II

106TH CONGRESS

1ST SESSION S. 1347

To amend the Internal Revenue Code of 1986 to exclude from gross income

capital gain from the disposition of certain urban property, Indian reservation property, or farm property which has been held for more than

5 years.

IN THE SENATE OF THE UNITED STATES

JULY 12, 1999

Mr. BROWNBACK introduced the following bill; which was read twice and

referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to exclude

from gross income capital gain from the disposition of

certain urban property, Indian reservation property, or

farm property which has been held for more than 5

years.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. EXCLUSION OF CAPITAL GAIN FROM CERTAIN

4 INVESTMENTS WITHIN URBAN AREAS AND IN5 DIAN RESERVATIONS.

6 (a) IN GENERAL.—Part I of subchapter P of chapter

7 1 of the Internal Revenue Code of 1986 (relating to treat-
2

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1 ment of capital gains) is amended by adding at the end

2 the following:

3 ‘‘SEC. 1203. 100 PERCENT EXCLUSION FOR CAPITAL GAIN

4 FROM URBAN AND INDIAN RESERVATION IN5 VESTMENTS.

6 ‘‘(a) EXCLUSION.—Gross income shall not include

7 qualified capital gain from the sale or exchange of any

8 qualified area asset held for more than 5 years.

9 ‘‘(b) QUALIFIED AREA ASSET.—For purposes of this

10 section—

11 ‘‘(1) IN GENERAL.—The term ‘qualified area

12 asset’ means—

13 ‘‘(A) any qualified area business stock,

14 ‘‘(B) any qualified area partnership inter15 est, and

16 ‘‘(C) any qualified area business property.

17 ‘‘(2) QUALIFIED AREA BUSINESS STOCK.—

18 ‘‘(A) IN GENERAL.—Except as provided in

19 subparagraph (B), the term ‘qualified area

20 business stock’ means any stock in a domestic

21 corporation if—

22 ‘‘(i) such stock is acquired by the tax23 payer on original issue from the corpora24 tion solely in exchange for cash,
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1 ‘‘(ii) as of the time such stock was

2 issued, such corporation was a qualified

3 area business (or, in the case of a new cor4 poration, such corporation was being orga5 nized for purposes of being a qualified area

6 business), and

7 ‘‘(iii) during substantially all of the

8 taxpayer’s holding period for such stock,

9 such corporation qualified as a qualified

10 area business.

11 ‘‘(B) REDEMPTIONS.—A rule similar to

12 the rule of section 1202(c)(3) shall apply for

13 purposes of this paragraph.

14 ‘‘(3) QUALIFIED AREA PARTNERSHIP INTER15 EST.—The term ‘qualified area partnership interest’

16 means any capital or profits interest in a domestic

17 partnership if—

18 ‘‘(A) such interest is acquired by the tax19 payer from the partnership solely in exchange

20 for cash,

21 ‘‘(B) as of the time such interest was ac22 quired, such partnership was a qualified area

23 business (or, in the case of a new partnership,

24 such partnership was being organized for pur25 poses of being a qualified area business), and
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1 ‘‘(C) during substantially all of the tax2 payer’s holding period for such interest, such

3 partnership qualified as a qualified area busi4 ness.

5 A rule similar to the rule of paragraph (2)(B) shall

6 apply for purposes of this paragraph.

7 ‘‘(4) QUALIFIED AREA BUSINESS PROPERTY.—

8 ‘‘(A) GENERAL RULE.—

9 ‘‘(i) IN GENERAL.—The term ‘quali10 fied area business property’ means any

11 property to which section 168 applies (or

12 would apply but for section 179) if—

13 ‘‘(I) such property was acquired

14 by the taxpayer by purchase (as de15 fined in section 179(d)(2)) after De16 cember 31, 1999,

17 ‘‘(II) the original use of which in

18 a qualified area commences with the

19 taxpayer, and

20 ‘‘(III) substantially all of the use

21 of which is in a qualified area and is

22 in active conduct of a qualified area

23 business by the taxpayer in such area.

