I

104TH CONGRESS

1ST SESSION H. R. 1072

To amend the Internal Revenue Code of 1986 to provide tax incentives

to encourage corporations to provide financing and management support

services to small business concerns operating in urban areas designated

as enterprise zones.

IN THE HOUSE OF REPRESENTATIVES

FEBRUARY 28, 1995

Mr. FRANKS of Connecticut introduced the following bill; which was referred

to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to provide

tax incentives to encourage corporations to provide financing and management support services to small business concerns operating in urban areas designated as

enterprise zones.

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

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Urban Entrepreneurial

5 Opportunities Act’’.
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1 SEC. 2. TAX INCENTIVES FOR URBAN ENTREPRENEURIAL

2 OPPORTUNITY FINANCING SUBSIDIARIES.

3 (a) GENERAL RULE.—Part VIII of subchapter B of

4 chapter 1 of the Internal Revenue Code of 1986 (relating

5 to special deductions for corporations) is amended by add6 ing at the end thereof the following new subpart:

7 ‘‘Subpart B—Tax Incentives for Urban

8 Entrepreneurial Opportunity Financing Subsidiaries

‘‘Sec. 251. Deduction for equity contributions to urban entrepreneurial opportunity financing subsidiaries.

‘‘Sec. 252. Overall limitation on deductions.

‘‘Sec. 253. Definitions and special rules.

9 ‘‘SEC. 251. DEDUCTION FOR EQUITY CONTRIBUTIONS TO

10 URBAN ENTREPRENEURIAL OPPORTUNITY

11 FINANCING SUBSIDIARIES.

12 ‘‘(a) GENERAL RULE.—In the case of a qualified con13 tributing corporation, there shall be allowed as a deduction

14 an amount equal to the equity contributions made by such

15 corporation to an urban entrepreneurial opportunity fi16 nancing subsidiary of such corporation. Such deduction

17 shall be allowed for the taxable year of the contributing

18 corporation in which the equity contribution is used by the

19 subsidiary in making qualified enterprise zone business

20 loans.

21 ‘‘(b) LIMITATION.—The amount allowed as a deduc22 tion under subsection (a) to any qualified contributing cor-
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1 poration for any taxable year shall not exceed the lesser

2 of—

3 ‘‘(1) $10,000,000, or

4 ‘‘(2) the portion of the program limitation allo5 cated to such corporation under section 252 to the

6 extent the amount so allocated was not used in a

7 prior taxable year.

8 ‘‘(c) EQUITY CONTRIBUTION.—For purposes of this

9 section, the term ‘equity contribution’ means—

10 ‘‘(1) any amount paid in cash for stock in an

11 urban entrepreneurial opportunity financing subsidi12 ary of the corporation if such stock is acquired at

13 its original issuance, and

14 ‘‘(2) any contribution in cash to the capital of

15 an urban entrepreneurial opportunity financing sub16 sidiary of the corporation.

17 ‘‘(d) RECAPTURE PROVISIONS.—

18 ‘‘(1) BASIS ADJUSTMENT.—The adjusted basis

19 of any stock held by a corporation in an urban en20 trepreneurial opportunity financing subsidiary of

21 such corporation shall be reduced by the amount al22 lowed as a deduction under subsection (a) in connec23 tion with the acquisition of such stock. No increase

24 in the basis of any such stock shall be made on ac25 count of any contribution to the capital of such sub-
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1 sidiary for which a deduction is allowed under sub2 section (a).

3 ‘‘(2) ORDINARY INCOME RECAPTURE.—Any

4 gain recognized on the sale or other disposition by

5 a corporation of stock in an urban entrepreneurial

6 opportunity financing subsidiary of such corporation

7 shall be treated as ordinary income.

8 ‘‘(3) CERTAIN EVENTS TREATED AS DISPOSI9 TIONS.—If any urban entrepreneurial opportunity fi10 nancing subsidiary of a corporation ceases to qualify

11 as an urban entrepreneurial opportunity financing

12 subsidiary with respect to such corporation, such

13 corporation shall recognize gain as if it sold its stock

14 in such subsidiary for an amount equal to its fair

15 market value immediately before such cessation.

16 ‘‘SEC. 252. OVERALL LIMITATION ON DEDUCTIONS.

17 ‘‘(a) GENERAL RULE.—The Secretary of Housing

18 and Urban Development shall allocate the program limita19 tion among the qualified contributing corporations submit20 ting applications to such Secretary for allocations under

21 this section.

22 ‘‘(b) PROGRAM LIMITATION.—The program limita23 tion is $250,000,000.

24 ‘‘(c) METHOD OF MAKING ALLOCATIONS.—The Sec25 retary of Housing and Urban Development shall prescribe
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1 regulations setting forth the procedures for making alloca2 tions under this section. Such procedures shall—

3 ‘‘(1) include the criteria used in selecting the

4 corporations to which the allocations are made, and

5 ‘‘(2) be designed to ensure a reasonable avail6 ability, on a geographical basis, of the benefits of

7 this subpart.

8 ‘‘SEC. 253. DEFINITIONS AND SPECIAL RULES.

9 ‘‘(a) QUALIFIED CONTRIBUTING CORPORATION.—

10 For purposes of this subpart, the term ‘qualified contrib11 uting corporation’ means any domestic corporation which

12 is not a small business concern; except that such term

13 shall not include any corporation predominantly engaged

14 in a banking, insurance, finance, or similar business.

