< Back to H.R. 1949 (103rd Congress, 1993–1994)

Text of To amend the Internal Revenue Code of 1986 to provide a capital gain exclusion for investments in qualified businesses with ...

...qualified businesses with employee stock ownership programs within Federal enterprise zones.

This bill was introduced on April 29, 1993, in a previous session of Congress, but was not enacted. The text of the bill below is as of Apr 29, 1993 (Introduced).

Source: GPO

HR 1949 IH

103d CONGRESS

1st Session

H. R. 1949

To amend the Internal Revenue Code of 1986 to provide a capital gain exclusion for investments in qualified businesses with employee stock ownership programs within Federal enterprise zones.

IN THE HOUSE OF REPRESENTATIVES

April 29, 1993

Mr. WELDON (for himself and Mr. ANDREWS of New Jersey) 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 provide a capital gain exclusion for investments in qualified businesses with employee stock ownership programs within Federal enterprise zones.

    Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That (a) chapter 1 of the Internal Revenue Code of 1986 (relating to normal taxes and surtaxes) is amended by inserting after subchapter T the following new subchapter:

Subchapter U--Capital Gain Exclusion For Investments In Enterprise Zones

‘Sec. 1391. 100 percent exclusion for gain from new zone investments.

‘Sec. 1392. Enterprise zone business defined.

‘Sec. 1393. Tax enterprise zone.

‘SEC. 1391. 100 PERCENT EXCLUSION FOR GAIN FROM NEW ZONE INVESTMENTS.

    ‘(a) GENERAL RULE- Gross income shall not include 100 percent of any qualified capital gain recognized on the sale or exchange of a qualified zone asset held for more than 5 years.

    ‘(b) QUALIFIED ZONE ASSET- For purposes of this section--

      ‘(1) IN GENERAL- The term ‘qualified zone asset’ means--

        ‘(A) any qualified zone stock,

        ‘(B) any qualified zone business property, and

        ‘(C) any qualified zone partnership interest.

      ‘(2) QUALIFIED ZONE STOCK-

        ‘(A) IN GENERAL- Except as provided in subparagraph (B), the term ‘qualified zone stock’ means any stock in a domestic corporation if--

          ‘(i) such stock is acquired by the taxpayer on original issue from the corporation solely in exchange for cash,

          ‘(ii) as of the time such stock was issued, such corporation was an enterprise zone business (or, in the case of a new corporation, such corporation was being organized for purposes of being an enterprise zone business), and

          ‘(iii) during substantially all of the taxpayer’s holding period for such stock, such corporation qualified as an enterprise zone business.

        ‘(B) REDEMPTIONS- The term ‘qualified zone stock’ shall not include any stock acquired from a corporation which made a substantial stock redemption or distribution (without a bona fide business purpose therefor) in an attempt to avoid the purposes of this section.

      ‘(3) QUALIFIED ZONE BUSINESS PROPERTY-

        ‘(A) IN GENERAL- The term ‘qualified zone business property’ means tangible property if--

          ‘(i) such property was acquired by the taxpayer by purchase (as defined in section 179(d)(2)) after the date on which the designation of the tax enterprise zone took effect,

          ‘(ii) the original use of such property in a tax enterprise zone commences with the taxpayer, and

          ‘(iii) during substantially all of the taxpayer’s holding period for such property, substantially all of the use of such property was in a tax enterprise zone and in an enterprise zone business of the taxpayer.

        ‘(B) SPECIAL RULE FOR SUBSTANTIAL IMPROVEMENTS- The requirements of clauses (i) and (ii) of subparagraph (A) shall be treated as satisfied with respect to--

          ‘(i) property which is substantially improved by the taxpayer, and

          ‘(ii) any land on which such property is located.

        For purposes of the preceding sentence, property shall be treated as subtantially improved by the taxpayer if, during any 24-month period beginning after the date on which the designation of the tax enterprise zone took effect, additions to basis with respect to such property in the hands of the taxpayer exceed the greater of (i) an amount equal to the adjusted basis at the beginning of such 24-month period in the hands of the taxpayer, or (ii) $5,000.

