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.
Amends the Small Business Act to earmark specified funds to be expended after FY 1994 for small businesses operating in urban empowerment zones or enterprise communities (urban tax enterprise zones). 
Amends the Internal Revenue Code to exclude from gross income qualified capital gain recognized on the sale or exchange of an urban tax enterprise zone asset held for more than five years.  Describes such assets as enterprise zone stock, business property, and partnership interests.
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.