[Congressional Bills 110th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3264 Introduced in House (IH)]







110th CONGRESS
  1st Session
                                H. R. 3264

    To amend the Internal Revenue Code of 1986 to modernize the tax 
             treatment of biomedical research corporations.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             July 31, 2007

      Ms. Schwartz (for herself, Mr. Brady of Texas, Mr. Neal of 
Massachusetts, and Mr. Herger) 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 modernize the tax 
             treatment of biomedical research corporations.

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

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``American Life 
Sciences Competitiveness Act of 2007''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--The table of contents is as follows:

Sec. 1. Short title; table of contents.
        TITLE I--PROVISIONS RELATING TO CORPORATE TAX INCENTIVES

Sec. 101. Modify change of ownership rules.
Sec. 102. Research credit expansion.
Sec. 103. Orphan drug credit expansion.
Sec. 104. Countermeasures and pandemic flu research incentives.
        TITLE II--PROVISIONS RELATING TO INVESTOR TAX INCENTIVES

Sec. 201. Capital gains rollover.
Sec. 202. Equity credit for incubational firms.

        TITLE I--PROVISIONS RELATING TO CORPORATE TAX INCENTIVES

SEC. 101. MODIFY CHANGE OF OWNERSHIP RULES.

    (a) In General.--Subsection (l) of section 382 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, or 
                        holds the rights to a device for which an 
                        investigational device exemption is approved 
                        under section 520(g) of such Act, and
                            ``(ii) certifies that, as of the time of 
                        such closing, the drug, biologic, or device is, 
                        or in the 6 month period beginning 3 months 
                        before such closing has been, under study 
                        pursuant to an investigational use exemption 
                        under section 505(i) or section 520(g) 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 expenses.
                            ``(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 may 
                        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. 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 December 31, 2007.

SEC. 102. RESEARCH CREDIT EXPANSION.

    (a) Contract Research Expenses.--Subparagraph (D) of section 
41(b)(3) (relating to contract research expenses) is amended--
            (1) in the heading by inserting ``biomedical research 
        corporations,'' after ``eligible small businesses,'', and
            (2) in clause (i) by redesignating subclauses (II) and 
        (III) as subclauses (III) and (IV) respectively, and by 
        inserting after subclause (I) the following new subclause:
                                    ``(II) a biomedical research 
                                corporation (as defined in section 
                                382(l)(9)(B)),''.
    (b) Basic Research Expenses of Qualifying Biomedical Research 
Corporation.--Section 41(e)(3) is amended to read as follows:
            ``(3) Qualified organization base period amount.--For 
        purposes of this subsection--
                    ``(A) In general.--The term `qualified organization 
                base period amount' means an amount equal to the sum 
                of--
                            ``(i) the minimum basic research amount, 
                        plus
                            ``(ii) the maintenance-of-effort amount.
                    ``(B) Biomedical research corporation.--In the case 
                of a biomedical research corporation, the qualified 
                organization base period amount is zero.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 103. ORPHAN DRUG CREDIT EXPANSION.

    (a) In General.--Subclause (I) of section 45C(b)(2)(A)(ii) is 
amended to read as follows:
                    ``(I) after the date that the application is filed 
                for designation under section 526 of such Act, and''.
    (b) Effective Date.--The amendments made by this section shall 
apply to amounts paid or incurred in taxable years beginning after 
December 31, 2007.

SEC. 104. COUNTERMEASURES AND PANDEMIC FLU RESEARCH INCENTIVES.

    (a) Tax Credit To Fund Countermeasure Research.--
            (1) In general.--Subpart D of part IV of subchapter A of 
        chapter 1 (relating to business related credits) is amended by 
        adding at the end the following new section:

``SEC. 45O. CREDIT FOR MEDICAL RESEARCH RELATED TO DEVELOPING 
              COUNTERMEASURES.

