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104TH CONGRESS

1ST SESSION H. R. 1785

To amend the Internal Revenue Code of 1986 to promote capital formation

for the development of new businesses.

IN THE HOUSE OF REPRESENTATIVES

JUNE 7, 1995

Mr. ZIMMER (for himself, Mr. SCHUMER, and Mr. CHRISTENSEN) 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 promote

capital formation for the development of new businesses.

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 ‘‘Entrepreneurial New

5 and Small Business Capital Formation Act of 1995’’.

6 SEC. 2. ROLLOVER OF CAPITAL GAINS ON CERTAIN SMALL

7 BUSINESS INVESTMENTS.

8 (a) IN GENERAL.—Part III of subchapter O of chap9 ter 1 of the Internal Revenue Code of 1986 (relating to
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1 common nontaxable exchanges) is amended by adding at

2 the end the following new section:

3 ‘‘SEC. 1045. ROLLOVER OF GAIN ON SMALL BUSINESS IN4 VESTMENTS.

5 ‘‘(a) NONRECOGNITION OF GAIN.—In the case of the

6 sale of any eligible small business investment with respect

7 to which the taxpayer elects the application of this section,

8 gain from such sale shall be recognized only to the extent

9 that the amount realized on such sale exceeds—

10 ‘‘(1) the cost of any other eligible small busi11 ness investment purchased by the taxpayer during

12 the 6-month period beginning on the date of such

13 sale, reduced by

14 ‘‘(2) any portion of such cost previously taken

15 into account under this section.

16 This section shall not apply to any gain which is treated

17 as ordinary income for purposes of this subtitle.

18 ‘‘(b) DEFINITIONS AND SPECIAL RULES.—For pur19 poses of this section—

20 ‘‘(1) PURCHASE.—The term ‘purchase’ has the

21 meaning given such term by section 1043(b)(4).

22 ‘‘(2) ELIGIBLE SMALL BUSINESS INVEST23 MENT.—Except as otherwise provided in this sec24 tion, the term ‘eligible small business investment’

25 means any stock in a domestic corporation, and any
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1 partnership interest in a domestic partnership,

2 which is originally issued after December 31, 1994,

3 if—

4 ‘‘(A) as of the date of issuance, such cor5 poration or partnership is a qualified small

6 business entity, and

7 ‘‘(B) such stock or partnership interest is

8 acquired by the taxpayer at its original issue

9 (directly or through an underwriter)—

10 ‘‘(i) in exchange for money or other

11 property (not including stock), or

12 ‘‘(ii) as compensation for services

13 (other than services performed as an un14 derwriter of such stock or partnership in15 terest).

16 A rule similar to the rule of section 1202(c)(3) shall

17 apply for purposes of this section.

18 ‘‘(3) ACTIVE BUSINESS REQUIREMENT.—Stock

19 in a corporation, and a partnership interest in a

20 partnership, shall not be treated as eligible small

21 business investment unless, during substantially all

22 of the taxpayer’s holding period for such stock or

23 partnership interest, such corporation or partnership

24 meets the active business requirements of subsection

25 (c). A rule similar to the rule of section
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1 1202(c)(2)(B) shall apply for purposes of this sec2 tion.

3 ‘‘(4) QUALIFIED SMALL BUSINESS ENTITY.—

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

5 small business entity’ means any domestic cor6 poration or partnership if—

7 ‘‘(i) for the taxable year of such entity

8 in which the stock or partnership interest

9 was issued and each prior taxable year,

10 such entity (and any predecessor thereof)

11 had gross receipts of less than

12 $20,000,000,

13 ‘‘(ii) at all times before such issuance,

14 such entity (and any predecessor thereof)

15 had aggregate gross assets (as defined in

16 section 1202(d)(2)) of less than

17 $25,000,000, and

18 ‘‘(iii) at all times before such issu19 ance, the excess of the fair market value of

20 the assets of such entity (and any prede21 cessor thereof) over the liabilities of such

22 entity was less than $10,000,000.

23 ‘‘(B) AGGREGATION RULES.—All persons

24 treated as a single employer under subsection
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1 (a) or (b) of section 52 shall be treated as one

2 person for purposes of subparagraph (A).

3 ‘‘(C) SPECIAL RULES FOR DETERMINING

4 GROSS RECEIPTS.—The rules of subparagraphs

5 (B) and (C) of section 448(c)(3) shall apply for

6 purposes of subparagraph (A)(i).

7 ‘‘(c) ACTIVE BUSINESS REQUIREMENT.—

8 ‘‘(1) IN GENERAL.—For purposes of subsection

9 (b)(3), the requirements of this subsection are met

10 by a qualified small business entity for any period

11 if—

12 ‘‘(A) the entity is engaged in the active

13 conduct of a trade or business, and

14 ‘‘(B) at least 80 percent (by value) of the

15 assets of such entity are used in the active con16 duct of a trade or business.

