To amend the Internal Revenue Code of 1986 to promote the economic recovery of the District of Columbia.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``District of Columbia Tax Incentives 
Improvement Act of 2002''.

SEC. 2. MODIFICATIONS TO ENTERPRISE ZONE BENEFITS AVAILABLE WITH 
              RESPECT TO THE DISTRICT OF COLUMBIA.

    (a) Entire District of Columbia Treated as Empowerment Zone.--
            (1) In general.--Subsection (a) of section 1400 of the 
        Internal Revenue Code of 1986 (relating to establishment of DC 
        Zone) is amended to read as follows:
    ``(a) Designation.--For purposes of this title--
            ``(1) the District of Columbia--
                    ``(A) is hereby designated as the District of 
                Columbia Enterprise Zone, and
                    ``(B) shall be treated as an empowerment zone 
                designated under subchapter U, and
            ``(2) the terms `District of Columbia Enterprise Zone' and 
        `DC Zone' mean the District of Columbia.''
            (2) Conforming amendments.--
                    (A) Section 1400 of such Code is amended by 
                striking subsections (b) and (c) and by redesignating 
                subsections (d), (e), and (f) as subsections (b), (c), 
                and (d), respectively.
                    (B) Subsection (b) of section 1400 of such Code, as 
                redesignated by subparagraph (A), is amended to read as 
                follows:
    ``(b) Special Rule for Application of Employment Credit.--In the 
case of the DC Zone, section 1396 (relating to empowerment zone 
employment credit) shall be applied by substituting `20' for `15' in 
the table contained in section 1396(b). The preceding sentence shall 
apply only with respect to qualified zone employees, as defined in 
section 1396(d), determined by treating no area other than the DC Zone 
as an empowerment zone or enterprise community.''
                    (C) Paragraph (2) of section 1400(d) of such Code, 
                as redesignated by subparagraph (A), is amended by 
                striking ``the census tracts referred to in subsection 
                (b)(1) as an enterprise community'' and inserting ``the 
                enterprise community in the District of Columbia''.
                    (D) Section 1400B of such Code is amended by 
                striking subsection (d) and by redesignating 
                subsections (e), (f), and (g) as subsections (d), (e), 
                and (f), respectively.
                    (E) Paragraph (1) of section 1400B(c) of such Code 
                is amended by striking ``section 1400(e)'' and 
                inserting ``section 1400(c)''.
    (b) Capital Gains Exclusion Available for Assets Held More Than 2 
Years.--
            (1) In general.--Subsection (a) of section 1400B of such 
        Code is amended by striking ``5 years'' and inserting ``2 
        years''.
            (2) Conforming amendment.--Paragraph (7) of section 
        1400B(b) of such Code is amended--
                    (A) by striking ``5-year'' in the heading and 
                inserting ``2-year'', and
                    (B) by striking ``5-year'' in the text and 
                inserting ``2-year''.
    (c) Modifications to Definition of DC Zone Business.--Subsection 
(c) of section 1400B of such Code is amended to read as follows:
    ``(c) DC Zone Business.--For purposes of this section--
            ``(1) In general.--The term `DC Zone business' means any 
        entity which is an enterprise zone business (as defined in 
        section 1397B), determined--
                    ``(A) after the application of section 1400(c),
                    ``(B) without regard to subsections (b)(1) and 
                (d)(2)(B) of section 1397B, and
                    ``(C) by treating no area other than the District 
                of Columbia as an empowerment zone or enterprise 
                community.
            ``(2) Special rule for businesses holding intangibles.--
        Paragraph (4) of section 1397B(d) shall not apply in 
        determining whether a business is a DC Zone business if--
                    ``(A) at least 30 percent of the employees of such 
                business are residents of the District of Columbia, and
                    ``(B) at least 50 percent of the wages (as defined 
                by section 3401(a)) paid by such business are paid to 
                residents of the District of Columbia.''
    (d) Effective Date.--The amendments made by this section shall take 
effect as if included in the amendments made by section 701 of the 
Taxpayer Relief Act of 1997.

SEC. 3. EXTENSION OF ENTERPRISE ZONE TREATMENT.