    ``(a) General Rule.--For purposes of section 38, in the case of a 
biomedical research corporation, the countermeasures research credit 
determined under this section for the taxable year is an amount equal 
to 20 percent of the eligible countermeasures research expenses for the 
taxable year.
    ``(b) Eligible Countermeasures Research Expenses.--For purposes of 
this section--
            ``(1) Eligible countermeasures research expenses.--
                    ``(A) In general.--Except as otherwise provided in 
                this paragraph, the term `eligible countermeasures 
                research expenses' means amounts paid or incurred by 
                the taxpayer during the taxable year for research, 
                including preclinical research and animal model 
                development, which would be described in subsection (b) 
                of section 41 if such subsection were applied with the 
                modifications set forth in subparagraph (B) of this 
                paragraph and that the Secretary of Health and Human 
                Services determines has significant potential to lead 
                to the development of a covered countermeasure.
                    ``(B) Modifications; increased incentive for 
                contract research payments.--For purposes of 
                subparagraph (A), subsection (b) of section 41 shall be 
                applied--
                            ``(i) by substituting `eligible 
                        countermeasures research' for `qualified 
                        research' each place it appears in paragraphs 
                        (2) and (3) of such subsection, and
                            ``(ii) by substituting `100 percent' for 
                        `65 percent' in paragraph (3)(A) of such 
                        subsection.
                    ``(C) Exclusion for amounts funded by grants, 
                etc.--The term `eligible countermeasures research 
                expenses' shall not include any amount to the extent 
                such amount is funded by any grant, contract, or 
                otherwise by another person (or any governmental 
                entity).
            ``(2) Covered countermeasure.--The term `covered 
        countermeasure' has the meaning given such term in division C 
        of the Department of Defense, Emergency Supplemental 
        Appropriations to Address Hurricanes in the Gulf of Mexico, and 
        Pandemic Influenza Act, 2006.
    ``(c) Coordination With Credit for Increasing Research 
Expenditures.--
            ``(1) In general.--Except as provided in paragraph (2), any 
        eligible countermeasures research expenses for a taxable year 
        shall not be taken into account for purposes of determining the 
        credit allowable under section 41 for such taxable year.
            ``(2) Expenses included in determining base period research 
        expenses.--Any eligible countermeasures research expenses for 
        any taxable year which are qualified research expenses (within 
        the meaning of section 41(b)) shall be taken into account in 
        determining base period research expenses for purposes of 
        applying section 41 to subsequent taxable years.
    ``(d) Coordination With Credit for Clinical Testing Expenses for 
Certain Drugs for Rare Diseases.--Any eligible countermeasures research 
expense for a taxable year shall not be taken into account for purposes 
of determining the credit allowable under section 45C for such taxable 
year.
    ``(e) Certain Rules Made Applicable.--Rules similar to the rules of 
paragraphs (1) and (2) of section 41(f) shall apply for purposes of 
this section.''.
            (2) Inclusion in general business credit.--Section 38(b) is 
        amended by striking ``plus'' at the end of paragraph (30), by 
        striking the period at the end of paragraph (31) and inserting 
        ``, and'', and by adding at the end the following new 
        paragraph:
            ``(32) the countermeasures research credit determined under 
        section 45O.''.
            (3) Denial of double benefit.--Section 280C is amended by 
        adding at the end the following new subsection:
    ``(f) Credit for Eligible Countermeasures Research Expenses.--
            ``(1) In general.--No deduction shall be allowed for that 
        portion of the eligible countermeasures research expenses (as 
        defined in section 45O(b)) otherwise allowable as a deduction 
        for the taxable year which is equal to the amount of the credit 
        determined for such taxable year under section 45O(a).
            ``(2) Certain rules to apply.--Rules similar to the rules 
        of paragraphs (2), (3), and (4) of subsection (c) shall apply 
        for purposes of this subsection.''.
            (4) Deduction for unused portion of credit.--Section 196(c) 
        is amended by striking ``and'' at the end of paragraph (12), by 
        striking the period at the end of paragraph (13) and inserting 
        ``, and'', and by adding at the end the following new 
        paragraph:
            ``(14) the countermeasures research credit determined under 
        section 45O(a).''.
            (5) Technical amendment.--The table of sections for subpart 
        D of part IV of subchapter A of chapter 1 is amended by adding 
        at the end the following new item:

``Sec. 45O. Credit for medical research related to developing 
                            countermeasures.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

        TITLE II--PROVISIONS RELATING TO INVESTOR TAX INCENTIVES

SEC. 201. CAPITAL GAINS ROLLOVER.

