R&D Tax Credit Bills Introduced

1/31. Representatives and Senators have begun to introduce bills that would modify and/or extend the research and development (R&D) tax credit. Many more bills are likely to follow.

At the very end of the 112th Congress, the Congress passed and President Obama signed, a huge fiscal cliff bill, HR 8 [LOC | WW], the "American Taxpayer Relief Act of 2013".

Section 301 of that bill modified and extended the R&D tax credit, which is codified at 26 U.S.C. § 41, but only through December 31, 2013. See, story titled "R&D Tax Credit Extended" in TLJ Daily E-Mail Alert No. 2,504, January 7, 2013.

Hence, the legislative process of further extension has already commenced.

The credit was first enacted in 1981 as a temporary measure. Since then the Congress has repeatedly extended it for one or a few years. With so many extensions, some companies have come to expect the credit to be continued, and often plan accordingly, even when the credit is allowed to lapse. Extensions have always been retroactive, with the exception of one year 15 years ago.

There are reasons for this continuous series of short term extensions. First, by keeping the credit temporary, administration and Congressional budget staff, in making revenue projections, can pretend that tax revenues will increase when the credit expires. That is, temporary extensions of the R&D tax credit are part of the ongoing budgetary smoke and mirrors process.

Also, by keeping the issue on the agenda, candidates for federal office, and especially incumbents, can rely upon a continuous flow of endorsements and campaign contributions from supporters of the credit.

On January 31, 2013, Sen. Chris Coons (D-DE), Sen. Mike Enzi (R-WY), and others introduced S 193 [LOC | WW], the "Startup Innovation Credit Act of 2012", a bill to incent startups to engage in research and development, and to incent the formation of startups, by allowing an R&D credit against payroll taxes rather than income taxes.

This bill does not address the duration of the R&D tax credit. It was referred to the Senate Finance Committee (SFC). See, related story in this issue titled "Sen. Coons Re-Introduces Bill to Allow Start Ups R&D Payroll Tax Credit".

On January 3, Rep. Rush Holt (D-NJ) introduced HR 119 [LOC | WW], an untitled bill, and HR 120 [LOC | WW], the "Create Jobs by Expanding the R&D Tax Credit Act of 2013".

HR 119 is a short and simple bill. It would strike subsection 41(h), which contains the sunset date, thus making the R&D credit permanent.

HR 120 would amend Section 41 to increase the credit for research expenses for 2013 and 2014, and to allow the credit to be assigned.

Both bills were referred to the House Ways and Means Committee (HWMC). See also, Rep. Holt's release.

Sen. Coons Re-Introduces Bill to Allow Start Ups An R&D Payroll Tax Credit

1/31. Sen. Chris Coons (D-DE), Sen. Mike Enzi (R-WY), Sen. Charles Schumer (D-NY), Sen. Marco Rubio (R-FL), Sen. Roy Blunt (R-MO), Sen. Debbie Stabenow (D-MI), and Sen. Jerry Moran (R-KS) introduced S 193 [LOC | WW], the "Startup Innovation Credit Act of 2013", a bill to incent start ups, and the formation of start ups, by allowing a credit against payroll taxes.

This is a re-introduction of S 3460 [LOC | WW], the "Startup Innovation Credit Act of 2013", which Sen. Coons and others introduced in the 112th Congress on July 31, 2012. The companion bill in the House was HR 6319 [LOC | WW], a bill with the same title introduced by Rep. Jim Gerlach (R-PA) and Rep. Zoe Lofgren (D-CA).  See, story titled "Startup R&D Tax Credit Bills Introduced" in TLJ Daily E-Mail Alert No. 2,434, August 22, 2012.

The Congress created the research and development (R&D) tax credit in 1981. It is codified at 26 U.S.C. § 41. The purpose of the credit is to incent innovation. The corporate income tax (to which the credit applies) taxes corporate income. A tax credit is an amount by which tax liability is reduced. Thus, to take advantage of the credit, a company must have taxable income. But, start up companies begin by loosing money, and therefore have no taxable income. Hence, they cannot take advantage of, or be incented by, the current R&D tax credit, at least until they start making money. Therefore, this bill attempts to provide an alternative means by which start up companies might take advantage of the credit -- a reduction in payroll taxes for engaging in research and development.