24 ‘‘(ii) SPECIAL RULE FOR SUBSTAN25 TIAL RENOVATIONS.—In the case of any
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1 property which is substantially renovated

2 by the taxpayer, the requirements of sub3 clauses (I) and (II) of clause (i) shall be

4 treated as satisfied. For purposes of the

5 preceding sentence, property shall be treat6 ed as substantially renovated by the tax7 payer if, during any 24-month period be8 ginning after December 31, 1999, addi9 tions to basis with respect to such property

10 in the hands of the taxpayer exceed the

11 greater of—

12 ‘‘(I) an amount equal to the ad13 justed basis at the beginning of such

14 24-month period in the hands of the

15 taxpayer, or

16 ‘‘(II) $5,000.

17 ‘‘(B) SPECIAL RULES FOR SALE-LEASE18 BACKS.—For purposes of subparagraph

19 (A)(i)(II), if property is sold and leased back by

20 the taxpayer within 3 months after the date

21 such property was originally placed in service,

22 such property shall be treated as originally

23 placed in service not earlier than the date on

24 which such property is used under the lease25 back.
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1 ‘‘(5) TREATMENT OF SUBSEQUENT PUR2 CHASERS.—The term ‘qualified area asset’ includes

3 any property which would be a qualified asset but

4 for paragraph (2)(A)(i), (3)(A), or (4)(A)(i)(II) in

5 the hands of the taxpayer if such property was a

6 qualified area asset in the hands of any prior holder.

7 ‘‘(6) 5-YEAR SAFE HARBOR.—If any property

8 ceases to be a qualified area asset by reason of para9 graph (2)(A)(iii), (3)(C), or (4)(A)(i)(III) after the

10 5-year period beginning on the date the taxpayer ac11 quired such property, such property shall continue to

12 be treated as meeting the requirements of such

13 paragraph; except that the amount of gain to which

14 subsection (a) applies on any sale or exchange of

15 such property shall not exceed the amount which

16 would be qualified capital gain had such property

17 been sold on the date of such cessation.

18 ‘‘(c) OTHER DEFINITIONS AND SPECIAL RULES.—

19 For purposes of this section—

20 ‘‘(1) QUALIFIED AREA.—

21 ‘‘(A) IN GENERAL.—The term ‘qualified

22 area’ means—

23 ‘‘(i) any urban area, or

24 ‘‘(ii) any area within an Indian res25 ervation.
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1 ‘‘(B) INDIAN RESERVATION.—The term

2 ‘Indian reservation’ has the meaning given such

3 term in section 168(j)(6).

4 ‘‘(C) URBAN AREA.—The term ‘urban

5 area’ has the meaning given such term in sec6 tion 1393(a)(3).

7 ‘‘(2) QUALIFIED AREA BUSINESS.—The term

8 ‘qualified area business’ has the same meaning given

9 the term ‘enterprise zone business’ by section 1397B

10 except that such section shall be applied—

11 ‘‘(A) without regard to subsections (b)(6)

12 and (c)(5) thereof,

13 ‘‘(B) by substituting ‘80 percent’ for ‘50

14 percent’ in subsections (b)(2) and (c)(1) there15 of,

16 ‘‘(C) by treating any reference to an em17 powerment zone as a reference to the applicable

18 qualified area, and

19 ‘‘(D) by treating the term ‘qualified busi20 ness’ under subsection (d) thereof as not includ21 ing any class II or class III gaming activity

22 conducted or licensed by an Indian tribe (within

23 the meaning of section 3402(r)(1)).

24 ‘‘(3) QUALIFIED CAPITAL GAIN.—Except as

25 otherwise provided in this subsection, the term
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1 ‘qualified capital gain’ means any gain recognized on

2 the sale or exchange of—

3 ‘‘(A) a capital asset, or

4 ‘‘(B) property used in the trade or busi5 ness (as defined in section 1231(b)).

6 ‘‘(4) SPECIAL RULES.—

7 ‘‘(A) GAIN BEFORE 2000 NOT QUALI8 FIED.—The term ‘qualified capital gain’ shall

9 not include any gain attributable to periods be10 fore January 1, 2000.