    (a) Effective Period of Designation.--Subsection (f) of section 
1400 of the Internal Revenue Code of 1986 is amended by striking 
``December 31, 2003'' each place it appears and inserting ``December 
31, 2009''.
    (b) Economic Development Bonds.--Subsection (b) of section 1400A of 
such Code is amended by striking ``December 31, 2003'' and inserting 
``December 31, 2009''.
    (c) Zero Percent Capital Gains Rate.--
            (1) Paragraphs (2)(A)(i), (3)(A), (4)(A)(i), and 
        (4)(B)(i)(I) of section 1400B(b) of such Code are each amended 
        by striking ``January 1, 2004'' and inserting ``January 1, 
        2010''.
            (2) Subsections (e)(2) and (g) of section 1400B of such 
        Code are each amended by striking ``2008'' each place it 
        appears and inserting ``2014''.

SEC. 4. FIRST-TIME HOMEBUYER CREDIT FOR DISTRICT OF COLUMBIA MADE 
              PERMANENT; OTHER MODIFICATIONS.

    (a) Credit Made Permanent.--Subsection (i) of section 1400C of the 
Internal Revenue Code of 1986 (relating to first-time homebuyer credit 
for District of Columbia) is amended by striking ``, and before January 
1, 2004''.
    (b) Treatment of Purchases In Connection With Divorce.--
            (1) In general.--Subsection (c) of section 1400C of such 
        Code is amended by adding at the end the following new 
        paragraph:
            ``(4) Purchases in connection with divorce.--
        Notwithstanding paragraphs (1) and (2), an individual shall be 
        treated as a first-time homebuyer with respect to the purchase 
        of any residence if--
                    ``(A) the sale of the residence is pursuant to a 
                divorce or separation instrument (as defined in section 
                71(b)(2)) relating to such individual and such 
                individual's spouse or former spouse, and
                    ``(B) such residence was the principal residence of 
                such individual at the time of such sale or for any 
                period ending not more than a reasonable period before 
                such sale.
        The Secretary shall prescribe such regulations as may be 
        necessary to prevent the abuse of the purposes of this 
        paragraph.''
            (2) Effective date.--The amendment made by paragraph (1) 
        shall apply to purchases after the date of the enactment of 
        this Act.
    (c) Credit Allowed Against Regular Tax and Alternative Minimum 
Tax.--
            (1) In general.--Subsection (d) of section 1400C of such 
        Code is amended to read as follows:
    ``(d) Limitation Based on Amount of Tax.--
            ``(1) In general.--The credit allowed under subsection (a) 
        for the taxable year shall not exceed the excess of--
                    ``(A) the sum of the regular tax liability (as 
                defined in section 26(b)) plus the tax imposed by 
                section 55, over
                    ``(B) the sum of the credits allowable under 
                subpart A of part IV of subchapter A and section 27 for 
                the taxable year.
            ``(2) Carryover of credit.--If the credit allowable under 
        subsection (a) exceeds the limitation imposed by paragraph (1) 
        for such taxable year, such excess shall be carried to the 
        succeeding taxable year and added to the credit allowable under 
        subsection (a) for such taxable year.''
            (2) Conforming amendment.--Section 1400C of such Code is 
        amended by striking subsection (g) and by redesignating 
        subsections (h) and (i) as subsections (g) and (h), 
        respectively.
            (3) Effective date.--The amendment made by paragraph (1) 
        shall apply to taxable years beginning after the date of the 
        enactment of this Act.

SEC. 5. EXPANSION OF TAX-EXEMPT ECONOMIC DEVELOPMENT BONDS.

    (a) In General.--Section 1400A of the Internal Revenue Code of 
1986, as amended by section 3, is amended to read as follows:

``SEC. 1400A. TAX-EXEMPT ECONOMIC DEVELOPMENT BONDS.

    ``(a) In General.--In the case of the District of Columbia 
Enterprise Zone--
            ``(1) section 1394(c)(1)(A) (relating to limitation on 
        amount of bonds) shall not apply,
            ``(2) section 1394(b)(3)(A) shall be applied without regard 
        to section 1397C(d)(4) (relating to treatment of businesses 
        holding intangibles), and
            ``(3) section 1394(b)(3)(B)(iii) shall be applied without 
        regard to the employee residency requirement.
    ``(b) Exemption From Volume Cap.--Bonds which are exempt facility 
bonds by reason of this section shall be treated as not being private 
activity bonds for purposes of section 146.
    ``(c) Period of Applicability.--This section shall apply to bonds 
issued during the period beginning on January 1, 1998, and ending on 
December 31, 2009.''
    (b) Effective Date.--The amendments made by this section shall 
apply to bonds issued after the date of the enactment of this Act.

