I

103D CONGRESS

2D SESSION H. R. 4175

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.

IN THE HOUSE OF REPRESENTATIVES

APRIL 12, 1994

Mr. MACHTLEY introduced the following bill; which was referred jointly to the

Committees on Small Business and Ways and Means

A BILL

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.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,
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1 SECTION 1. FINANCIAL ASSISTANCE FOR SMALL BUSI2 NESSES OPERATING IN URBAN

3 EMPOWERMENT ZONES AND ENTERPRISE

4 COMMUNITIES.

5 Section 7(a) of the Small Business Act (15 U.S.C.

6 636(a)) is amended by adding at the end the following:

7 ‘‘(23)(A) Out of the amounts appropriated to

8 carry out this subsection, not less than

9 $1,000,000,000 shall be expended in each fiscal year

10 for small business concerns operating in urban areas

11 designated as empowerment zones or enterprise com12 munities pursuant to section 1391 of the Internal

13 Revenue Code of 1986.

14 ‘‘(B) Subparagraph (A) shall apply to any fiscal

15 year beginning after September 30, 1994, in which

16 designations described in subparagraph (A) are in

17 effect.’’.

18 SEC. 2. EXCLUSION FOR CAPITAL GAIN FROM NEW INVEST19 MENTS IN SMALL BUSINESSES OPERATING IN

20 URBAN EMPOWERMENT ZONES AND ENTER21 PRISE COMMUNITIES.

22 (a) IN GENERAL.—Subchapter U of chapter 1 of the

23 Internal Revenue Code of 1986 (relating to designation

24 and treatment of empowerment zones, enterprise commu25 nities, and rural development investment areas) is amend-
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1 ed by redesignating part IV as part V and by inserting

2 after part III the following new part:

3 ‘‘PART IV—EXCLUSION FOR CAPITAL GAIN FROM

4 NEW INVESTMENTS IN SMALL BUSINESSES

5 OPERATING IN URBAN EMPOWERMENT

6 ZONES AND ENTERPRISE COMMUNITIES

‘‘Sec. 1397D. Exclusion for gain from new investments in small

businesses operating in urban empowerment zones

and enterprise communities.

7 ‘‘SEC. 1397D. EXCLUSION FOR GAIN FROM NEW INVEST8 MENTS IN SMALL BUSINESSES OPERATING IN

9 URBAN EMPOWERMENT ZONES AND ENTER10 PRISE COMMUNITIES.

11 ‘‘(a) GENERAL RULE.—In the case of an individual,

12 gross income shall not include any qualified capital gain

13 recognized on the sale or exchange of a qualified zone

14 asset held for more than 5 years.

15 ‘‘(b) QUALIFIED ZONE ASSET.—For purposes of this

16 section:

17 ‘‘(1) IN GENERAL.—The term ‘qualified zone

18 asset’ means—

19 ‘‘(A) any qualified zone stock,

20 ‘‘(B) any qualified zone business property,

21 and

22 ‘‘(C) any qualified zone partnership inter23 est.

24 ‘‘(2) QUALIFIED ZONE STOCK.—
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1 ‘‘(A) IN GENERAL.—Except as provided in

2 subparagraph (B), the term ‘qualified zone

3 stock’ means any stock in a domestic corpora4 tion if—

5 ‘‘(i) such stock is acquired by the tax6 payer on original issue from the corpora7 tion solely in exchange for cash,

8 ‘‘(ii) as of the time such stock was is9 sued, such corporation was a small urban

10 enterprise zone business (or, in the case of

11 a new corporation, such corporation was

12 being organized for purposes of being a

13 small urban enterprise zone business), and

14 ‘‘(iii) during substantially all of the

15 taxpayer’s holding period for such stock,

16 such corporation qualified as a small urban

17 enterprise zone business.

