I

104TH CONGRESS

1ST SESSION H. R. 1918

To amend the Internal Revenue Code of 1986 to modify the exclusion of

gain on certain small business stock.

IN THE HOUSE OF REPRESENTATIVES

JUNE 22, 1995

Mr. MATSUI (for himself and Mr. ENGLISH of Pennsylvania) 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 modify

the exclusion of gain on certain small business stock.

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 ‘‘Enterprise Capital

5 Formation Act of 1995’’.

6 SEC. 2. FINDINGS.

7 The Congress hereby finds that—

8 (1) investments in small business venture cap9 ital stock should be encouraged because of both the
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1 special risks and the social and economic benefits as2 sociated with such investments,

3 (2) the exclusion from income of gain on small

4 business venture capital stock is an important incen5 tive for individuals and corporations to invest in

6 such stock, and

7 (3) tax incentives for investments in capital as8 sets in general should be supplemented with an ef9 fective tax incentive for investments in small busi10 ness venture capital stock.

11 SEC. 3. MODIFICATIONS TO EXCLUSION OF GAIN ON CER12 TAIN SMALL BUSINESS STOCK.

13 (a) INCREASE IN EXCLUSION.—Subsection (a) of sec14 tion 1202 of the Internal Revenue Code of 1986 is amend15 ed by striking ‘‘50 percent’’ and inserting ‘‘75 percent’’.

16 (b) EXCLUSION AVAILABLE TO CORPORATIONS.—

17 (1) IN GENERAL.—Subsection (a) of section

18 1202 of such Code is amended by striking ‘‘other

19 than a corporation’’.

20 (2) TECHNICAL AMENDMENT.—Subsection (c)

21 of section 1202 of such Code is amended by adding

22 at the end the following new paragraph:

23 ‘‘(4) STOCK HELD AMONG MEMBERS OF CON24 TROLLED GROUP NOT ELIGIBLE.—Stock of a mem25 ber of a parent-subsidiary controlled group (as de-
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1 fined in subsection (d)(3)) shall not be treated as

2 qualified small business stock while held by another

3 member of such group.’’

4 (c) REPEAL OF MINIMUM TAX PREFERENCE.—

5 (1) IN GENERAL.—Subsection (a) of section 57

6 of such Code is amended by striking paragraph (7).

7 (2) TECHNICAL AMENDMENT.—Subclause (II)

8 of section 53(d)(1)(B)(ii) of such Code is amended

9 by striking ‘‘, (5), and (7)’’ and inserting ‘‘and (5)’’.

10 (d) STOCK OF LARGER BUSINESSES ELIGIBLE FOR

11 EXCLUSION.—

12 (1) Paragraph (1) of section 1202(d) of such

13 Code is amended by striking ‘‘$50,000,000’’ each

14 place it appears and inserting ‘‘$100,000,000’’.

15 (2) Subsection (d) of section 1202 of such Code

16 is amended by adding at the end the following new

17 paragraph:

18 ‘‘(4) INFLATION ADJUSTMENT OF ASSET LIMI19 TATION.—In the case of stock issued in any calendar

20 year after 1996, the $100,000,000 amount con21 tained in paragraph (1) shall be increased by an

22 amount equal to—

23 ‘‘(A) such dollar amount, multiplied by

24 ‘‘(B) the cost-of-living adjustment deter25 mined under section 1(f)(3) for the calendar
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1 year in which the taxable year begins, deter2 mined by substituting ‘calendar year 1995’ for

3 ‘calendar year 1992’ in subparagraph (B)

4 thereof.

5 If any amount as adjusted under the preceding sen6 tence is not a multiple of $10,000, such amount

7 shall be rounded to the nearest multiple of

8 $10,000.’’

9 (e) REPEAL OF PER-ISSUER LIMITATION.—Section

10 1202 of such Code is amended by striking subsection (b).

11 (f) OTHER MODIFICATIONS.—

12 (1) REPEAL OF WORKING CAPITAL LIMITA13 TION.—Paragraph (6) of section 1202(e) of such

14 Code is amended—

15 (A) by striking ‘‘within 2 years’’ in sub16 paragraph (B), and

17 (B) by striking the last sentence.

18 (2) EXCEPTION FROM REDEMPTION RULES

19 WHERE BUSINESS PURPOSE.—Paragraph (3) of sec20 tion 1202(c) of such Code is amended by adding at

21 the end the following new subparagraph:

22 ‘‘(D) WAIVER WHERE BUSINESS PUR23 POSE.—A purchase of stock by the issuing cor24 poration shall be disregarded for purposes of

25 subparagraphs (A) and (B) if the issuing cor-
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1 poration establishes that there was a business

2 purpose for such purchase and such purchase is

3 not inconsistent with the purposes of this sec4 tion.’’

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

6 this section shall apply to stock issued after December 31,

7 1994.

8 (h) ELECTION TO APPLY AMENDMENTS TO STOCK

9 ISSUED AFTER AUGUST 10, 1993.—

10 (1) IN GENERAL.—The amendments made by

11 this section shall apply to any qualified stock issued

12 after August 10, 1993, if the taxpayer elects to

13 apply such amendments with respect to such stock.

14 (2) QUALIFIED STOCK.—For purposes of para15 graph (1), the term ‘‘qualified stock’’ means stock—

16 (A) which is held by the taxpayer on De17 cember 31, 1994, and

18 (B) which was not qualified small business

19 stock (as defined section 1202(c) of the Inter20 nal Revenue Code of 1986) when issued but

21 which would be qualified small business stock

22 (as so defined) if the amendments made by this

23 section applied to stock issued after August 10,

24 1993.
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1 (3) RECOGNITION OF GAIN.—For purposes of

2 the Internal Revenue Code of 1986—

3 (A) IN GENERAL.—Any qualified stock to

4 which the election under paragraph (1) applies

5 shall be treated—

6 (i) as having been sold on January 1,

7 1995, for an amount equal to its fair mar8 ket value on such date, and

9 (ii) as having been reacquired on such

10 date for an amount equal to such fair mar11 ket value.

12 The preceding sentence shall not apply for pur13 poses of determining whether the stock is quali14 fied small business stock (as so defined).

15 (B) TREATMENT OF GAIN OR LOSS.—

16 (i) Any gain resulting from subpara17 graph (A) shall be treated as received or

18 accrued on January 1, 1995, and shall be

19 recognized notwithstanding any provision

20 of the Internal Revenue Code of 1986.

21 (ii) Any loss resulting from subpara22 graph (A) shall not be allowed for any tax23 able year.

24 (4) ELECTION.—An election under paragraph

25 (1) shall be made in such manner as the Secretary
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1 may prescribe and shall specify the stock for which

2 such election is made. Such an election, once made

3 with respect to any stock, shall be irrevocable.

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