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108th CONGRESS
1st Session
H. R. 2968
To permit biomedical research corporations to engage in certain equity
financings without incurring limitations on net operating loss
carryforwards and certain built-in losses, and for other purposes.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
July 25, 2003
Mr. Reynolds (for himself, Mr. Cantor, Mr. Matsui, Mr. Cardin, and Mr.
Holt) introduced the following bill; which was referred to the
Committee on Ways and Means
_______________________________________________________________________
A BILL
To permit biomedical research corporations to engage in certain equity
financings without incurring limitations on net operating loss
carryforwards and certain built-in losses, 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 ``Biotechnology Future Investment
Expansion Act of 2003''.
SEC. 2. FINDINGS AND PURPOSE.
(a) Findings.--Congress finds the following:
(1) American bioscience research corporations conduct long-
term research and development on breakthrough medical
technologies. This commercial bioscience research industry
forms an irreplaceable link between pure scientific discovery
and the development of powerful biomedical products and
technologies. It is critical to the maintenance of American
competitiveness internationally that these long-term research
and development projects be encouraged.
(2) Such long-term research projects 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) Long-term biomedical research companies are among the
most research-intensive and capital-intensive companies in the
world.
(4) In addition to the scientific and technical risks
attending their long-term research programs, many biomedical
research companies must subject their technologies to lengthy
and expensive regulatory reviews before they are permitted
access to the marketplace.
(5) Biomedical research companies typically operate in
financially challenging circumstances. These companies must
engage in intensive research activity for many years in order
to develop their products and earn profits. Many are small
businesses lacking the internal cash flow, stability and
borrowing capacity of large corporations.
(6) The long-term commercial bioscience research industry
is heavily dependent on outside sources of equity capital to
fund lengthy and intensive research prior to earning any
revenues. 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 breakthrough commercial research
reflects a recognition that the capital marketplace tends to
allocate insufficient resources to sustain the Nation's need
for such foundational scientific research and development.
(8) American long-term bioscience research companies
constitute one of the core commercial sectors which Congress
intended to benefit from existing tax incentives for commercial
research.
(9) However, the current Federal income tax incentives are
simply not working in the case of many bioscience companies
focused on breakthrough medical technologies.
(10) Current Federal income tax incentives do not work as
intended for most high technology bioscience companies because
they typically incur net operating losses for a decade or more
during their lengthy research and development phases and
therefore receive no contemporaneous benefit from these tax
incentives.
(11) Further, Federal tax rules aimed chiefly at preventing
corporate loss trafficking and tax-motivated mergers and
acquisitions penalize these companies. The very process of
raising successive increments of private capital through
routine equity financings triggers these rules and subjects
biomedical research companies to severe limitations on net
operating loss and tax credit carryforwards. These limitations
practically eliminate for the commercial bioscience industry
any economic benefit from these tax incentives.
(12) These tax incentives instead tend to favor investment
by large, profitable companies, often engaged in secondary or
tertiary research activities, and thus to discriminate against
and to cause under-investment in longer-term breakthrough
technologies, a bias which is harmful to American
competitiveness.
(13) The inability to benefit from existing Federal income
tax incentives for commercial research places long-term
bioscience research companies at a substantial disadvantage in
the capital marketplace where they must compete with other
companies able to use these tax incentives currently.
(14) A tax system that does not discriminate would ensure
that existing tax incentives in favor of research and
experimentation 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, minimizing capital
marketplace distortions caused by differences in tax and income
status.
(b) Purpose.--The purpose of this Act is to provide that long-term
biomedical research corporations will not incur limitations on
research-related tax incentive carryforwards simply because they engage
in the routine equity financings that are the financial lifeblood of
the industry.
SEC. 3. 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 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 under
study in phase II or phase III of a clinical
investigation carried out under such section.
``(C) Qualified investment.--For purposes of this
paragraph, the term `qualified investment' means any
acquisition of stock in a biomedical research
corporation if such stock is acquired at its original
issue (directly or through an underwriter), solely in
exchange for cash, and the closing thereon occurs after
the date of the enactment of this paragraph.
``(D) 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, except that the
requirements of subparagraph (H) shall be applied only
as of the time of closing on the issuance of the
convertible debt.
``(E) Biomedical research corporation must meet 5-
year expenditure test with respect to any qualified
investment.--
``(i) In general.--This paragraph shall not
apply to a qualified investment in a biomedical
research corporation unless such corporation
meets the expenditure test for each year of the
measuring period.
``(ii) Measuring period.--For purposes of
this subparagraph, the term `measuring period'
means, with respect to any qualified
investment, the taxable year of the biomedical
research corporation in which the closing on
the investment occurs, the 2 preceding taxable
years, and the 2 subsequent taxable years.
``(iii) Expenditure test.--A biomedical
research corporation meets the expenditure test
of this subparagraph for a taxable year if at
least 25 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)
which are paid or incurred for clinical testing
or preclinical biomedical research.
``(iv) Clinical testing.--For purposes of
this subparagraph, the term `clinical testing'
means any human clinical testing which is
carried out under any investigational new drug
application in effect under section 505 of the
Federal Food, Drug, and Cosmetic Act.
``(F) 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.
``(G) 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.
``(H) Proceeds of qualified investments shall be
devoted to research on preexisting technology.--
``(i) In general.--This paragraph shall not
apply to any qualified investment unless the
net proceeds of such qualified investment do
not exceed the excess of--
``(I) the sum of the biomedical
research corporation's aggregate
qualifying clinical expenditures for
the 3 years following the qualified
investment, over
``(II) three times the
corporation's qualifying clinical
expenditures for the year preceding the
qualified investment, plus the amount
of the corporation's cash and cash
equivalents immediately before the
closing on the qualified investment.
``(ii) Qualifying clinical expenditures.--
For purposes of this subparagraph, the term
`qualifying clinical expenditures' means
amounts described in section 41(b) which are
paid or incurred by a biomedical research
corporation for clinical testing in connection
with 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 which is (at the
time of the closing on the qualified
investment) under study in phase II or phase
III of a clinical investigation carried out
under such section.
``(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) Proceeds of Equity Investments to Be Treated as Working
Capital.--Subparagraph (C) of section 382(l)(4) of such Code is amended
by adding at the end the following: ``Such term shall not include any
assets reasonably expected to be used within 3 years to fund qualifying
clinical expenditures (as defined in paragraph (9)(H)(ii) without
regard to the parenthetical therein).''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
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