18 ‘‘(B) REDEMPTIONS.—The term ‘qualified

19 zone stock’ shall not include any stock acquired

20 from a corporation which made a substantial

21 stock redemption or distribution (without a

22 bona fide business purpose therefor) in an at23 tempt to avoid the purposes of this section.
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1 ‘‘(3) QUALIFIED ZONE BUSINESS PROPERTY.—

2 The term ‘qualified zone business property’ means

3 tangible property if—

4 ‘‘(i) such property was acquired by

5 the taxpayer by purchase (as defined in

6 section 179(d)(2)) after the date on which

7 the designation of the urban tax enterprise

8 zone took effect,

9 ‘‘(ii) the original use of such property

10 in such an urban tax enterprise zone with

11 the taxpayer, and

12 ‘‘(iii) during substantially all of the

13 taxpayer’s holding period for such prop14 erty, substantially all of the use of such

15 property was in an urban tax enterprise

16 zone and in a small urban enterprise zone

17 business of the taxpayer.

18 ‘‘(A) SPECIAL RULE FOR SUBSTANTIAL IM19 PROVEMENTS.—The requirements of clauses (i)

20 and (ii) of subparagraph (A) shall be treated as

21 satisfied with respect to—

22 ‘‘(i) property which is substantially

23 improved by the taxpayer, and

24 ‘‘(ii) any land on which such property

25 is located.
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1 For purposes of the preceding sentence, prop2 erty shall be treated as substantially improved

3 by the taxpayer if, during any 24-month period

4 beginning after the date on which the designa5 tion of the urban tax enterprise zone took ef6 fect, additions to basis with respect to such

7 property in the hands of the taxpayer exceed

8 the greater of (i) an amount equal to the ad9 justed basis at the beginning of such 24-month

10 period in the hands of the taxpayer, or (ii)

11 $5,000.

12 ‘‘(B) LIMITATION ON LAND.—The term

13 ‘qualified zone business property’ shall not in14 clude land which is not an integral part of a

15 qualified business (as defined in section

16 1397B(d)).

17 ‘‘(4) QUALIFIED ZONE PARTNERSHIP INTER18 EST.—The term ‘qualified zone partnership interest’

19 means any interest in a partnership if—

20 ‘‘(A) such interest is acquired by the tax21 payer from the partnership solely in exchange

22 for cash,

23 ‘‘(B) as of the time such interest was ac24 quired, such partnership was a small urban en25 terprise zone business (or, in the case of a new
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1 partnership, such partnership was being orga2 nized for purposes of being a small urban enter3 prise zone business), and

4 ‘‘(C) during substantially all of the tax5 payer’s holding period for such interest, such

6 partnership qualified as a small urban enter7 prise zone business.

8 A rule similar to the rule of paragraph (2)(C) shall

9 apply for purposes of this paragraph.

10 ‘‘(5) TREATMENT OF SUBSEQUENT PUR11 CHASERS.—The term ‘qualified zone asset’ includes

12 any property which would be a qualified zone asset

13 but for paragraph (2)(A)(i), (3)(A)(ii), or (4)(A) in

14 the hands of the taxpayer if such property was a

15 qualified zone asset in the hands of any prior holder.

16 ‘‘(6) 10-YEAR SAFE HARBOR.—If any property

17 ceases to be a qualified zone asset by reason of para18 graph (2)(A)(iii), (3)(A)(iii), or (4)(C) after the 10-

19 year period beginning on the date the taxpayer ac20 quired such property, such property shall continue to

21 be treated as meeting the requirements of such

22 paragraph; except that the amount of gain to which

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

24 such property shall not exceed the amount which
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1 would be qualified capital gain had such property

2 been sold on the date of such cessation.

3 ‘‘(7) TREATMENT OF ZONE TERMINATIONS.—

4 The termination of any designation of an area as a

5 urban tax enterprise zone shall be disregarded for

6 purposes of determining whether any property is a

7 qualified zone asset.

