[Congressional Bills 112th Congress]
[From the U.S. Government Publishing Office]
[H.R. 6353 Introduced in House (IH)]

112th CONGRESS
  2d Session
                                H. R. 6353

  To amend the Internal Revenue Code of 1986 to allow a deduction for 
        patent box profit from the use of United States patents.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             August 2, 2012

 Ms. Schwartz (for herself and Mr. Boustany) 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 allow a deduction for 
        patent box profit from the use of United States patents.

    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 ``Manufacturing American Innovation 
Act of 2012''.

SEC. 2. DEDUCTION FOR PATENT BOX PROFITS.

    (a) In General.--Part VI of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 is amended by adding at the end the 
following new section:

``SEC. 200. PATENT BOX PROFITS.

    ``(a) Allowance of Deduction.--If the taxpayer elects the 
application of this section, there shall be allowed as a deduction an 
amount equal to 71 percent of the lesser of--
            ``(1) the patent box profit of the taxpayer for the taxable 
        year, or
            ``(2) taxable income (determined without regard to this 
        section) for the taxable year.
    ``(b) Patent Box Profit.--For purposes of this section--
            ``(1) In general.--Except as provided by paragraph (9), the 
        term `patent box profit' means, with respect to a taxable year, 
        IP profit multiplied by the ratio--
                    ``(A) the numerator of which is the 5-year research 
                and development expenditures of the taxpayer with 
                respect to the taxable year, and
                    ``(B) the denominator of which is the 5-year total 
                costs of the taxpayer with respect to the taxable year.
            ``(2) IP profit.--The term `IP profit' means the excess (if 
        any) of--
                    ``(A) patent gross receipts, over
                    ``(B) the sum of--
                            ``(i) the taxpayer's cost of goods sold for 
                        the taxable year that are properly allocable to 
                        patent gross receipts,
                            ``(ii) other expenses, losses, or 
                        deductions (other than the deduction allowed 
                        under this section), which are properly 
                        allocable to patent gross receipts, as 
                        determined by the Secretary, plus
                            ``(iii) routine profit.
            ``(3) Routine profit.--The term `routine profit' means--
                    ``(A) the taxpayer's cost of goods sold for the 
                taxable year properly allocable to patent gross 
                receipts reduced by the sum of cost of raw materials, 
                cost of items purchased for resale, and amounts 
                incurred for intangible property rights (including 
                royalties and amortization), multiplied by
                    ``(B) 15 percent.
            ``(4) Allocation method.--The Secretary shall prescribe 
        rules for the proper allocation of items described in this 
        paragraph for purposes of determining patent box profit. Such 
        rules shall provide for the proper allocation of items whether 
        or not such items are directly allocable to patent gross 
        receipts.
            ``(5) Special rules.--
                    ``(A) Determination of costs.--
                            ``(i) In general.--Cost shall be determined 
                        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 manufacture.--
                        In the case of any property described in clause 
                        (ii) that had been exported by the taxpayer for 
                        further manufacture, the increase in cost or 
                        adjusted basis under subparagraph (A) shall not 
                        exceed 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 manufacture.
                    ``(B) 5-year research and development 
                expenditures.--The term `5-year research 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 ending 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 ending 
                        with such taxable year, over
                            ``(ii) the sum of--
                                    ``(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 period.--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 referred to in 
                        subparagraphs (B) and (C), such subparagraphs 
                        shall be applied on the basis of the period 
                        during which such taxpayer was in existence.
                            ``(ii) Treatment of predecessors.--Any 
                        reference in this paragraph to a taxpayer shall 
                        include a reference to any predecessor of such 
                        taxpayer.
            ``(6) Patent gross receipts.--
                    ``(A) In general.--The term `patent gross receipts' 
                means gross receipts of the taxpayer 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 percentage 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 infringement 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 
                                regulations or other guidance 
                                prescribed by the Secretary, such term 
                                shall not include any transaction with 
                                a related person which the Secretary 
                                determines abuses the purposes of this 
                                paragraph.
                                    ``(II) Related person.--A person 
                                shall be treated as related to another 
                                person if such persons are treated as a 
                                single employer under subsection (a) or 