The bill would add a new subsection to the end of Section 41titled "Treatment of Credit to Qualified Small Businesses". It would provide that for start up companies that meet certain requirements, "there shall be allowed as a credit against the tax imposed ... on wages paid with respect to the employment of all employees ...", rather than a credit against the tax imposed on income.

The requirements include that the start up company be less than five years old, and have less than $5 Million in gross receipts for the taxable year. The bill would also impose an upper limit of $250,000 on the credit for any taxable year.

Sen. Coons (at left) explained the theory underlying this bill. He said that the goal is "fostering the kind of environment which supports the private sector and which turns ideas into innovations, innovations into products, and products into companies that help create good jobs." See, Congressional Record, January 31, 2013, at Page S440.

He said that "Under current policy, one way we do that federally is by supporting research and development through the existing R&D tax credit. Companies that invest in R&D generate new products, which sparks new industries with spillover benefits for all kinds of sectors. That is why there has long been strong bipartisan support for the existing R&D tax credit. By all accounts it is working."

He continued, "But there is a critical gap in the existing R&D credit. It isn't available to startups because they are not yet profitable, and thus they don't have an income tax liability against which to take a credit."

He added that "more than half the R&D credit last year was taken by companies with revenue over $1 billion, well-established, profitable companies. There is nothing wrong with that; it is just not targeting these tax expenditures toward the sector of our economy that is taking the greatest risk and in some ways has the greatest potential.

Sen. Coons concluded that "Today, we take another step toward seeing this solution implemented with the reintroduction of this bipartisan Startup Innovation Credit Act. It says in order to spur research and development, we should allow companies to claim the R&D tax credit against their employment taxes, against their W-2 instead of their income tax liability. That opens this credit to new companies that don't yet have an income tax liability."

He also announced in a release that Rep. Jim Gerlach (R-PA) and Rep. Ron Kind (D-WI) are expected to re-introduce companion legislation in the House".

FTC Brings and Settles Civil Action Against Path

1/31. The Federal Trade Commission (FTC) filed a civil complaint [17 pages in PDF] in the U.S. District Court (NDCal) against Path alleging violation of Section 5 of the FTC Act and the COPPA in connection with its collection of personal information in violation of its privacy policy and collection of information from children.

The FTC also announced that the FTC and Path have agreed to settle this case.

The complaint states that "Path develops, markets, distributes, or sells software applications for mobile devices to consumers" and "has operated a social networking online service" that enables users to share a personal journal with others. Path required users to submit certain personal information. It also collected and stored personal information from the user's mobile device address book, without notice.

The complaint further alleges that Path maintained a privacy policy, but violated the terms of that policy with its data collection practices.

The complaint states that Path informed users through its privacy policy that it automatically collected certain enumerated information. But, Path's privacy policy did not use the word "only". And, Path did not disclose in its privacy policy that it also collected data from address books on mobile devices.

That is, this complaint pleads "deceptive" conduct by omission.

Under the proposed consent decree [25 pages in PDF] Path admits no wrongdoing. The decree enjoins Path from further violation of the FTC Act and COPPA, orders destruction of information collected in violation of the FTC Act and COPPA, and imposes a civil penalty of $800,000.

Rep. Joe Barton (R-TX) stated in a release that "Once again the FTC has determined that another company has not only violated its own privacy policies, but also took advantage of children. How many more times does this need to happen before my colleagues in Congress are convinced to act?"

Rep. Barton added that "I am appreciative of the steps that have been taken by the industry, but it is simply not enough. Thankfully, the FTC Act gives the agency the authority to hold companies to their own privacy policies. If we didn't have this law, there would be absolutely no accountability. Every company should have a privacy policy and adhere to it."

See also, statement of FTC Chairman Jonathan Leibowitz, and FTC release.

This cast is FTC v. Path, Inc., U.S. District Court for the Northern District of California, San Francisco Division, D.C. No. C-13-0448.

People and Appointments

1/31. President Obama nominated Jane Kelly to be a Judge of the U.S. Court of Appeals (8thCir). See, White House news office release and release. She has been an Assistant Federal Public Defender in the Northern District of Iowa since 1994.