    (a) In General.--
            (1) Section 1045(a) is amended by inserting ``or biomedical 
        research corporation stock'' after ``qualified small business 
        stock'' each place it appears herein.
            (2) Section 1045(b) is amended by redesignating paragraphs 
        (2), (3), (4), and (5) as paragraphs (3), (4), (5), and (6), 
        respectively, and by inserting after paragraph (1) the 
        following new paragraph:
            ``(2) Biomedical research corporation.--The term 
        `biomedical research corporation' has the meaning given to such 
        term in section 382(l)(9)(B) and has gross assets that do not 
        exceed $250,000,000 and agrees to submit such reports to the 
        Secretary and to shareholders as the Secretary may require to 
        carry out the purposes of this section. An entity meets the 
        gross assets test of the preceding sentence if the average 
        annual gross assets of such entity for the 3-taxable-year 
        period ending with the taxable year prior to the taxable year 
        in which the sale of qualified small business stock does not 
        exceed $250,000,000. For purposes of the preceding sentence, 
        rules similar to the rules of paragraphs (2) and (3) of section 
        448(c) (other than paragraph (3)(C) thereof) shall apply.''.
    (b) Conforming Amendments.--
            (1) The heading for section 1045 is amended by inserting 
        ``or biomedical research'' after ``small business'' each time 
        it appears.
            (2) The item relating to section 1045 in the table of 
        sections for part III of subchapter O of chapter 1 is amended 
        by inserting ``or biomedical research'' after ``small 
        business'' each time it appears.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 202. EQUITY CREDIT FOR INCUBATIONAL FIRMS.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
(as amended by this Act) is amended by inserting after section 45O the 
following new section:

``SEC. 45P. INCUBATIONAL EQUITY TAX CREDIT.