                                (b) of section 52 or subsection (m) or 
                                (o) of section 414, except that 
                                determinations under subsections (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 qualified 
                patent or patents if more than a substantial percentage 
                of the value of the product is derived from the use of 
                one or more qualified patents.
            ``(8) Qualified patent.--
                    ``(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 Office under title 
                        35, United States Code,
                            ``(ii) with respect to which--
                                    ``(I) the taxpayer is the patent 
                                owner or the holder of an exclusive 
                                license to exploit the patent within a 
                                specified territory or for a specific 
                                purpose,
                                    ``(II) the taxpayer is actively 
                                involved in the decisionmaking 
                                connected with exploiting the patent, 
                                and
                                    ``(III) either the taxpayer or a 
                                member of the affiliated group of which 
                                the taxpayer is a member performed 
                                significant activity to develop the 
                                patented invention, its application, or 
                                a product incorporating the patented 
                                invention, and
                            ``(iii) for any taxable year beginning 
                        after the third taxable year beginning after 
                        the date of the enactment of this section, more 
                        than a substantial percentage of the activity 
                        to develop the patented invention or its 
                        application occurs in the United States.
                Clause (iii) shall not apply to a patent if a member of 
                the taxpayer's affiliated group performed more than a 
                substantial percentage of the activity to develop the 
                patent outside the United States prior to the end of 
                such third taxable year, and the taxpayer owns the 
                patent in the United States at the end of such third 
                taxable year.
                    ``(B) Special rule for certain foreign patents.--If 
                the taxpayer--
                            ``(i) is the patent owner or the holder of 
                        an exclusive license to exploit a patent which 
                        meets the requirements of subparagraph (A),
                            ``(ii) is issued or extended by a foreign 
                        country a patent for the same or substantially 
                        similar invention or application as the patent 
                        described in clause (i), and
                            ``(iii) is the owner of, or the holder of 
                        an exclusive license to exploit, the foreign 
                        patent described in clause (ii),
                then the foreign patent described in clause (ii) shall 
                be treated as a qualified patent for purposes of this 
                section.
                    ``(C) Special rules relating to licensing.--
                            ``(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 Secretary 
                                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 requirements of clause 
                        (i) and has developed or has acquired and added 
                        substantial value to the qualified patent, but 
                        only so long as the licensor is regularly 
                        engaged in the development and addition of 
                        substantial value to property of such kind.
                    ``(D) Special rules relating to patent 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 purposes 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 Trademark 
                                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 
                                        (determined without regard to 
                                        subsection (a)) that would be 
                                        shown on returns of tax of the 
                                        taxpayer for all taxable years 
                                        for which a deduction was 
                                        allowed under subsection (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 subsection (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), 
                                interest at the underpayment rate 
                                established 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 patent 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 subparagraph (A) 
                for a taxable year shall apply with respect to all 
                qualified patents. Such election, once made, may be 
                revoked only with the consent of the Secretary.
    ``(c) Alternative Method for Certain Taxpayers.--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 purposes of this 
section--
            ``(1) Application of section to pass-thru entities.--
                    ``(A) Partnerships and s corporations.--In the case 
                of a partnership or S corporation--
                            ``(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, 
                        expenses, 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 allocable share 
                        of each item described in clause (i) or (ii) of 
                        subsection (b)(2)(A) (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 subparagraph 