1/31. President Obama nominated Gregory Phillips to be a Judge of the U.S. Court of Appeals (10thCir). See, White House news office release and release. He is the Attorney General of Wyoming.

1/31. Jeremy Parish, the Senate Judiciary Committee's (SJC) Chief Counsel for Nominations Oversight, left the SJC. Sen. Patrick Leahy (D-VT) and Sen. Charles Grassley (R-IA) praised his work at the SJC's January 31 meeting. He received an ovation from Democratic and Republican Senators and staff.

9th Circuit Again Addresses Enforceability of Arbitration Clauses in Consumer Contracts

1/30. The U.S. Court of Appeals (9thCir) issued its opinion [26 pages in PDF] in Kramer v. Toyota, a case regarding the enforceability of arbitration clauses in consumer contracts. The Court of Appeals affirmed the judgment of the District Court, which denied Toyota's motion to compel arbitration.

This case involves car sales contracts. However, arbitration clauses are also commonly used, and challenged by class action lawyers, in consumer contracts involving telecommunications, broadband, and other tech services and products.

The nominal plaintiffs, Jessica Kramer and others, bought Toyota cars. The purchase contracts contained both arbitration and class action waiver clauses. The plaintiffs filed a complaint alleging defective brakes, and pleading several California state law causes of action.

State and federal courts courts in California have a history of hostility to arbitration clauses, and class action waiver clauses, in consumer contracts. However, the Supreme Court addressed this matter in AT&T Mobility v. Concepcion in 2011. See, April 27, 2011 opinion [39 pages in PDF], and story titled "Supreme Court Holds Class Action Waiver Clauses in Arbitration Contracts Are Enforceable" in TLJ Daily E-Mail Alert No. 2,228, April 28, 2011.

The Supreme Court held that a contract between a wireless phone company and its consumers that provides for mandatory arbitration of consumer complaints, and waiver of class actions, is enforceable under Section 2 of the Federal Arbitration Act (FAA), notwithstanding the state of California's attempt to render such contracts unenforceable as unconscionable.

The Supreme Court's opinion had the effect of abrogating the California Supreme Court's 2005 opinion in Discover Bank v. Superior Court, 113 P.3d 1100, which had held that class action arbitration provisions are unconscionable and unenforceable in consumer contracts of adhesion under certain circumstances.

Despite the US Supreme Court's recent ruling, the District Court and Court of Appeals, held the arbitration clauses in the present case unenforceable.

The Court of Appeals ruled that since the arbitration clauses were in contracts between car purchasers and car dealers, and since Toyota was not a signatory, there was no agreement between the plaintiffs and Toyota to arbitrate.

The Court of Appeals also rejected various legal arguments, in the nature of equitable estoppel, advanced by Toyota that the plaintiffs are nevertheless bound by the arbitration clauses in the present litigation.

This case is Jessica Kramer, et al.  v. Toyota Motor Corporation, et al., U.S. Court of Appeals for the 9th Circuit, App. Ct. No. 12-55050, an appeal from the U.S. District Court for the Central District of California, D.C. No. 8:10-ml-02172-CJC-RNB, Judge Cormac Carney presiding. Judge Gordon Quist wrote the opinion of the Court of Appeals, in which Judges Andrew Kleinfeld and Margaret McKeown joined.

It might also be observed that the Supreme Court's 2011 decision was based upon a fragile 5-4 split.

In addition, there have been efforts in recent Congresses to pass an amendment to the FAA that would render unenforceable arbitration clauses in consumer contracts, as well as employment contracts. See, for example, HR 3010 [LOC | WW] and S 1782 [LOC | WW], both titled the "Arbitration Fairness Act of 2007", in the 110th Congress, and HR 1020 [LOC | WW] and S 931 [ LOC | WW], both titled the "Arbitration Fairness Act of 2009", in the 111th Congress. Most of the sponsors were Democrats.

Proponents could not move these bills during the 111th Congress when Democrats controlled the House, Senate, and Presidency. Hence, it is highly unlikely that any such bill would be enacted in the current 113th Congress.