11 ‘‘(B) CERTAIN GAIN ON REAL PROPERTY

12 NOT QUALIFIED.—The term ‘qualified capital

13 gain’ shall not include any gain which would be

14 treated as ordinary income under section 1245

15 or under section 1250 if section 1250 applied to

16 all depreciation rather than the additional de17 preciation.

18 ‘‘(C) INTANGIBLES AND LAND NOT INTE19 GRAL PART OF QUALIFIED BUSINESS.—The

20 term ‘qualified capital gain’ shall not include

21 any gain which is attributable to real property,

22 or an intangible asset, which is not an integral

23 part of a qualified area business.

24 ‘‘(D) RELATED PARTY TRANSACTIONS.—

25 The term ‘qualified capital gain’ shall not in-
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1 clude any gain attributable, directly or indi2 rectly, in whole or in part, to a transaction with

3 a related person. For purposes of this subpara4 graph, persons are related to each other if such

5 persons are described in section 267(b) or

6 707(b)(1).

7 ‘‘(d) CERTAIN OTHER RULES TO APPLY.—Rules

8 similar to the rules of subsections (g), (h), (i)(2), and (j)

9 of section 1202 shall apply for purposes of this section.

10 ‘‘(e) SALES AND EXCHANGES OF INTERESTS IN

11 PARTNERSHIPS AND S CORPORATIONS WHICH ARE

12 QUALIFIED AREA BUSINESSES.—In the case of the sale

13 or exchange of an interest in a partnership, or of stock

14 in an S corporation, which was a qualified area business

15 during substantially all of the period the taxpayer held

16 such interest or stock, the amount of qualified capital gain

17 shall be determined without regard to—

18 ‘‘(1) any gain which is attributable to real prop19 erty, or an intangible asset, which is not an integral

20 part of any qualified area business, and

21 ‘‘(2) any gain attributable to periods before De22 cember 31, 1999.’’

23 (b) CONFORMING AMENDMENTS.—

24 (1) Paragraph (9) of section 1(h) of the Inter25 nal Revenue Code of 1986 (relating to maximum
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1 capital gains rate) is amended by striking ‘‘and sec2 tion 1202 gain’’ and inserting ‘‘section 1202 gain,

3 and gain excluded from gross income under section

4 1203(a)’’.

5 (2) Section 172(d)(2)(B) of such Code (relating

6 to modifications with respect to net operating loss

7 deduction) is amended by striking ‘‘section 1202’’

8 and inserting ‘‘sections 1202 and 1203’’.

9 (3) Section 642(c)(4) of such Code (relating to

10 adjustments) is amended by inserting ‘‘or 1203(a)’’

11 after ‘‘section 1202(a)’’ and by inserting ‘‘or 1203’’

12 after ‘‘section 1202’’.

13 (4) Section 643(a)(3) of such Code (defining

14 distributable net income) is amended by striking

15 ‘‘section 1202’’ and inserting ‘‘sections 1202 and

16 1203’’.

17 (5) Section 691(c)(4) of such Code (relating to

18 coordination with capital gain provisions) is amend19 ed by inserting ‘‘1203,’’ after ‘‘1202,’’.

20 (6) The second sentence of section 871(a)(2) of

21 such Code (relating to capital gains of aliens present

22 in the United States 183 days or more) is amended

23 by inserting ‘‘or 1203’’ after ‘‘section 1202’’.
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1 (7) The table of sections of part I of subchapter

2 P of chapter 1 of such Code is amended by adding

3 at the end the following:

‘‘Sec. 1203. 100 percent exclusion for capital gain from urban

and Indian reservation investment.’’

4 (8)(A) Subchapter W of chapter 1 of such Code

5 (relating to District of Columbia enterprise zone) is

6 amended by striking section 1400B and redesig7 nating section 1400C as section 1400B.

8 (B) Section 23(c) of such Code is amended by

9 striking ‘‘1400C’’ and inserting ‘‘1400B’’.

10 (C) Section 25(e)(1)(C) of such Code is amend11 ed by striking ‘‘1400C’’ and inserting ‘‘1400B’’.

12 (D) Section 1016(a)(27) of such Code is

13 amended by striking ‘‘1400C’’ and inserting

14 ‘‘1400B’’ each place it appears.