        ‘(C) LIMITATION ON LAND- The term ‘qualified zone business property’ shall not include land which is not an integral part of a qualified business (as defined in section 1392(c)).

      ‘(4) QUALIFIED ZONE PARTNERSHIP INTEREST- The term ‘qualified zone partnership interest’ means any interest in a partnership if--

        ‘(A) such interest is acquired by the taxpayer from the partnership solely in exchange for cash,

        ‘(B) as of the time such interest was acquired, such partnership was an enterprise zone business (or, in the case of a new partnership, such partnership was being organized for purposes of being an enterprise zone business), and

        ‘(C) during substantially all of the taxpayer’s holding period for such interest, such partnership qualified as an enterprise zone business.

      A rule similar to the rule of paragraph (2)(B) shall apply for purposes of this paragraph.

      ‘(5) TREATMENT OF SUBSEQUENT PURCHASERS- The term ‘qualified zone asset’ includes any property which would be a qualified zone asset but for paragraph (2)(A)(i), (3)(A)(ii), or (3)(A) in the hands of the taxpayer if such property was a qualified zone asset in the hands of any prior holder.

      ‘(6) 10-YEAR SAFE HARBOR- If any property ceases to be a qualified zone asset by reason of paragraph (2)(A)(iii), (3)(A)(iii), or (3)(C) after the 10-year period beginning on the date the taxpayer acquired such property, such property shall continue to be treated as meeting the requirements of such paragraph; except that the amount of gain to which subsection (a) applies on any sale or exchange of such property shall not exceed the amount which would be qualified capital gain had such property been sold on the date of such cessation.

      ‘(7) TREATMENT OF ZONE TERMINATIONS- The termination of any designation of an area as a tax enterprise zone shall be disregarded for purposes of determining whether any property is a qualified zone asset.

    ‘(c) OTHER DEFINITIONS AND SPECIAL RULES- For purposes of this section--

      ‘(1) QUALIFIED CAPITAL GAIN- Except as otherwise provided in this subsection, the term ‘qualified capital gain’ means any long-term capital gain.

      ‘(2) CERTAIN GAIN ON REAL PROPERTY NOT QUALIFIED- The term ‘qualified capital gain’ shall not include any gain which would be treated as ordinary income under section 1250 if section 1250 applied to all depreciation rather than the additional depreciation.

      ‘(3) GAIN ATTRIBUTABLE TO PERIODS AFTER TERMINATION OF ZONE DESIGNATION NOT QUALIFIED- The term ‘qualified capital gain’ shall not include any gain attributable to periods after the termination of any designation of an area as a tax enterprise zone.

    ‘(d) TREATMENT OF PASS-THRU ENTITIES-

      ‘(1) SALES AND EXCHANGES- Gain on the sale or exchange of an interest in a pass-thru entity held by the taxpayer (other than an interest in an entity which was an enterprise zone business during substantially all of the period the taxpayer held such interest) for more than 5 years shall be treated as gain described in subsection (a) to the extent such gain is attributable to amounts which would be qualified capital gain on qualified zone assets (determined as if such assets had been sold on the date of the sale or exchange) held by such entity for more than 5 years and throughout the period the taxpayer held such interest. A rule similar to the rule of paragraph (2)(C) shall apply for purposes of the preceding sentence.

      ‘(2) INCOME INCLUSIONS-

        ‘(A) IN GENERAL- Any amount included in income by reason of holding an interest in a pass-thru entity (other than an entity which was an enterprise zone business during substantially all of the period the taxpayer held the interest to which such inclusion relates) shall be treated as gain described in subsection (a) if such amount meets the requirements of subparagraph (B).