People and Appointments

1/30. The Copyright Office (CO) announced in a release that Karyn Claggett (at right) has been named Associate Register of Copyrights and Director of Policy & International Affairs. She has worked at the CO since March of 2011. Before that, she worked at the Department of Justice (DOJ) on intellectual property issues. She has also worked for the Recording Industry Association of America (RIAA) and for the law firm of Williams & Connolly.

1/30. The Department of Justice (DOJ) announced in a release that Lanny Breuer (at left), Assistant Attorney General in charge of the Criminal Division, will leave on March 1, 2013.

1/30. Ray LaHood, Secretary of Transportation, will leave the Department of Transportation (DOT). See, DOT release and statement by President Obama.

People and Appointments

1/29. The Senate confirmed John Kerry to be Secretary of State by a vote of 94-3. See, Roll Call No. 5.

1/29. Sen. Orrin Hatch (R-UT), the ranking Republican on the Senate Finance Committee (SFC), announced minority staff changes. Kimberly Brandt will be Chief Oversight Counsel. Bryan Hickman will be Senior Counsel. Jay Khosla will be both Chief Health Counsel and Policy Director. See, release.

Sen. Rockefeller Releases Staff Memo on Cyber Security Legislation

1/28. Sen. John Rockefeller (D-WV), the Chairman of the Senate Commerce Committee (SCC), released a memorandum [6 pages in PDF] written by unidentified Democratic staff regarding S 3414 [LOC | WW], the "Cybersecurity Act of 2012" in the 112th Congress.

On September 19, 2012, Sen. Rockefeller sent a letter [PDF] to the Chief Executive Officers (CEOs) of every one of the Fortune 500 companies regarding S 3414. He is a cosponsor.

This unusual letter was in the nature of an angry harangue. See, story titled "Sen. Rockefeller Sends Interrogatories to 500 CEOs" in TLJ Daily E-Mail Alert No. 2,461, October 15, 2012.

Sen. Rockefeller's interrogatories included some material misstatements regarding the content of S 3414. For example, they characterized the bill as creating a voluntary program, when in fact it would have created a new regulatory regime. Hence, it is problematic to draw conclusions from answers to these interrogatories.

The staff report discloses that only "approximately three hundred companies" responded.

The report concludes that "Many companies were generally supportive of your efforts and many of their concerns could be addressed through a revised bill introduced this year. Many companies expressed support for a federal program that enables the private sector and the federal government to voluntarily work together to determine the greatest cyber risks facing the country and the best path forward to address them."

That bill was released in July of 2012. There were no hearings on the bill. There were no committee mark ups either. Sen. Harry Reid (D-NV) twice attempted to bring up the bill in the full Senate, without opportunity for amendment. Both times cloture motions failed. See, stories titled "Senate Again Rejects Cloture on Bill to Impose Cyber Security Regulatory Regime" in TLJ Daily E-Mail Alert No. 2,473, November 14, 2012, and "Senate Rejects Cloture on Sen. Lieberman's Cyber Security Bill" in TLJ Daily E-Mail Alert No. 2,419, August 3, 2012.

WTO Authorizes Antigua and Barbuda to Infringe US IP Rights

1/28. The World Trade Organization (WTO) authorized the tiny Caribbean nation of Antigua and Barbuda (AB) to retaliate against the US for violating WTO obligations by maintaining protectionist gambling laws that discriminate against internet gambling services provided in AB.

The retaliatory measures approved by the WTO include violation of intellectual property rights of US rights holders with a total value of $21 Million per year.

AB filed its complaint with the WTO against the US back in 2003. The US has vigorously contested the allegations, and arrogantly disregarded WTO determinations since then.

See, full story.

More News

1/28. The U.S. China Economic and Security Review Commission released a paper [44 pages in PDF] titled "The Reliability of China’s Economic Data: An Analysis of National Output". The author is the USCESRC's Iacob Weser. It concludes that the People's Republic of China's (PRC) gross national produce (GNP) "official statistics are not as reliable as those produced in the United States and Europe". For example, "both private and state-owned enterprises have incentives to misreport income and output -- in some cases to avoid taxes and regulation, in other cases to appease officials."

People and Appointments

1/26. Sen. Tom Harkin (D-IA) announced in a release that he will not seek re-election in 2014.

Go to News from January 21-25, 2013.