15 ‘‘(b) URBAN ENTREPRENEURIAL OPPORTUNITY FI16 NANCING SUBSIDIARY.—For purposes of this subpart, the

17 term ‘urban entrepreneurial opportunity financing subsidi18 ary’ means any domestic corporation—

19 ‘‘(1) all the stock of which (exclusive of direc20 tors’ qualifying shares) is held directly by one quali21 fied contributing corporation, and

22 ‘‘(2) all the activities of which consist of—

23 ‘‘(A) making qualified enterprise zone busi24 ness loans,
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1 ‘‘(B) providing management, administra2 tive, consulting, and other support services to

3 qualified small business concerns to which such

4 corporation has made qualified enterprise zone

5 business loans, and

6 ‘‘(C) making temporary investments (for a

7 period not exceeding 6 months) of amounts

8 being held for purposes of making qualified en9 terprise zone business loans.

10 ‘‘(c) QUALIFIED ENTERPRISE ZONE BUSINESS

11 LOANS.—For purposes of this subpart, the term ‘qualified

12 enterprise zone business loan’ means any loan made by

13 an urban entrepreneurial opportunity financing subsidiary

14 if—

15 ‘‘(1) such loan is made to a qualified small

16 business concern and such concern is not related

17 (within the meaning of section 267(b) or 707(b)) to

18 such subsidiary or the qualified contributing cor19 poration holding such subsidiary,

20 ‘‘(2) the proceeds of such loan are used by such

21 qualified small business concern in the active con22 duct of a trade or business in an urban enterprise

23 zone,

24 ‘‘(3) the urban entrepreneurial opportunity fi25 nancing subsidiary provides (without charge) sub-
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1 stantial qualified services to the qualified small busi2 ness concern in connection with such loan, except

3 that such small business concern may waive the re4 quirements of this paragraph, and

5 ‘‘(4) the interest on such loan does not ex6 ceed—

7 ‘‘(A) in the case of a secured loan, the

8 prime rate plus 3 percentage points, or

9 ‘‘(B) in the case of any other loan, the

10 prime rate plus 8 percentage points.

11 ‘‘(d) QUALIFIED SMALL BUSINESS CONCERN.—For

12 purposes of this subpart, the term ‘qualified small busi13 ness concern’ means any person if—

14 ‘‘(1) such person is a small business concern

15 within the meaning of section 3 of the Small Busi16 ness Act (15 U.S.C. 632), and

17 ‘‘(2) substantially all of the activities of such

18 person are within an urban enterprise zone.

19 ‘‘(e) OTHER DEFINITIONS AND SPECIAL RULES.—

20 ‘‘(1) URBAN ENTERPRISE ZONE.—For purposes

21 of this subpart, the term ‘urban enterprise zone’

22 means—

23 ‘‘(A) any urban area designated as an en24 terprise zone under any State law program, and
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1 ‘‘(B) any urban area designated as an en2 terprise zone under Federal law.

3 ‘‘(2) SUBSTANTIAL QUALIFIED SERVICES.—For

4 purposes of this subpart, the term ‘substantial quali5 fied services’ means, with respect to any loan made

6 by an urban entrepreneurial opportunity financing

7 subsidiary, any management, administrative, con8 sulting, or other support services provided to the

9 borrower under such loan, but only if the amount of

10 such services, to be provided during the first year

11 such loan is outstanding involve at least 1,000 man12 hours for each $100,000 principal amount of such

13 loan.

14 ‘‘(3) PRIME RATE.—For purposes of this sub15 part—

16 ‘‘(A) IN GENERAL.—The term ‘prime rate’

17 means the average predominant prime rate

18 quoted by commercial banks to large busi19 nesses, as determined by the Board of Gov20 ernors of the Federal Reserve System.

21 ‘‘(B) WHEN DETERMINATION MADE.—

22 ‘‘(i) Except as provided in clause (ii),

23 the determination of the prime rate shall

24 be made as of the time the loan is made.
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1 ‘‘(ii) If the loan is a variable rate

2 loan, the prime rate taken into account

3 with respect to any change in rate shall be

4 determined as of the time such change

5 takes effect.

6 ‘‘(4) TREATMENT OF CONTROLLED GROUPS.—

7 Any group of corporations treated as a single em8 ployer under section 52 (a) or (b) shall be treated

9 as one corporation for purposes of this subpart.

10 ‘‘(f) EMPLOYEES OF BORROWER MAY BE TAKEN

11 INTO ACCOUNT FOR CERTAIN PURPOSES.—If—

12 ‘‘(1) a qualified contributing corporation has

13 provided financing through an urban entrepreneurial

14 opportunity financing subsidiary to any qualified

15 small business concern, and

16 ‘‘(2) such qualified small business concern des17 ignates such subsidiary as its primary lender,

18 such qualified contributing corporation may treat the em19 ployees of such qualified small business concern as its own

20 employees for purposes of determining which such quali21 fied contributing corporation is in compliance with the re22 quirements of any Federal law. A qualified small business

23 concern may designate only 1 urban entrepreneurial op24 portunity financing subsidiary is its primary lender for

25 any period.’’
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1 (b) CLERICAL AMENDMENT.—Part VIII of sub2 chapter B of chapter 1 of such Code is amended by insert3 ing after the part heading the following:

‘‘Subpart A—General provisions.

‘‘Subpart B—Tax incentives for urban entrepreneurial opportunity financing subsidiaries.

4 ‘‘Subpart A—General Provisions’’.

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

6 this section shall take effect on the date of the enactment

7 of this Act.

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