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Text of To amend the Internal Revenue Code to provide that capital gains not be recognized if invested in certain small businesses.

...certain small businesses.

This bill was introduced on July 24, 1997, in a previous session of Congress, but was not enacted. The text of the bill below is as of Jul 24, 1997 (Introduced).

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HR 2252 IH

105th CONGRESS

1st Session

H. R. 2252

To amend the Internal Revenue Code to provide that capital gains not be recognized if invested in certain small businesses.

IN THE HOUSE OF REPRESENTATIVES

July 24, 1997

Ms. FURSE introduced the following bill; which was referred to the Committee on Ways and Means


A BILL

To amend the Internal Revenue Code to provide that capital gains not be recognized if invested in certain small businesses.

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

SECTION 1. NONRECOGNITION OF GAIN WHERE ROLLOVER TO SMALL BUSINESS INVESTMENTS.

    (a) IN GENERAL- Part III of subchapter O of chapter 1 of the Internal Revenue Code of 1986 (relating to common nontaxable exchanges) is amended by adding at the end the following new section:

‘SEC. 1045. ROLLOVER OF GAIN TO SMALL BUSINESS INVESTMENTS.

    ‘(a) NONRECOGNITION OF GAIN- In the case of the sale of any capital asset with respect to which the taxpayer elects the application of this section, gain from such sale shall be recognized only to the extent that the amount realized on such sale exceeds--

      ‘(1) the cost of any eligible small business investment purchased by the taxpayer during the 12-month period beginning on the date of such sale, reduced by

      ‘(2) any portion of such cost previously taken into account under this section.

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

      ‘(1) CAPITAL ASSET- The term ‘capital asset’ has the meaning given such term by section 1221 (determined without regard to paragraph (2) of such section), except that such term shall include gain derived from the bulk sale of inventory not in the ordinary course of a trade or business.

      ‘(2) INVESTMENT PROPERTY- The term ‘investment property’ means property that has the capacity to produce gross income from--

        ‘(A) interest, annuities, or royalties, not derived in the ordinary course of a trade or business, or

        ‘(B) dividends.

      Such term shall not include expansion shares.

      ‘(3) PURCHASE- The term ‘purchase’ has the meaning given such term by section 1043(b)(4).

      ‘(4) ELIGIBLE SMALL BUSINESS INVESTMENT- Except as otherwise provided in this section, the term ‘eligible small business investment’ means any stock in a domestic corporation, and any partnership interest in a domestic partnership, if--

        ‘(A) as of the date of issuance of such stock or partnership interest, such corporation or partnership is a qualified small business entity, and

        ‘(B) such stock or partnership interest is acquired by the taxpayer at its original issue (directly or through an underwriter) in exchange for money or other property (not including stock).

      A rule similar to the rule of section 1202(c)(3) shall apply for purposes of this section.

      ‘(5) QUALIFIED SMALL BUSINESS ENTITY-

        ‘(A) IN GENERAL- The term ‘qualified small business entity’ means any domestic corporation or partnership if--

          ‘(i) for the taxable year of such entity in which the stock or partnership interest was issued and each prior taxable year, such entity (and any predecessor thereof) had gross receipts of less than $5,000,000,

          ‘(ii) the primary activity of such entity (and any predecessor thereof) for the taxable year of such issuance and each prior taxable year was an activity listed in the Standard Industrial Classification Manual, 1987 (SIC), as published by the Office of Management and Budget, Executive Office of the President, as being--

            ‘(I) agriculture, forestry or fishing (Division A),

            ‘(II) mining (Division B),

            ‘(III) construction (Division C),

            ‘(IV) manufacturing (Division D),

            ‘(V) transportation, communications, electric, gas or sanitary service (Division E),

            ‘(VI) wholesale trade (Division F),

            ‘(VII) retail trade (Division (G),

            ‘(VIII) personal services (Major Group 72, Division I),

            ‘(IX) business services (Major Group 73, Division I),

            ‘(X) automotive repair, services or parking (Major Group 75, Division I),

            ‘(XI) miscellaneous repair services (Major Group 76, Division I), or

            ‘(XII) engineering, accounting, research, management or related services (Major Group 87, Division I),

          ‘(iii) such entity generates income from investment property only as an incidental effect of the management of a working capital pool aggregated and directed toward investing in any qualified small business entity, and

          ‘(iv) the majority of full-time employees employed by such entity and the largest percentage, by dollar value, of independent contractors under contract to such entity are located in the United States.

