value relative to the amount of the qualified investment. (I)

Regulations

The Secretary may issue such regulations as may be appropriate to achieve the purposes of this paragraph, to prevent abuse, and to provide for treatment of biomedical research corporations under sections 383 and 384 that is consistent with the purposes of this paragraph.

(b)

Effective date

The amendment made by this section shall apply to taxable years beginning after the date of enactment of this Act.