Prohibits an electing corporation from using nonrelinquished research or NOL tax credits until such corporation has paid back the original amount of the refundable credit in Federal income taxes.
Provides for credit recapture in the event of failure to increase research activity.
[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.
<all>
Introduced in Senate
Sponsor introductory remarks on measure. (CR S6329)
Read twice and referred to the Committee on Finance.
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