SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Small Business Capital Gains 
Enhancement Act of 1997''.

SEC. 2. MODIFICATIONS TO EXCLUSION OF GAIN ON CERTAIN SMALL BUSINESS 
              STOCK.

    (a) Increased Exclusion.--
            (1) In general.--Subsection (a) of section 1202 of the 
        Internal Revenue Code of 1986 (relating to 50-percent exclusion 
        for gain from certain small business stock) is amended--
                    (A) by striking ``50 percent'' and inserting ``75 
                percent'', and
                    (B) by striking ``50-Percent'' in the heading and 
                inserting ``75-Percent''.
            (2) Conforming amendments.--
                    (A) The heading for section 1202 of such Code is 
                amended by striking ``50-percent'' and inserting ``75-
                percent''.
                    (B) The table of sections for part I of subchapter 
                P of chapter 1 of such Code is amended by striking 
                ``50-percent'' in the item relating to section 1202 and 
                inserting ``75-percent''.
    (b) Exclusion Available to Corporations.--
            (1) In general.--Subsection (a) of section 1202 of the 
        Internal Revenue Code of 1986, as amended by subsection (a), is 
        amended by striking ``other than a corporation''.
            (2) Technical amendment.--Subsection (c) of section 1202 of 
        such Code is amended by adding at the end the following new 
        paragraph:
            ``(4) Stock held among members of controlled group not 
        eligible.--Stock shall not be treated as qualified small 
        business stock if such stock was at any time held by any member 
        of the parent-subsidiary controlled group (as defined in 
        subsection (d)(3)) which includes the qualified small 
        business.''
    (c) Repeal of Minimum Tax Preference.--
            (1) In general.--Section 57(a) of the Internal Revenue Code 
        of 1986 (relating to items of tax preference) is amended by 
        striking paragraph (7).
            (2) Technical amendment.--Section 53(d)(1)(B)(ii)(II) of 
        such Code is amended by striking ``, (5), and (7)'' and 
        inserting ``and (5)''.
    (d) Stock of Larger Businesses Eligible for Exclusion.--
            (1) Section 1202(d)(1) of the Internal Revenue Code of 1986 
        (relating to qualified small business) is amended by striking 
        ``$50,000,000'' each place it appears and inserting 
        ``$100,000,000''.
            (2) Section 1202(d) of such Code is amended by adding at 
        the end the following new paragraph:
            ``(4) Inflation adjustment of asset limitation.--In the 
        case of stock issued in any calendar year after 1997, the 
        $100,000,000 amount contained in paragraph (1) shall be 
        increased by an amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, determined by substituting 
                `calendar year 1996' for `calendar year 1992' in 
                subparagraph (B) thereof.
        If any amount as adjusted under the preceding sentence is not a 
        multiple of $1,000,000, such amount shall be rounded to the 
        next lower multiple of $1,000,000.''
    (e) Per-Issuer Limitation.--Section 1202(b)(1)(A) of the Internal 
Revenue Code of 1986 (relating to per-issuer limitation on taxpayer's 
gain) is amended by striking ``$10,000,000'' and inserting 
``$20,000,000''.
    (f) Other Modifications.--
            (1) Working capital limitation.--Section 1202(e)(6) of the 
        Internal Revenue Code of 1986 (relating to working capital) is 
        amended by striking ``2 years'' each place it appears and 
        inserting ``5 years''.
            (2) Redemption rules.--Section 1203(c)(3) of such Code 
        (relating to certain purchases by corporation of its own stock) 
        is amended by adding at the end the following new subparagraph:
                    ``(D) Waiver where business purpose.--A purchase of 
                stock by the issuing corporation shall be disregarded 
                for purposes of subparagraph (B) if the issuing 
                corporation establishes that there was a business 
                purpose for such purchase and one of the principal 
                purposes of the purchase was not to avoid the 
                limitation of this section.''
    (g) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to stock issued 
        after the date of the enactment of this Act.
            (2) Special rule.--The amendments made by subsections (c), 
        (e), and (f) shall apply to stock issued after August 10, 1993.

SEC. 3. 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, 1996, if--
                    ``(A) as of the date of issuance, such corporation 
                or partnership is a qualified small business entity,
                    ``(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), and
                    ``(C) the taxpayer has held such stock or interest 
                at least 6 months as of the time of the sale described 
                in subsection (a).
        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 an 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) such entity (and any predecessor 
                        thereof) had aggregate gross assets (as defined 
                        in section 1202(d)(2)) of less than $25,000,000 
                        at all times before the issuance of the 
                        interest described in paragraph (2), and
                            ``(ii) the aggregate gross assets (as so 
                        defined) of the entity immediately after the 
                        issuance (determined by taking into account 
                        amounts received in the issuance) are less than 
                        $25,000,000.
                    ``(B) Aggregation rules.--Rules similar to the 
                rules of section 1202(d)(3) shall apply for purposes of 
                this paragraph.
    ``(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 
                qualified trade or business (within the meaning of 
                section 1202(e)(3)).
        Such requirements shall not be treated as met for any period if 
        during such period the entity is described in subparagraph (A), 
        (B), (C), or (D) of section 1202(e)(4).
            ``(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 shall apply for 
purposes of this section, except that a 6-month holding period shall be 
substituted for a 5-year holding period where applicable.
    ``(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 investments 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 investments 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 and regulations to modify the application of section 1202 to 
the extent necessary to apply such section to a partnership rather than 
a corporation.''
    (b) Conforming Amendment.--Paragraph (23) of section 1016(a) of the 
Internal Revenue Code of 1986 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 the Internal Revenue Code of 1986 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, 1996.
Small Business Capital Gains Enhancement Act of 1997 - Amends the Internal Revenue Code to increase from 50 percent to 75 percent the exclusion from gain for a taxpayer, including a corporation, resulting from the sale or exchange of qualified small business stock held for more than five years.  States that stock held among members of a parent-subsidiary controlled group shall not be eligible for such treatment. 
Exempts such exclusion from alternative minimum tax provisions. 
Increases:  (1) the qualified small business asset limit from $50 million to $100 million; and (2) the per-issuer limit from $10 million to $20 million. 
Increases the working capital asset holding period from two years to five years. 
Provides for the nontaxable rollover of gain from qualified small business stock to another small business stock.
Small Business Capital Gains Enhancement Act of 1997