        For purposes of clause (iii), ownership interests in entities controlled by such entity or directly involved in the primary activity referred to in clause (ii) with respect to such entity do not constitute investment property, and the Secretary may further define by regulation what constitutes an incidental holding of investment property.

        ‘(B) AGGREGATION RULES- All persons treated as a single employer under subsection (a) or (b) of section 52 shall be treated as one person for purposes of subparagraph (A).

        ‘(C) SPECIAL RULES FOR DETERMINING GROSS RECEIPTS- The rules of subparagraphs (B) and (C) of section 448(c)(3) shall apply for purposes of subparagraph (A)(i).

    ‘(c) INAPPLICABILITY TO CERTAIN GAIN- Subsection (a) shall not apply to any of the following types of gain:

      ‘(1) Gain from the sale or other disposition of property received in lieu of salary, wages, or other compensation for services performed by the taxpayer, to the extent of the fair market value of the property at the time of receipt by the taxpayer.

      ‘(2) Gain from the sale of property that is not held for the production of income.

      ‘(3) Gain from investment property.

      ‘(4) Gain that is treated or characterized as ordinary income for purposes of this title.

      ‘(5) Gain, to the extent the gain is not recognized under section 1044 or 1202, notwithstanding that the gain is derived from the sale of expansion shares.

    ‘(d) CERTAIN OTHER RULES TO APPLY- Rules similar to the rules of subsections (f), (g), (h), and (j) of section 1202 (without regard to any 5-year holding period requirement) shall apply for purposes of this section.

    ‘(e) PROHIBITION OF BASIS ADJUSTMENTS- If gain from any sale is not recognized by reason of subsection (a), such gain shall not be applied to reduce the basis for determining gain or loss of any eligible small business investment which is purchased by the taxpayer during the 12-month period described in subsection (a).

    ‘(f) STATUTE OF LIMITATIONS- If any gain is realized by the taxpayer on the sale or exchange of any eligible small business investment and there is in effect an election under subsection (a) with respect to such gain, then--

      ‘(1) the statutory period for the assessment of any deficiency with respect to such gain shall not expire before the expiration of 3 years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may by regulations prescribe) of--

        ‘(A) the taxpayer’s cost of purchasing the eligible small business investment which the taxpayer claims results in nonrecognition of any part of such gain,

        ‘(B) the taxpayer’s intention not to purchase any eligible small business investment within the 12-month period described in subsection (a), or

        ‘(C) a failure to make such purchase within such 12-month period, and

      ‘(2) such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.

    ‘(g) REGULATIONS- The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this section, including regulations to prevent the avoidance of the purposes of this section through splitups, shell corporations, partnerships, or otherwise.

    ‘(h) TERMINATION- Subsection (a) shall not apply to any taxable year beginning on or after January 1, 2004.’

    (b) REPORT BY SECRETARY- Not later than December 31, 2001, the Secretary of the Treasury shall submit to each House of the Congress a report detailing the effects of section 1045 of such Code, as added by this Act.

    (c) CLERICAL AMENDMENT- The table of sections for part III of subchapter O of chapter 1 of such Code is amended by adding at the end the following new item:

‘Sec. 1045. Rollover of gain to small business investments.’

    (d) EFFECTIVE DATE- The amendments made by this section shall apply to investments purchased after the date of the date of the enactment of this Act, for taxable years ending after such date.