8 ‘‘(c) SMALL URBAN ENTERPRISE ZONE BUSINESS;

9 URBAN TAX ENTERPRISE ZONE.—For purposes of this

10 section:

11 ‘‘(1) SMALL URBAN ENTERPRISE ZONE BUSI12 NESS.—The term ‘small urban enterprise zone busi13 ness’ means an enterprise zone business (as defined

14 in section 1397B) which normally employs 500 or

15 fewer employees on any day during the taxable year;

16 except that, in applying section 1397B for such pur17 poses—

18 ‘‘(A) references to empowerment zones

19 shall be treated as references only to urban tax

20 enterprise zones, and

21 ‘‘(B) the term ‘qualified business’ shall not

22 include any trade or business of producing

23 property of a character subject to the allowance

24 for depletion under section 611.
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1 ‘‘(B) URBAN TAX ENTERPRISE ZONE.—The

2 term ‘urban tax enterprise zone’ means any

3 empowerment zone, and any enterprise community,

4 which is located in an urban area.

5 ‘‘(d) OTHER DEFINITIONS AND SPECIAL RULES.—

6 For purposes of this section:

7 ‘‘(1) QUALIFIED CAPITAL GAIN.—Except as

8 otherwise provided in this subsection, the term

9 ‘qualified capital gain’ means any long-term capital

10 gain.

11 ‘‘(2) CERTAIN GAIN ON REAL PROPERTY NOT

12 QUALIFIED.—The term ‘qualified capital gain’ shall

13 not include any gain which would be treated as ordi14 nary income under section 1250 if section 1250 ap15 plied to all depreciation rather than the additional

16 depreciation.

17 ‘‘(3) GAIN ATTRIBUTABLE TO PERIODS AFTER

18 TERMINATION OF ZONE DESIGNATION NOT QUALI19 FIED.—The term ‘qualified capital gain’ shall not in20 clude any gain attributable to periods after the ter21 mination of any designation of an area as an urban

22 tax enterprise zone.

23 ‘‘(e) TREATMENT OF PASS-THRU ENTITIES.—

24 ‘‘(1) SALES AND EXCHANGES.—Gain on the

25 sale or exchange of an interest in a pass-thru entity
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1 held by the taxpayer (other than an interest in an

2 entity which was a small urban enterprise zone busi3 ness during substantially all of the period the tax4 payer held such interest) for more than 5 years shall

5 be treated as gain described in subsection (a) to the

6 extent such gain is attributable to amounts which

7 would be qualified capital gain on qualified zone as8 sets (determined as if such assets had been sold on

9 the date of the sale or exchange) held by such entity

10 for more than 5 years and throughout the period the

11 taxpayer held such interest. A rule similar to the

12 rule of paragraph (2)(C) shall apply for purposes of

13 the preceding sentence.

14 ‘‘(2) INCOME INCLUSIONS.—

15 ‘‘(A) IN GENERAL.—Any amount included

16 in income by reason of holding an interest in a

17 pass-thru entity (other than an entity which

18 was a small urban enterprise zone business dur19 ing substantially all of the period the taxpayer

20 held the interest to which such inclusion re21 lates) shall be treated as gain described in sub22 section (a) if such amount meets the require23 ments of subparagraph (B).

24 ‘‘(B) REQUIREMENTS.—An amount meets

25 the requirements of this subparagraph if—
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1 ‘‘(i) such amount is attributable to

2 qualified capital gain recognized on the

3 sale or exchange by the pass-thru entity of

4 property which is a qualified zone asset in

5 the hands of such entity and which was

6 held by such entity for the period required

7 under subsection (a), and

8 ‘‘(ii) such amount is includible in the

9 gross income of the taxpayer by reason of

10 the holding of an interest in such entity

11 which was held by the taxpayer on the date

12 on which such pass-thru entity acquired

13 such asset and at all times thereafter be14 fore the disposition of such asset by such

15 pass-thru entity.

