Form 8820 Orphan Drug Credit

2006 Form 8820, Orphan Drug Credit (Rev. Dec. 2006)
Circulation: This is the first circulated draft of the 2006 Form 8820 (Rev. Dec. 2006) for your
review and comments. See below for a discussion of the major changes.
TPCC Meeting: None, but one may be arranged if requested.
Prior version: The 2005 Form 8820 is available at: http://www.irs.gov/pub/irs-pdf/f8820.pdf
Other Products: Circulations of draft tax forms, instructions, notices, and publications are
posted at:http://taxforms.web.irs.gov/draft_products.html
Comments: Please email, fax, call, or mail any comments by June 23, 2006.
Mike Cyrus
Tax Forms and Publications
SE:W:CAR:MP:T:B:P
Email: [email protected]
Phone: 202-927-9545
Fax: 202-622-3262

Major Changes
On the Form[1] The text “Rev. December 2006” is added under the form number in the upper left
corner because the form was converted from annual use to continuous use. Accordingly,
the text “2005” was eliminated from the upper right corner and the bottom right corner
(replaced with the text “Rev. 12-2006” in the bottom right corner).
[2] The Part I and Part II headings are eliminated because the function of the old Part II
(to compute the allowable credit) is now on Form 3800. Since there is no longer a Part II,
a Part I designation is unnecessary.
[3] Line 3 is rewritten to eliminate the text “pass-through.”
[4] Line 4 is rewritten. The text “Current year credit” is removed. Estates and trusts are
now directed to line 5 so that an allocation to beneficiaries can be shown. Now
partnerships and S corporations are directed to report the amount on Schedule K. All
others are directed to line 1k of the 2006 Form 3800 (as an example since this will now
be a continuous use form, revised only when necessary).
[5] Lines 5 and 6 are added to allow estates and trusts to show allocations to beneficiaries
and figure the resulting amount to show on Form 3800.
In the Instructions[1] A What’s New section is added with the following bulleted items.
• The tax liability limit is no longer figured on this form; instead, it must be figured
on Form 3800, General Business Credit.

•

•

Taxpayers that are not partnerships, S corporations, cooperatives, estates, trusts,
or members of a controlled group, and whose only source of this credit is
from those pass-through entities, are not required to complete or file this
form. Instead, they can report this credit directly on line 1k of Form 3800.
The IRS will revise this December 2006 version of the form only when
necessary. Continue to use this version for tax years beginning after 2005 until a
new revision is issued.

[2] The Who Must File section is removed as it is unnecessary.
[3] In the first paragraph, under Specific Instructions the text “Skip lines 1 and 2 if you
are only claiming a credit that was allocated to you from an S corporation or partnership”
is removed as it is unnecessary.
[4] The instructions for line 3 are removed because new lines 5 and 6 on the form (in
conjunction with Schedules K) now explain the allocation of the credit to beneficiaries,
partners, and shareholders.
[4] The instructions for S corporations, partnerships, and electing large partnerships, in
the second paragraph under Specific Instructions, are eliminated as the information is
now shown on Schedules K.
[4] All of the Part II instructions are removed to conform to the removal of the Part II on
the form. Accordingly, the Part I heading is removed.

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Form

I.R.S. SPECIFICATIONS
TO BE REMOVED BEFORE PRINTING
INSTRUCTIONS TO PRINTER
FORM 8820, PAGE 1 of 2
MARGINS: TOP 13 mm (1⁄ 2 "), CENTER SIDES.
PRINTS: HEAD TO HEAD
PAPER: WHITE WRITING, SUB. 20
INK:BLACK
FLAT SIZE: 203 mm (8") 3 279 mm (11")
PERFORATE: (NONE)
DO NOT PRINT — DO NOT PRINT — DO NOT PRINT — DO NOT PRINT

8820

(Rev. December 2006)

Department of the Treasury
Internal Revenue Service

Name(s) shown on return

Action

Date

O.K. to print
Revised proofs
requested

OMB No. 1545-1505

Orphan Drug Credit

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Attachment
Sequence No.

Attach to your tax return.

Qualified clinical testing expenses paid or incurred during the tax year

1

2

Current year credit. Multiply line 1 by 50% (.50) (see instructions)

2

3

Orphan drug credit from S corporations, partnerships, estates, or trusts

3

4

Add lines 2 and 3. Estates and trusts go to line 5; partnerships and S corporations, report this
amount on Schedule K; all others, report this amount on the applicable line of Form 3800 (e.g.,
line 1k of the 2006 Form 3800)

4

5

Amount allocated to the beneficiaries of the estate or trust (see instructions)

5

6

Estates and trusts. Subtract line 5 from line 4. Report this amount on the applicable line of Form 3800
(e.g., line 1k of the 2006 Form 3800)

6

Section references are to the Internal
Revenue Code unless otherwise noted.

What’s New
● The tax liability limit is no longer
figured on this form; instead, it must be
figured on Form 3800, General Business
Credit.
● Taxpayers that are not partnerships, S
corporations, estates, or trusts, and
whose only source of this credit is from
those pass-through entities, are not
required to complete or file this form.
Instead, they can report this credit
directly on line 1k of Form 3800.
● The IRS will revise this December
2006 version of the form only when
necessary. Continue to use this version
for tax years beginning after 2005 until a
new revision is issued.

Purpose of Form
Use Form 8820 to claim the orphan drug
credit. The credit is 50% of qualified
clinical testing expenses paid or incurred
during the tax year. See section 45C and
Regulations section 1.28-1 for details.