17 ‘‘(2) SPECIAL RULE FOR CERTAIN ACTIVI18 TIES.—For purposes of paragraph (1), if, in connec19 tion with any future trade or business, an entity is

20 engaged in—

21 ‘‘(A) startup activities described in section

22 195(c)(1)(A),

23 ‘‘(B) activities resulting in the payment or

24 incurring of expenditures which may be treated
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1 as research and experimental expenditures

2 under section 174, or

3 ‘‘(C) activities with respect to in-house re4 search expenses described in section 41(b)(4),

5 such entity shall be treated with respect to such ac6 tivities as engaged in (and assets used in such activi7 ties shall be treated as used in) the active conduct

8 of a trade or business. Any determination under this

9 paragraph shall be made without regard to whether

10 the entity has any gross income from such activities

11 at the time of the determination.

12 ‘‘(3) CERTAIN RULES TO APPLY.—Rules similar

13 to the rules of paragraphs (5), (6), (7), and (8) of

14 section 1202(e) shall apply for purposes of this sub15 section.

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

17 similar to the rules of subsections (f), (g), (h), and (j)

18 of section 1202 (without regard to any 5-year holding pe19 riod requirement) shall apply for purposes of this section.

20 ‘‘(e) BASIS ADJUSTMENTS.—If gain from any sale is

21 not recognized by reason of subsection (a), such gain shall

22 be applied to reduce (in the order acquired) the basis for

23 determining gain or loss of any eligible small business in24 vestment which is purchased by the taxpayer during the

25 6-month period described in subsection (a).
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1 ‘‘(f) STATUTE OF LIMITATIONS.—If any gain is real2 ized by the taxpayer on the sale or exchange of any eligible

3 small business investment and there is in effect an election

4 under subsection (a) with respect to such gain, then—

5 ‘‘(1) the statutory period for the assessment of

6 any deficiency with respect to such gain shall not ex7 pire before the expiration of 3 years from the date

8 the Secretary is notified by the taxpayer (in such

9 manner as the Secretary may by regulations pre10 scribe) of—

11 ‘‘(A) the taxpayer’s cost of purchasing

12 other eligible small business investment which

13 the taxpayer claims results in nonrecognition of

14 any part of such gain,

15 ‘‘(B) the taxpayer’s intention not to pur16 chase other eligible small business investment

17 within the 6-month period described in sub18 section (a), or

19 ‘‘(C) a failure to make such purchase with20 in such 6-month period, and

21 ‘‘(2) such deficiency may be assessed before the

22 expiration of such 3-year period notwithstanding the

23 provisions of any other law or rule of law which

24 would otherwise prevent such assessment.
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1 ‘‘(g) REGULATIONS.—The Secretary shall prescribe

2 such regulations as may be appropriate to carry out the

3 purposes of this section, including regulations to prevent

4 the avoidance of the purposes of this section through

5 splitups, shell corporations, partnerships, or otherwise.’’

6 (b) CONFORMING AMENDMENT.—Paragraph (23) of

7 section 1016(a) of such Code is amended—

8 (1) by striking ‘‘or 1044’’ and inserting ‘‘,

9 1044, or 1045’’, and

10 (2) by striking ‘‘or 1044(d)’’ and inserting ‘‘,

11 1044(d), or 1045(e)’’.

12 (c) CLERICAL AMENDMENT.—The table of sections

13 for part III of subchapter O of chapter 1 of such Code

14 is amended by adding at the end the following new item:

‘‘Sec. 1045. Rollover of gain on small business investments.’’

15 (d) EFFECTIVE DATE.—The amendments made by

16 this section shall apply to taxable years ending after De17 cember 31, 1994.

18 SEC. 3. LOSSES ON ELIGIBLE SMALL BUSINESS INVEST19 MENTS.

20 (a) IN GENERAL.—Part IV of subchapter P of chap21 ter 1 of the Internal Revenue Code of 1986 (relating to

22 special rules for determining gains and losses) is amended

23 by inserting after section 1244 the following new section:
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1 ‘‘SEC. 1244A. LOSSES ON ELIGIBLE SMALL BUSINESS IN2 VESTMENTS.

3 ‘‘If—

4 ‘‘(1) a loss is on any eligible small business in5 vestment (as defined in section 1045(b)), and

6 ‘‘(2) such loss would (but for this section) be a

7 loss from the sale or exchange of a capital asset,

8 then such loss shall be treated as an ordinary loss. For

9 purposes of section 172 (relating to the net operating loss

10 deduction), any amount of loss treated by reason of this

11 section as an ordinary loss shall be treated as attributable

12 to a trade or business of the taxpayer.’’

13 (b) CLERICAL AMENDMENT.—The table of sections

14 for such part IV is amended by inserting after the item

15 relating to section 1244 the following new item:

‘‘Sec. 1244A. Losses on eligible small business investments.’’

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

17 this section shall apply to taxable years ending after De18 cember 31, 1994.

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