15 (E) The table of sections for subchapter W of

16 chapter 1 of such Code is amended by striking the

17 items relating to sections 1400B and 1400C and in18 serting the following:

‘‘Sec. 1400B. First-time homebuyer credit for District of Columbia.’’

19 (c) EFFECTIVE DATE.—The amendments made by

20 this section shall apply to taxable years beginning after

21 December 31, 1999.
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1 SEC. 2. EXCLUSION FOR CAPITAL GAIN FROM CERTAIN

2 FARM PROPERTY.

3 (a) IN GENERAL.—Part I of subchapter P of chapter

4 1 of the Internal Revenue Code of 1986 (relating to treat5 ment of capital gains), as amended by section 1, is amend6 ed by adding at the end the following:

7 ‘‘SEC. 1204. 100 PERCENT EXCLUSION FOR CAPITAL GAIN

8 FROM FARM PROPERTY.

9 ‘‘(a) EXCLUSION.—In the case of an individual (as

10 defined in section 1301(b)(2)), gross income shall not in11 clude any qualified capital gain from the sale or exchange

12 of qualified farm property held for more than 5 years.

13 ‘‘(b) DEFINITIONS.—For purposes of this section—

14 ‘‘(1) QUALIFIED CAPITAL GAIN.—

15 ‘‘(A) IN GENERAL.—Except as provided in

16 subparagraphs (B) and (C), the term ‘qualified

17 capital gain’ means any long-term capital gain.

18 ‘‘(B) GAIN BEFORE 2000 NOT QUALI19 FIED.—The term ‘qualified capital gain’ shall

20 not include any gain attributable to periods be21 fore January 1, 2000.

22 ‘‘(C) CERTAIN GAIN NOT QUALIFIED.—The

23 term ‘qualified capital gain’ shall not include

24 any gain which would be treated as ordinary in25 come under section 1245 or under section 1250
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1 if section 1250 applied to all depreciation rath2 er than the additional depreciation.

3 ‘‘(2) QUALIFIED FARM PROPERTY.—The term

4 ‘qualified farm property’ means any property used

5 by the taxpayer in connection with any farming busi6 ness (as defined in section 263A(e)(4)).’’

7 (b) CONFORMING AMENDMENTS.—

8 (1) Paragraph (9) of section 1(h) of the Inter9 nal Revenue Code of 1986 (relating to maximum

10 capital gains rate), as amended by section 1, is

11 amended by inserting ‘‘or 1204(a)’’ after ‘‘1203(a)’’.

12 (2) Section 172(d)(2)(B) of such Code (relating

13 to modifications with respect to net operating loss

14 deduction), as so amended, is amended by striking

15 ‘‘1202 and 1203’’ and inserting ‘‘1202, 1203, and

16 1204’’.

17 (3) Section 642(c)(4) of such Code (relating to

18 adjustments), as so amended, is amended by striking

19 ‘‘1202(a) or 1203(a)’’ and inserting ‘‘1202(a),

20 1203(a), or 1204(a)’’ and by striking ‘‘1202 or

21 1203’’ and inserting ‘‘1202, 1203, or 1204.

22 (4) Section 643(a)(3) of such Code (defining

23 distributable net income), as so amended, is amend24 ed by striking ‘‘sections 1202 and 1203’’ and insert25 ing ‘‘sections 1202, 1203, and 1204’’.
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1 (5) Section 691(c)(4) of such Code (relating to

2 coordination with capital gain provisions), as so

3 amended, is amended by inserting ‘‘1204,’’ after

4 ‘‘1203,’’.

5 (6) The second sentence of section 871(a)(2) of

6 such Code (relating to capital gains of aliens present

7 in the United States 183 days or more), as so

8 amended, is amended by striking ‘‘1202 or 1203’’

9 and inserting ‘‘1202, 1203, or 1204’’.

10 (7) The table of sections of part I of subchapter

11 P of chapter 1 of such Code, as so amended, is

12 amended by adding at the end the following:

‘‘Sec. 1204. 100 percent exclusion for capital gain from farm

property.’’

13 (c) EFFECTIVE DATE.—The amendments made by

14 this section shall apply to taxable years beginning after

15 December 31, 1999.

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