SEC. 6. BONDS OF DISTRICT OF COLUMBIA EXEMPT FROM STATE AND LOCAL 
              TAXES.

    (a) In General.--Section 485 of the District of Columbia Home Rule 
Act is amended to read as follows:
    ``Sec. 485. Bonds and notes issued by the Council pursuant to this 
title and the interest thereon shall be exempt from all taxation 
(except estate, inheritance, and gift taxes) by the United States, any 
State or political subdivision thereof, the District, or any possession 
of the United States.''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2001.

SEC. 7. ZERO PERCENT WITHHOLDING RATE ON PAYMENTS MADE WITH RESPECT TO 
              DC ZONE INSURANCE POLICIES.

    (a) In General.--Subchapter W of chapter 1 of the Internal Revenue 
Code of 1986 is amended by adding at the end the following new section:

``SEC. 1400D. ZERO PERCENT WITHHOLDING RATE ON PAYMENTS MADE WITH 
              RESPECT TO DC ZONE INSURANCE POLICIES.

    ``(a) In General.--The tax and withholding rates under sections 
871, 881, 1441, and 1442 shall be zero for any payments made by an 
exempt insurance company with respect to a DC Zone insurance policy 
issued by such company.
    ``(b) Exempt Insurance Company.--For purposes of this section, the 
term `exempt insurance company' means any insurance company--
            ``(1) which is subject to tax under subchapter L, and
            ``(2) which is a DC Zone business (as defined in section 
        1400B(c)) or would be such a business if subsection (b) of 
        section 1397B were applied without regard to paragraphs (2), 
        (6), and (8) thereof.
    ``(c) DC Zone Insurance Policy.--The term `DC Zone insurance 
policy' means an insurance or annuity contract, including a contract 
for amounts held at interest, issued by (but not reinsured by) an 
exempt insurance company in connection with property in, liability 
arising out of an activity in, or the lives or health of residents of, 
a country other than the United States. For purposes of this section, 
the determination of whether a contract is a life insurance contract or 
an annuity contract shall be made without regard to sections 72(s), 
101(f), 871(h), and 7702 if--
            ``(1) such contract is regulated as a life insurance 
        contract or an annuity contract by the Department of Insurance 
        and Securities Regulation of the District of Columbia, and
            ``(2) no policyholder, insured, annuitant, or beneficiary 
        with respect to such policy is a United States person.
    ``(d) Exclusion From Reporting.--No reporting shall be required 
under this title from an exempt insurance company with respect to 
amounts paid by such company under a DC Zone insurance policy to a 
person who is not a United States person in connection with risks 
located outside the United States.''
    (b) Clerical Amendment.--The table of sections for such subchapter 
W is amended by adding at the end the following new item:

                              ``Sec. 1400D. Zero percent withholding 
                                        rate on payments made with 
                                        respect to DC Zone insurance 
                                        policies.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts paid after the date of the enactment of this Act.

Summary: District of Columbia Tax Incentives Improvement Act of 2002 - Amends the Internal Revenue Code to designate the entire District of Columbia as an enterprise zone which shall be treated as an empowerment zone. Excludes from gross income capital gains on sale or exchange of District assets held for more than two years . Defines what constitutes a District business. Nullifies the exclusion of any trade or business from counting as a District business for reason of consisting predominantly of dealing in intangibles if: (1) at least 30 percent of the employees of such a business are District residents. And (2) at least 50 percent of the wages are paid to District residents. Extends time line for which provisions of enterprise zone treatment will last. Makes permanent provisions of law pertaining to the first-time homebuyer credit . Extends classification of first-time homebuyer to certain individuals buying residences due to divorce or separation, and directs the Secretary of Treasury to prescribe regulations to prevent abuses of such provision. Removes the limitation on the amount of tax-exempt enterprise zone facility bonds that can be issued. Exempts certain bonds and notes issued by the District Council and the interest thereon from all taxation by the United States, any State or political subdivision thereof, the District, or any possession of the United States. Sets the tax and withholding rates for nonresident aliens and foreign corporations at zero for payments made by an exempt insurance company with respect to a DC Zone insurance policy issued by such company . Relieves exempt insurance companies from reporting requirements with respect to amounts paid under a DC Zone insurance policy to foreigners in connection with risks located outside the United States.