    ``(a) Allowance of Credit.--
            ``(1) General rule.--For purposes of section 38, in the 
        case of a taxpayer who makes a qualified incubational equity 
        investment during the taxable year, the incubational equity tax 
        credit determined under this section for such taxable year is 
        an amount equal to the applicable percentage of the amount paid 
        to the qualified incubational company solely in exchange for 
        its stock at original issue.
            ``(2) Applicable percentage.--For purposes of paragraph 
        (1), the applicable percentage is 20 percent.
    ``(b) Qualified Incubational Equity Investment.--For purposes of 
this section--
            ``(1) In general.--The term `qualified incubational equity 
        investment' means any equity investment in a qualified 
        incubational company if--
                    ``(A) such investment (not exceeding $500,000 per 
                taxable year) is acquired by the taxpayer at its 
                original issue (directly or through an underwriter) 
                solely in exchange for cash,
                    ``(B) not less than \1/2\ of such cash is used by 
                the qualified incubational company with respect to 
                qualifying research under section 41, and
                    ``(C) such investment is designated for purposes of 
                this section by the qualified incubational company.
        Such term shall not include any equity investment issued by a 
        qualified incubational company more than 5 years after the date 
        that such company receives an allocation under subsection (d). 
        Any allocation not used within such 5-year period may be 
        reallocated by the Secretary under subsection (d).
            ``(2) Limitation.--The maximum amount of equity investments 
        issued by a qualified incubational company which may be 
        designated under paragraph (1)(C) by such company shall not 
        exceed the portion of the limitation amount allocated under 
        subsection (f) to such company.
            ``(3) Treatment of subsequent purchasers.--The term 
        `qualified equity investment' includes any equity investment 
        which would (but for paragraph (1)(A)) be a qualified equity 
        investment in the hands of the taxpayer if such investment was 
        a qualified equity investment in the hands of a prior holder.
            ``(4) Redemptions.--A rule similar to the rule of section 
        1202(c)(3) shall apply for purposes of this subsection.
            ``(5) Equity investment.--The term `equity investment' 
        means any stock (other than nonqualified preferred stock as 
        defined in section 351(g)(2)) in an entity which is a 
        corporation.
    ``(c) Qualified Incubational Company.--For purposes of this 
section--
            ``(1) In general.--The term `qualified incubational 
        company' means any domestic biomedical research corporation (as 
        defined in section 382(l)(9)(B)) subject to tax under 
        subchapter C of this chapter, that has 25 employees or less and 
        gross assets of less than $25,000,000.
            ``(2) Gross assets test.--For purpose of paragraph (1), 
        rules similar to the rules of section 1244(d)(3) shall apply, 
        determined by substituting `$25,000,000' for `$500,000,000' in 
        subparagraph (A) thereof.
    ``(d) National Limitation on Amount of Investments Designated.--
            ``(1) In general.--There is an incubational equity tax 
        credit limitation of $500,000,000 for each taxable year.
            ``(2) Allocation of limitation.--The limitation under 
        paragraph (1) shall be allocated by the Secretary among 
        qualified incubational companies selected by the Secretary. In 
        making allocations under the preceding sentence, the Secretary 
        shall give priority to the extent to which it is reasonably 
        anticipated that a qualified incubational company would have 
        insufficient taxable income and tax liability to utilize the 
        section 41 research tax credit.
            ``(3) Carryover of unused limitation.--If the qualified 
        incubational equity tax credit limitation for any taxable year 
        exceeds the aggregate amount allocated under paragraph (2) for 
        such year, such limitation for the succeeding taxable year 
        shall be increased by the amount of such excess.
    ``(e) Recapture of Credit in Certain Cases.--
            ``(1) In general.--If, at any time during the 4-year period 
        beginning on the date of the original issue of a qualified 
        incubational equity investment in a qualified incubational 
        company, there is a recapture event with respect to such 
        investment, then the tax imposed by this chapter for the 
        taxable year in which such event occurs shall be increased by 
        the credit recapture amount.
            ``(2) Credit recapture amount.--For purposes of paragraph 
        (1), the credit recapture amount is an amount equal to the sum 
        of--
                    ``(A) the aggregate decrease in the credits allowed 
                to the taxpayer under section 38 for all prior taxable 
                years which would have resulted if no credit had been 
                determined under this section with respect to such 
                investment; plus
                    ``(B) interest at the underpayment rate established 
                under section 6621 on the amount determined under 
                subparagraph (A) for each prior taxable year for the 
                period beginning on the due date for filing the return 
                for the prior taxable year involved.
        No deduction shall be allowed under this chapter for interest 
        described in subparagraph (B).
            ``(3) Recapture event.--For purposes of paragraph (1), 
        there is a recapture event with respect to a qualified 
        countermeasures equity investment in a qualified 
        countermeasures company if--
                    ``(A) such company ceases to be a qualified 
                biomedical research corporation (as defined in section 
                382(l)(9)(B)), or
                    ``(B) such investment is redeemed by such company.
            ``(4) Special rules.--
                    ``(A) Tax benefit rule.--The tax for the taxable 
                year shall be increased under paragraph (1) only with 
                respect to credits allowed by reason of this section 
                which were used to reduce tax liability. In the case of 
                credits not so used to reduce tax liability, the 
                carryforwards and carrybacks under section 39 shall be 
                appropriately adjusted.
                    ``(B) No credits against tax.--Any increase in tax 
                under this subsection shall not be treated as a tax 
                imposed by this chapter for purposes of determining the 
                amount of any credit under this chapter or for purposes 
                of section 55.
    ``(f) Basis Reduction.--The basis of any qualified incubational 
equity investment shall be reduced by the amount of any credit 
determined under this section with respect to such investment. This 
subsection shall not apply for purposes of sections 1202, 1400B, and 
1400F.
    ``(g) Regulations.--The secretary shall prescribe such regulations 
as may be appropriate to carry out this section, including regulations 
which--
            ``(1) prevent the abuse of the purposes of this section,
            ``(2) impose appropriate reporting requirements, and
            ``(3) apply the provisions of this section to newly formed 
        entities.''.
    (b) Credit To Be Part of General Business Credit.--Section 38(b) 
(as amended by this Act) is further amended by striking ``and'' at the 
end of paragraph (31), by striking the period at the end of paragraph 
(32) and inserting ``, and'', and by adding at the end the following:
            ``(33) the incubational equity tax credit determined under 
        section 45N(a).''.
    (c) Deduction for Unused Portion of Credit.--Section 196(c) 
(defining qualified business credits), as amended by this section, is 
amended by striking ``and'' at the end of paragraph (12), by striking 
the period at the end of paragraph (13) and inserting ``, and'', and by 
adding at the end the following new paragraph:
            ``(14) the incubational equity tax credit determined under 
        section 45P(a).''.
    (d) Clerical Amendment.--The table of sections for subpart D of 
part IV of subchapter A of chapter 1 (as amended by this Act) is 
further amended by adding after the item relating to section 45O the 
following new item:

``Sec. 45P. Incubational equity tax credit.''.
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.
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