                        (A)(ii) (as determined therein) shall be 
                        apportioned between the beneficiaries and the 
                        fiduciary (and among the beneficiaries) under 
                        regulations prescribed by the Secretary, and
                            ``(ii) for purposes of paragraph (2), 
                        adjusted gross income of the trust or estate 
                        shall be determined as provided in section 
                        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 income' 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
                            ``(ii) without regard to this section.
                    ``(D) Agricultural and horticultural 
                cooperatives.--
                            ``(i) Deduction allowed to patrons.--Any 
                        person who receives a qualified payment from a 
                        specified agricultural or horticultural 
                        cooperative shall be allowed for the taxable 
                        year in which such payment is received a 
                        deduction under subsection (a) equal to the 
                        portion of the deduction allowed under 
                        subsection (a) to such cooperative which is--
                                    ``(I) allowed with respect to the 
                                portion of the patent box profit to 
                                which such payment is attributable, and
                                    ``(II) identified by such 
                                cooperative in a written notice mailed 
                                to such person during the payment 
                                period described in section 1382(d).
                            ``(ii) Cooperative denied deduction for 
                        portion of qualified payments.--The taxable 
                        income of a specified agricultural or 
                        horticultural cooperative shall not be reduced 
                        under section 1382 by reason of that portion of 
                        any qualified payment as does not exceed the 
                        deduction allowable under clause (i) with 
                        respect to such payment.
                            ``(iii) Taxable income of cooperatives 
                        determined without regard to certain 
                        deductions.--For purposes of this section, the 
                        taxable income of a specified agricultural or 
                        horticultural cooperative shall be computed 
                        without regard to any deduction allowable under 
                        subsection (b) or (c) of section 1382 (relating 
                        to patronage dividends, per-unit retain 
                        allocations, and nonpatronage distributions).
                            ``(iv) Special rule for marketing 
                        cooperatives.--For purposes of this section, a 
                        specified agricultural or horticultural 
                        cooperative described in clause (vi)(II) shall 
                        be treated as having manufactured, produced, 
                        grown, or extracted in whole or significant 
                        part any qualifying production property 
                        marketed by the organization which its patrons 
                        have so manufactured, produced, grown, or 
                        extracted.
                            ``(v) Qualified payment.--For purposes of 
                        this paragraph, the term `qualified payment' 
                        means, with respect to any person, any amount 
                        which--
                                    ``(I) is described in paragraph (1) 
                                or (3) of section 1385(a),
                                    ``(II) is received by such person 
                                from a specified agricultural or 
                                horticultural cooperative, and
                                    ``(III) is attributable to patent 
                                box profits with respect to which a 
                                deduction is allowed to such 
                                cooperative under subsection (a).
                            ``(vi) Specified agricultural or 
                        horticultural cooperative.--For purposes of 
                        this paragraph, the term `specified 
                        agricultural or horticultural cooperative' 
                        means an organization to which part I of 
                        subchapter T applies which is the owner of, or 
                        theholder of an exclusive license to exploit, a 
                        qualified patent.
                    ``(E) Regulations.--The Secretary may prescribe 
                rules requiring or restricting the allocation of items 
                under this paragraph and may prescribe such reporting 
                requirements as the Secretary determines appropriate.
            ``(2) Special rule for affiliated groups.--
                    ``(A) In general.--All members of an expanded 
                affiliated group shall be treated as a single 
                corporation for purposes of this section.
                    ``(B) Expanded affiliated group.--For purposes of 
                this section, the term `expanded affiliated group' 
                means an affiliated group as defined in section 
                1504(a), determined--
                            ``(i) by substituting `more than 50 
                        percent' for `at least 80 percent' each place 
                        it appears, and
                            ``(ii) without regard to paragraphs (2) and 
                        (4) of section 1504(b).
                    ``(C) Allocation of deduction.--Except as provided 
