H.R. 4175 (103rd): To amend the Small Business Act to provide financial assistance to small businesses operating in urban empowerment ...

...zones and enterprise communities and to amend the Internal Revenue Code of 1986 to allow individuals an exclusion for cap

103rd Congress, 1993–1994. Text as of Apr 12, 1994 (Introduced).

Status & Summary | PDF | Source: GPO

HR 4175 IH

103d CONGRESS

2d Session

H. R. 4175

To amend the Small Business Act to provide financial assistance to small businesses operating in urban empowerment zones and enterprise communities and to amend the Internal Revenue Code of 1986 to allow individuals an exclusion for capital gain from new investments in those small businesses.

IN THE HOUSE OF REPRESENTATIVES

APRIL 12, 1994

Mr. MACHTLEY introduced the following bill; which was referred jointly to the Committees on Small Business and Ways and Means


A BILL

To amend the Small Business Act to provide financial assistance to small businesses operating in urban empowerment zones and enterprise communities and to amend the Internal Revenue Code of 1986 to allow individuals an exclusion for capital gain from new investments in those small businesses.

    Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. FINANCIAL ASSISTANCE FOR SMALL BUSINESSES OPERATING IN URBAN EMPOWERMENT ZONES AND ENTERPRISE COMMUNITIES.

    Section 7(a) of the Small Business Act (15 U.S.C. 636(a)) is amended by adding at the end the following:

      ‘(23)(A) Out of the amounts appropriated to carry out this subsection, not less than $1,000,000,000 shall be expended in each fiscal year for small business concerns operating in urban areas designated as empowerment zones or enterprise communities pursuant to section 1391 of the Internal Revenue Code of 1986.

      ‘(B) Subparagraph (A) shall apply to any fiscal year beginning after September 30, 1994, in which designations described in subparagraph (A) are in effect.’.

SEC. 2. EXCLUSION FOR CAPITAL GAIN FROM NEW INVESTMENTS IN SMALL BUSINESSES OPERATING IN URBAN EMPOWERMENT ZONES AND ENTERPRISE COMMUNITIES.

    (a) IN GENERAL- Subchapter U of chapter 1 of the Internal Revenue Code of 1986 (relating to designation and treatment of empowerment zones, enterprise communities, and rural development investment areas) is amended by redesignating part IV as part V and by inserting after part III the following new part:

‘PART IV--EXCLUSION FOR CAPITAL GAIN FROM NEW INVESTMENTS IN SMALL BUSINESSES OPERATING IN URBAN EMPOWERMENT ZONES AND ENTERPRISE COMMUNITIES

‘Sec. 1397D. Exclusion for gain from new investments in small businesses operating in urban empowerment zones and enterprise communities.

‘SEC. 1397D. EXCLUSION FOR GAIN FROM NEW INVESTMENTS IN SMALL BUSINESSES OPERATING IN URBAN EMPOWERMENT ZONES AND ENTERPRISE COMMUNITIES.

    ‘(a) GENERAL RULE- In the case of an individual, gross income shall not include 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 a small urban enterprise zone business (or, in the case of a new corporation, such corporation was being organized for purposes of being a small urban enterprise zone business), and

          ‘(iii) during substantially all of the taxpayer’s holding period for such stock, such corporation qualified as a small urban 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- 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 urban tax enterprise zone took effect,

          ‘(ii) the original use of such property in such an urban tax enterprise zone 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 an urban tax enterprise zone and in a small urban enterprise zone business of the taxpayer.

        ‘(A) 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 substantially improved by the taxpayer if, during any 24-month period beginning after the date on which the designation of the urban 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.

        ‘(B) 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 1397B(d)).

      ‘(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 a small urban enterprise zone business (or, in the case of a new partnership, such partnership was being organized for purposes of being a small urban enterprise zone business), and

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

      A rule similar to the rule of paragraph (2)(C) 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 (4)(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 (4)(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 urban tax enterprise zone shall be disregarded for purposes of determining whether any property is a qualified zone asset.

    ‘(c) SMALL URBAN ENTERPRISE ZONE BUSINESS; URBAN TAX ENTERPRISE ZONE- For purposes of this section:

      ‘(1) SMALL URBAN ENTERPRISE ZONE BUSINESS- The term ‘small urban enterprise zone business’ means an enterprise zone business (as defined in section 1397B) which normally employs 500 or fewer employees on any day during the taxable year; except that, in applying section 1397B for such purposes--

        ‘(A) references to empowerment zones shall be treated as references only to urban tax enterprise zones, and

        ‘(B) 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.

      ‘(B) URBAN TAX ENTERPRISE ZONE- The term ‘urban tax enterprise zone’ means any empowerment zone, and any enterprise community, which is located in an urban area.

    ‘(d) 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 an urban tax enterprise zone.

    ‘(e) 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 a small urban 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 a small urban 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.

    ‘(f) 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 a small urban 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 1397B(d)), and

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

    ‘(g) 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.’

    (b) TECHNICAL AMENDMENTS-

      (1) Section 172(d)(2)(B) of such Code (relating to modifications with respect to net operating loss deduction) is amended to read as follows:

        ‘(B) the exclusions provided by sections 1202 and 1397D shall not be allowed.’

      (2) Paragraph (4) of section 642(c) of such Code is amended--

        (A) by inserting ‘or 1397D(a)’ after ‘section 1202(a)’, and

        (B) by striking ‘section 1202’ and inserting ‘such section’.

      (3) The last sentence of paragraph (3) of section 643(a) of such Code is amended to read as follows: ‘The exclusions under sections 1202 and 1397D shall not be taken into account.’

      (4) Paragraph (4) of section 691(c) of such Code is amended by inserting ‘1397D,’ after ‘1201,’.

      (5) The second sentence of paragraph (2) of section 871(a) of such Code is amended by striking ‘section 1202’ and inserting ‘sections 1202 and 1397D’.

      (6) The section 1397D of such Code contained in part V of subchapter U of chapter 1 of such Code (as redesignated by subsection (a)) is redesignated as section 1397E.

      (7) The table of parts for subchapter U of chapter 1 of such Code is amended by striking the last item and inserting the following:

‘Part IV. Exclusion for capital gain from new investments in small businesses operating in urban empowerment zones and enterprise communities.

‘Part V. Regulations.’

    (c) EFFECTIVE DATE- The amendments made by this section shall take effect on the date of the enactment of this Act.