        ‘(B) REQUIREMENTS- An amount meets the requirements of this subparagraph if--

          ‘(i) such amount is attributable to qualified capital gain recognized on the sale or exchange by the pass-thru entity of property which is a qualified zone asset in the hands of such entity and which was held by such entity for the period required under subsection (a), and

          ‘(ii) such amount is includible in the gross income of the taxpayer by reason of the holding of an interest in such entity which was held by the taxpayer on the date on which such pass-thru entity acquired such asset and at all times thereafter before the disposition of such asset by such pass-thru entity.

        ‘(C) LIMITATION BASED ON INTEREST ORIGINALLY HELD BY TAXPAYER- Subparagraph (A) shall not apply to any amount to the extent such amount exceeds the amount to which subparagraph (A) would have applied if such amount were determined by reference to the interest the taxpayer held in the pass-thru entity on the date the qualified zone asset was acquired.

      ‘(3) PASS-THRU ENTITY- For purposes of this subsection, the term ‘pass-thru entity’ means--

        ‘(A) any partnership,

        ‘(B) any S corporation,

        ‘(C) any regulated investment company, and

        ‘(D) any common trust fund.

    ‘(e) SALES AND EXCHANGES OF INTERESTS IN PARTNERSHIPS AND S CORPORATIONS WHICH ARE QUALIFIED ZONE BUSINESSES- In the case of the sale or exchange of an interest in a partnership, or of stock in an S corporation, which was an enterprise zone business during substantially all of the period the taxpayer held such interest or stock, the amount of qualified capital gain shall be determined without regard to--

      ‘(1) any intangible, and any land, which is not an integral part of any qualified business (as defined in section 1392(b)), and

      ‘(2) gain attributable to periods before the designation of an area as a tax enterprise zone.

    ‘(f) CERTAIN TAX-FREE AND OTHER TRANSFERS- For purposes of this section--

      ‘(1) IN GENERAL- In the case of a transfer of a qualified zone asset to which this subsection applies, the transferee shall be treated as--

        ‘(A) having acquired such asset in the same manner as the transferor, and

        ‘(B) having held such asset during any continuous period immediately preceding the transfer during which it was held (or treated as held under this subsection) by the transferor.

      ‘(2) TRANSFERS TO WHICH SUBSECTION APPLIES- This subsection shall apply to any transfer--

        ‘(A) by gift,

        ‘(B) at death, or

        ‘(C) from a partnership to a partner thereof of a qualified zone asset with respect to which the requirements of subsection (d)(2) are met at the time of the transfer (without regard to the 5-year holding requirement).

      ‘(3) CERTAIN RULES MADE APPLICABLE- Rules similar to the rules of section 1244(d)(2) shall apply for purposes of this section.

    ‘(g) CERTAIN BUSINESSES TREATED AS NOT QUALIFIED BUSINESSES- For purposes of this section, the term ‘enterprise zone business’ has the meaning given such term by section 1392 except that, in applying section 1392 for such purposes, the term ‘qualified business’ shall not include any trade or business of producing property of a character subject to the allowance for depletion under section 611.

‘SEC. 1392. ENTERPRISE ZONE BUSINESS DEFINED.

    ‘(a) IN GENERAL- For purposes of this subpart, the term ‘enterprise zone business’ means, with respect to any taxable year, any corporation or partnership if for such year--

      ‘(1)(A) every trade or business of such entity is the active conduct of a qualified business within a tax enterprise zone, and

      ‘(B) at least 80 percent of the total gross income of such entity is derived from the active conduct of such businesses,

      ‘(2) substantially all of the use of the tangible property of such entity (whether owned or leased) is within a tax enterprise zone,

      ‘(3) substantially all of the intangible property of such entity is used in, and exclusively related to, the active conduct of any such business,

      ‘(4) substantially all of the services performed for such entity by its employees are performed in a tax enterprise zone,