                in regulations, the deduction under subsection (a) 
                shall be allocated among the members of the expanded 
                affiliated group in proportion to each member's 
                respective amount (if any) of patent box profit.
            ``(3) Coordination with minimum tax.--For purposes of 
        determining alternative minimum taxable income under section 
        55--
                    ``(A) patent box profit shall be determined without 
                regard to any adjustments under sections 56 through 59, 
                and
                    ``(B) in the case of a corporation, subsection 
                (a)(2) shall be applied by substituting `alternative 
                minimum taxable income' for `taxable income'.
            ``(4) Coordination with domestic production activities 
        deduction.--This section shall be applied without regard to 
        section 199.
            ``(5) Unrelated business taxable income.--For purposes of 
        determining the tax imposed by section 511, subsection (a)(2) 
        shall be applied by substituting `unrelated business taxable 
        income' for `taxable income'.
            ``(6) Acquisitions and dispositions.--The Secretary shall 
        provide for the application of this subsection in cases where 
        the taxpayer acquires, or disposes of, the major portion of a 
        trade or business or the major portion of a separate unit of a 
        trade or business during the taxable year.
            ``(7) United states.--The term `United States' includes the 
        District of Columbia, Puerto Rico, the Virgin Islands, Guam, 
        American Samoa, the Commonwealth of the Northern Mariana 
        Islands, the Federated States of Micronesia, the Republic of 
        the Marshall Islands, and Palau.
    ``(e) Election.--
            ``(1) In general.--The taxpayer may make an election to 
        have this section apply for any taxable year.
            ``(2) Pass-thru entities.--In the case of a pass-thru 
        entity, the election shall be made at the partner or 
        shareholder level.
            ``(3) Revocation.--An election under paragraph (1), once 
        made, may be revoked only with the consent of the Secretary.
    ``(f) Regulations.--The Secretary shall prescribe such regulations 
as may be appropriate to carry out this section, including regulations 
which prevent the abuse of the purposes of this section.''.
    (b) Conforming Amendments.--
            (1) Section 56(d)(1)(A) of such Code is amended by striking 
        ``deduction under section 199'' both places it appears and 
        inserting ``deductions under sections 199 and 200''.
            (2) Section 56(g)(4)(C) of such Code is amended by adding 
        at the end the following new clause:
                            ``(vii) Deduction for domestic business 
                        income.--Clause (i) shall not apply to any 
                        amount allowable as a deduction under section 
                        200.''.
            (3) The following provisions of such Code are each amended 
        by inserting ``200,'' after ``199,''.
                    (A) Section 86(b)(2)(A).
                    (B) Section 135(c)(4)(A).
                    (C) Section 137(b)(3)(A).
                    (D) Section 219(g)(3)(A)(ii).
                    (E) Section 221(b)(2)(C)(i).
                    (F) Section 222 (b)(2)(C)(i).
                    (G) Section 246(b)(1).
                    (H) Section 469(i)(3)(F)(iii).
            (4) Section 163(j)(6)(A)(i) of such Code is amended by 
        striking ``and'' at the end of subclause (III) and by inserting 
        after subclause (IV) the following new subclause:
                                    ``(V) any deduction allowable under 
                                section 200, and''.
            (5) Section 170(b)(2)(C) of such Code is amended by 
        striking ``and'' at the end of clause (iv), by striking the 
        period at the end of clause (v) and inserting ``, and'', and by 
        inserting after clause (v) the following new clause:
                            ``(vi) section 200.''.
            (6) Section 172(d) of such Code is amended by adding at the 
        end the following new paragraph:
            ``(8) Domestic business income.--The deduction under 
        section 200 shall not be allowed.''.
            (7) Section 199(c) of such Code is amended by adding at the 
        end the following new paragraph:
            ``(8) Coordination with patent box profits deduction.--
        Qualified production activities income, taxable income, and 
        domestic production gross receipts shall be determined without 
        regard to section 200.''.
            (8) Section 199(d)(2)(B) of such Code is amended by 
        striking ``this section'' and inserting ``this section and 
        section 200''.
            (9) Section 613(a) of such Code is amended by striking 
        ``deduction under section 199'' and inserting ``deductions 
        under sections 199 and 200''.
            (10) Section 613A(d)(1) of such Code is amended by 
        redesignating subparagraphs (C), (D), and (E) as subparagraphs 
        (D), (E), and (F), respectively, and by inserting after 
        subparagraph (B) the following new subparagraph:
                    ``(C) any deduction allowable under section 200,''.
            (11) Section 1402(a) of such Code is amended by striking 
        ``and'' at the end of paragraph (16), by redesignating 
        paragraph (17) as paragraph (18), and by inserting after 
        paragraph (16) the following new paragraph:
            ``(17) the deduction provided by section 200 shall not be 
        allowed; and''.
    (c) Clerical Amendment.--The table of sections for part VI of 
subchapter B of chapter 1 of such Code is amended by adding at the end 
the following new item:

``Sec. 200. Patent box profits.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.
                                 <all>