Definitions
Qualified clinical testing expenses.
Generally, qualified clinical testing
expenses are amounts paid or incurred
by the taxpayer that would be described
as qualified research expenses under
section 41, with two modifications:
● In sections 41(b)(2) and (3), “clinical
testing” is substituted for “qualified
research” and

103

Identifying number

1

General Instructions

Signature

● 100% (instead of 65% or 75%) of
contract research expenses are treated
as clinical testing expenses.

Qualified clinical testing expenses do
not include expenses to the extent they
are funded by a grant, contract, or
otherwise by a governmental entity or
another person.
Clinical testing. Generally, clinical
testing means any human clinical testing
that meets all four of the following
conditions.
1. The testing is carried out under an
exemption for a drug being tested for a
rare disease or condition under section
505(i) of the Federal Food, Drug, and
Cosmetic Act (Act).
2. The testing occurs after the date
the drug is designated under Act section
526 and before the date on which an
application for the drug is approved
under Act section 505(b) (or, if the drug
is a biological product, before the date
the drug is licensed under section 351 of
the Public Health Service Act).
3. The testing is conducted by or for
the taxpayer to whom the designation
under Act section 526 applies.
4. The testing relates to the use of the
drug for the rare disease or condition for
which it was designated under Act
section 526.
Rare disease or condition. A rare
disease or condition is one which
afflicts:

● More than 200,000 persons in the
United States, but for which there is no
reasonable expectation of recovering the
cost of developing and making available
a drug in the United States for the
disease from sales of the drug in the
United States.
The above determinations are made as
of the date the drug is designated under
Act section 526.

Testing Not Eligible for the
Credit
The credit is not allowed for clinical
testing conducted outside the United
States unless there is an insufficient U.S.
testing population and the testing is
conducted by a U.S. person or by
another person not related to the
taxpayer. Testing conducted either
inside or outside the United States by a
corporation to which section 936 applies
is not eligible for the orphan drug credit.

Coordination With the
Research Credit
Qualified clinical testing expenses used
to figure the orphan drug credit cannot
also be used to figure the credit for
increasing research activities. However,
any of these expenses that are also
qualified research expenses must be
included in base period research
expenses when figuring the credit for
increasing research activities in a later
tax year.

● 200,000 or fewer persons in the
United States or

For Paperwork Reduction Act Notice, see page 2.

Cat. No. 11208S

Form

8820

(Rev. 12-2006)

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I.R.S. SPECIFICATIONS
TO BE REMOVED BEFORE PRINTING
INSTRUCTIONS TO PRINTER
FORM 8820, PAGE 2 of 2
MARGINS: TOP 13 mm (1⁄ 2 "), CENTER SIDES.
PRINTS: HEAD TO HEAD
PAPER: WHITE WRITING, SUB. 20
INK:BLACK
FLAT SIZE: 203 mm (8") 3 279 mm (11")
PERFORATE: (NONE)
DO NOT PRINT — DO NOT PRINT — DO NOT PRINT — DO NOT PRINT

Form 8820 (Rev. 12-2006)

Specific Instructions
Figure any orphan drug credit from your
own trade or business on lines 1 and 2.
Line 1
Members of a controlled group of
corporations or group of businesses
under common control. The group is
treated as a single taxpayer and the
credit allowed each member is based on
its proportionate share of the qualified
clinical testing expenses of the group.
Enter on line 1 your share of the group’s
qualified clinical testing expenses.
Line 2
Reduce the deduction for qualified
clinical testing expenses otherwise
allowable on your income tax return by
the amount of the credit shown on line
2. If the credit exceeds the amount
allowed as a deduction for the tax year,
reduce the amount chargeable to the
capital account for the year for such
expenses by the amount of the excess.
See section 280C(b) for special rules.

Page

Line 5

relating to a form or its instructions must
be retained as long as their contents
may become material in the
administration of any Internal Revenue
law. Generally, tax returns and return
information are confidential, as required
by section 6103.
The time needed to complete and file
this form will vary depending on
individual circumstances. The estimated
burden for individual taxpayers filing this
form is approved under OMB control
number 1545-0074 and is included in
the estimates shown in the instructions
for their individual income tax return. The
estimated burden for all other taxpayers
who file this form is shown below.

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Allocate the orphan drug credit on line 4
between the estate or trust and the
beneficiaries in the same proportion as
income was allocated. On the dotted line
to the left of line 4, the estate or trust
should enter its share of the credit.
Label it “1041 Portion” and use this
amount in Part II (or on Form 3800, if
required) to figure the credit to take on
Form 1041. On Schedule K-1, show
each beneficiary’s share of the portion
allocated to beneficiaries.
Paperwork Reduction Act Notice. We
ask for the information on this form to
carry out the Internal Revenue laws of
the United States. You are required to
give us the information. We need it to
ensure that you are complying with
these laws and to allow us to figure and
collect the right amount of tax.

You are not required to provide the
information requested on a form that is
subject to the Paperwork Reduction Act
unless the form displays a valid OMB
control number. Books or records

Printed on Recycled Paper

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Recordkeeping
Learning about the
law or the form
Preparing and sending
the form to the IRS

X hr., XX min.

X hr.
X hr., X min.

If you have comments concerning the
accuracy of these time estimates or
suggestions for making this form
simpler, we would be happy to hear
from you. See the instructions for the tax
return with which this form is filed.