Entrepreneurial New and Small Business Capital Formation Act of 1995

Summary: Entrepreneurial New and Small Business Capital Formation Act of 1995 - Amends the Internal Revenue Code to recognize, if elected by the taxpayer, gain (other than ordinary income) on the sale of any eligible small business investment only to the extent the amount realized exceeds the cost of any other small business investment purchased by the taxpayer during the previous six months.  Applies to the amendments made by this Act rules (from provisions relating to a 50 percent exclusion for gain from certain small business stock) relating to stock conversion, pass-through entities, transfers, and short positions.  Mandates basis reductions for unrecognized gain. Treats a loss on an eligible small business investment, if the loss would otherwise be from the sale or exchange of a capital asset, as an ordinary loss.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Entrepreneurial New and Small 
Business Capital Formation Act of 1995''.

SEC. 2. ROLLOVER OF CAPITAL GAINS ON CERTAIN 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 ON SMALL BUSINESS INVESTMENTS.

    ``(a) Nonrecognition of Gain.--In the case of the sale of any 
eligible small business investment 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 other eligible small business 
        investment purchased by the taxpayer during the 6-month period 
        beginning on the date of such sale, reduced by
            ``(2) any portion of such cost previously taken into 
        account under this section.
This section shall not apply to any gain which is treated as ordinary 
income for purposes of this subtitle.
    ``(b) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Purchase.--The term `purchase' has the meaning given 
        such term by section 1043(b)(4).
            ``(2) 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, which 
        is originally issued after December 31, 1994, if--
                    ``(A) as of the date of issuance, 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)--
                            ``(i) in exchange for money or other 
                        property (not including stock), or
                            ``(ii) as compensation for services (other 
                        than services performed as an underwriter of 
                        such stock or partnership interest).
        A rule similar to the rule of section 1202(c)(3) shall apply 
        for purposes of this section.
            ``(3) Active business requirement.--Stock in a corporation, 
        and a partnership interest in a partnership, shall not be 
        treated as eligible small business investment unless, during 
        substantially all of the taxpayer's holding period for such 
        stock or partnership interest, such corporation or partnership 
        meets the active business requirements of subsection (c). A 
        rule similar to the rule of section 1202(c)(2)(B) shall apply 
        for purposes of this section.
            ``(4) 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 $20,000,000,
                            ``(ii) at all times before such issuance, 
                        such entity (and any predecessor thereof) had 
                        aggregate gross assets (as defined in section 
                        1202(d)(2)) of less than $25,000,000, and
                            ``(iii) at all times before such issuance, 
                        the excess of the fair market value of the 
                        assets of such entity (and any predecessor 
                        thereof) over the liabilities of such entity 
                        was less than $10,000,000.
                    ``(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) Active Business Requirement.--
            ``(1) In general.--For purposes of subsection (b)(3), the 
        requirements of this subsection are met by a qualified small 
        business entity for any period if--
                    ``(A) the entity is engaged in the active conduct 
                of a trade or business, and
                    ``(B) at least 80 percent (by value) of the assets 
                of such entity are used in the active conduct of a 
                trade or business.
            ``(2) Special rule for certain activities.--For purposes of 
        paragraph (1), if, in connection with any future trade or 
        business, an entity is engaged in--
                    ``(A) startup activities described in section 
                195(c)(1)(A),
                    ``(B) activities resulting in the payment or 
                incurring of expenditures which may be treated as 
                research and experimental expenditures under section 
                174, or
                    ``(C) activities with respect to in-house research 
                expenses described in section 41(b)(4),
        such entity shall be treated with respect to such activities as 
        engaged in (and assets used in such activities shall be treated 
        as used in) the active conduct of a trade or business. Any 
        determination under this paragraph shall be made without regard 
        to whether the entity has any gross income from such activities 
        at the time of the determination.
            ``(3) Certain rules to apply.--Rules similar to the rules 
        of paragraphs (5), (6), (7), and (8) of section 1202(e) shall 
        apply for purposes of this subsection.
    ``(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) Basis Adjustments.--If gain from any sale is not recognized 
by reason of subsection (a), such gain shall be applied to reduce (in 
the order acquired) the basis for determining gain or loss of any 
eligible small business investment which is purchased by the taxpayer 
during the 6-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 other 
                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 
                other eligible small business investment within the 6-
                month period described in subsection (a), or
                    ``(C) a failure to make such purchase within such 
                6-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.''
    (b) Conforming Amendment.--Paragraph (23) of section 1016(a) of 
such Code is amended--
            (1) by striking ``or 1044'' and inserting ``, 1044, or 
        1045'', and
            (2) by striking ``or 1044(d)'' and inserting ``, 1044(d), 
        or 1045(e)''.
    (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 on small 
                                        business investments.''
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after December 31, 1994.

SEC. 3. LOSSES ON ELIGIBLE SMALL BUSINESS INVESTMENTS.

    (a) In General.--Part IV of subchapter P of chapter 1 of the 
Internal Revenue Code of 1986 (relating to special rules for 
determining gains and losses) is amended by inserting after section 
1244 the following new section:

``SEC. 1244A. LOSSES ON ELIGIBLE SMALL BUSINESS INVESTMENTS.

    ``If--
            ``(1) a loss is on any eligible small business investment 
        (as defined in section 1045(b)), and
            ``(2) such loss would (but for this section) be a loss from 
        the sale or exchange of a capital asset,
then such loss shall be treated as an ordinary loss. For purposes of 
section 172 (relating to the net operating loss deduction), any amount 
of loss treated by reason of this section as an ordinary loss shall be 
treated as attributable to a trade or business of the taxpayer.''
    (b) Clerical Amendment.--The table of sections for such part IV is 
amended by inserting after the item relating to section 1244 the 
following new item:

                              ``Sec. 1244A. Losses on eligible small 
                                        business investments.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after December 31, 1994.