16 ‘‘(C) LIMITATION BASED ON INTEREST

17 ORIGINALLY HELD BY TAXPAYER.—Subpara18 graph (A) shall not apply to any amount to the

19 extent such amount exceeds the amount to

20 which subparagraph (A) would have applied if

21 such amount were determined by reference to

22 the interest the taxpayer held in the pass-thru

23 entity on the date the qualified zone asset was

24 acquired.
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1 ‘‘(3) PASS-THRU ENTITY.—For purposes of this

2 subsection, the term ‘pass-thru entity’ means—

3 ‘‘(A) any partnership,

4 ‘‘(B) any S corporation,

5 ‘‘(C) any regulated investment company,

6 and

7 ‘‘(D) any common trust fund.

8 ‘‘(f) SALES AND EXCHANGES OF INTERESTS IN

9 PARTNERSHIPS AND S CORPORATIONS WHICH ARE

10 QUALIFIED ZONE BUSINESSES.—In the case of the sale

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

12 in an S corporation, which was a small urban enterprise

13 zone business during substantially all of the period the

14 taxpayer held such interest or stock, the amount of quali15 fied capital gain shall be determined without regard to—

16 ‘‘(1) any intangible, and any land, which is not

17 an integral part of any qualified business (as defined

18 in section 1397B(d)), and

19 ‘‘(2) gain attributable to periods before the des20 ignation of an area as an urban tax enterprise zone.

21 ‘‘(g) CERTAIN TAX-FREE AND OTHER TRANS22 FERS.—For purposes of this section:

23 ‘‘(1) IN GENERAL.—In the case of a transfer of

24 a qualified zone asset to which this subsection ap25 plies, the transferee shall be treated as—
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1 ‘‘(A) having acquired such asset in the

2 same manner as the transferor, and

3 ‘‘(B) having held such asset during any

4 continuous period immediately preceding the

5 transfer during which it was held (or treated as

6 held under this subsection) by the transferor.

7 ‘‘(2) TRANSFERS TO WHICH SUBSECTION AP8 PLIES.—This subsection shall apply to any trans9 fer—

10 ‘‘(A) by gift,

11 ‘‘(B) at death, or

12 ‘‘(C) from a partnership to a partner

13 thereof of a qualified zone asset with respect to

14 which the requirements of subsection (d)(2) are

15 met at the time of the transfer (without regard

16 to the 5-year holding requirement).

17 ‘‘(3) CERTAIN RULES MADE APPLICABLE.—

18 Rules similar to the rules of section 1244(d)(2) shall

19 apply for purposes of this section.’’

20 (b) TECHNICAL AMENDMENTS.—

21 (1) Section 172(d)(2)(B) of such Code (relating

22 to modifications with respect to net operating loss

23 deduction) is amended to read as follows:

24 ‘‘(B) the exclusions provided by sections

25 1202 and 1397D shall not be allowed.’’
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1 (2) Paragraph (4) of section 642(c) of such

2 Code is amended—

3 (A) by inserting ‘‘or 1397D(a)’’ after ‘‘sec4 tion 1202(a)’’, and

5 (B) by striking ‘‘section 1202’’ and insert6 ing ‘‘such section’’.

7 (3) The last sentence of paragraph (3) of sec8 tion 643(a) of such Code is amended to read as fol9 lows: ‘‘The exclusions under sections 1202 and

10 1397D shall not be taken into account.’’

11 (4) Paragraph (4) of section 691(c) of such

12 Code is amended by inserting ‘‘1397D,’’ after

13 ‘‘1201,’’.

14 (5) The second sentence of paragraph (2) of

15 section 871(a) of such Code is amended by striking

16 ‘‘section 1202’’ and inserting ‘‘sections 1202 and

17 1397D’’.

18 (6) The section 1397D of such Code contained

19 in part V of subchapter U of chapter 1 of such Code

20 (as redesignated by subsection (a)) is redesignated

21 as section 1397E.

22 (7) The table of parts for subchapter U of

23 chapter 1 of such Code is amended by striking the

24 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.
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‘‘Part V. Regulations.’’

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

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

3 of this Act.

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