      ‘(5) at least 1/3 of its employees are residents of a tax enterprise zone,

      ‘(6) such entity offers its employees an opportunity to purchase equity interests in such entity and at least 5 percent (by value) of the equity interests in such entity are held (directly or through a defined contribution plan which meets the requirements of section 401(a)) by employees who (as of the time of the acquisition of the interests) were disadvantaged residents of a tax enterprise zone,

      ‘(7) less than 5 percent of the average of the aggregate unadjusted bases of the property of such entity is attributable to collectibles (as defined in section 408(m)(2)) other than collectibles that are held primarily for sale to customers in the ordinary course of such business, and

      ‘(8) less than 5 percent of the average of the aggregate unadjusted bases of the property of such entity is attributable to nonqualified financial property.

    ‘(b) DISADVANTAGED RESIDENTS- For purposes of subsection (a), an employee is a disadvantaged resident of a tax enterprise zone if such employee is a resident of such zone and if--

      ‘(1) such employee is a member of an economically disadvantaged family (within the meaning of section 51(d)(11)), or

      ‘(2) the family income (within the meaning of section 143(f)(2)) of such employee is less than 50 percent of the applicable median family income (as defined in section 143(f)(4)).

    ‘(c) QUALIFIED BUSINESS- For purposes of this section--

      ‘(1) IN GENERAL- Except as otherwise provided in this subsection, the term ‘qualified business’ means any trade or business.

      ‘(2) RENTAL OF REAL PROPERTY- The rental to others of real property located in a tax enterprise zone shall be treated as a qualified business if and only if--

        ‘(A) in the case of real property which is not residential rental property (as defined in section 168(e)(2)), the lessee is an enterprise zone business, or

        ‘(B) in the case of residential rental property (as so defined)--

          ‘(i) such property was originally placed in service after the date the tax enterprise zone was designated, or

          ‘(ii) such property is rehabilitated after such date in a rehabilitation which meets requirements based on the principles of section 42(e)(3).

      ‘(3) RENTAL OF TANGIBLE PERSONAL PROPERTY- The rental to others of tangible personal property shall be treated as a qualified business if and only if substantially all of the rental of such property is by enterprise zone businesses or by residents of a tax enterprise zone.

      ‘(4) TREATMENT OF BUSINESS HOLDING INTANGIBLES- The term ‘qualified business’ shall not include any trade or business consisting predominantly of the development or holding of intangibles for sale or license.

      ‘(5) CERTAIN BUSINESSES EXCLUDED- The term ‘qualified business’ shall not include--

        ‘(A) any trade or business consisting of the operation of any facility described in section 144(c)(6)(B), and

        ‘(B) any trade or business the principal activity of which is farming (within the meaning of subparagraphs (A) or (B) of section 2032A(e)(5)), but only if, as of the close of the preceding taxable year, the sum of--

          ‘(i) the aggregate unadjusted bases (or, if greater, the fair market value) of the assets owned by the taxpayer which are used in such a trade or business, and

          ‘(ii) the aggregate value of assets leased by the taxpayer which are used in such a trade or business,

        exceeds $500,000.

      For purposes of subparagraph (B), rules similar to the rules of section 1395(b) shall apply.

    ‘(d) NONQUALIFIED FINANCIAL PROPERTY- For purposes of this section, the term ‘nonqualified financial property’ means debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities, and other similar property specified in regulations; except that such term shall not include--

      ‘(1) reasonable amounts of working capital held in cash, cash equivalents, or debt instruments with a term of 18 months or less, or

      ‘(2) debt instruments described in section 1221(4).

‘SEC. 1393. TAX ENTERPRISE ZONE.

    ‘For purposes of this subchapter, the term ‘tax enterprise zone’ means any area hereafter designated as an enterprise zone or tax enterprise zone pursuant to any law enacted after the date of the enactment of this section.’

    (b) CLERICAL AMENDMENT- The table of subchapters for chapter 1 of such Code is amended by inserting after the item relating to subchapter T the following new subchapter:

‘SUBCHAPTER U--Capital gain exclusion for investments in enterprise zones.’