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

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, 2003.''
    (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 and 
before January 1, 2003.

Summary: Amends the Internal Revenue Code to recognize gain on the sale of any capital asset, if the taxpayer so elects, only to the extent that the amount realized exceeds the cost of any eligible small business investment purchased by the taxpayer during the 12 months before the sale, reduced by any portion of the cost previously taken into account under these provisions. Terminates these provisions after the year 2002.