I

104TH CONGRESS

1ST SESSION H. R. 2095

To amend the Internal Revenue Code to provide that capital gains not

be recognized if invested in certain small businesses.

IN THE HOUSE OF REPRESENTATIVES

JULY 21, 1995

Ms. FURSE introduced the following bill; which was referred to the Committee

on Ways and Means

A BILL

To amend the Internal Revenue Code to provide that capital

gains not be recognized if invested in certain small 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. NONRECOGNITION OF GAIN WHERE ROLLOVER

4 TO SMALL BUSINESS INVESTMENTS.

5 (a) IN GENERAL.—Part III of subchapter O of chap6 ter 1 of the Internal Revenue Code of 1986 (relating to

7 common nontaxable exchanges) is amended by adding at

8 the end the following new section:
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1 ‘‘SEC. 1045. ROLLOVER OF GAIN TO SMALL BUSINESS IN2 VESTMENTS.

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

4 sale of any capital asset with respect to which the taxpayer

5 elects the application of this section, gain from such sale

6 shall be recognized only to the extent that the amount re7 alized on such sale exceeds—

8 ‘‘(1) the cost of any eligible small business in9 vestment purchased by the taxpayer during the 12-

10 month period beginning on the date of such sale, re11 duced by

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

13 into account under this section.

14 ‘‘(b) DEFINITIONS AND SPECIAL RULES.—For pur15 poses of this section—

16 ‘‘(1) CAPITAL ASSET.—The term ‘capital asset’

17 has the meaning given such term by section 1221

18 (determined without regard to paragraph (2) of such

19 section), except that such term shall include gain de20 rived from the bulk sale of inventory not in the ordi21 nary course of a trade or business.

22 ‘‘(2) INVESTMENT PROPERTY.—The term ‘in23 vestment property’ means property that has the ca24 pacity to produce gross income from—
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1 ‘‘(A) interest, annuities, or royalties, not

2 derived in the ordinary course of a trade or

3 business, or

4 ‘‘(B) dividends.

5 Such term shall not include expansion shares.

6 ‘‘(3) PURCHASE.—The term ‘purchase’ has the

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

8 ‘‘(4) ELIGIBLE SMALL BUSINESS INVEST9 MENT.—Except as otherwise provided in this sec10 tion, the term ‘eligible small business investment’

11 means any stock in a domestic corporation, and any

12 partnership interest in a domestic partnership, if—

13 ‘‘(A) as of the date of issuance of such

14 stock or partnership interest, such corporation

15 or partnership is a qualified small business en16 tity, and

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

18 acquired by the taxpayer at its original issue

19 (directly or through an underwriter) in ex20 change for money or other property (not includ21 ing stock).

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

23 apply for purposes of this section.

24 ‘‘(5) QUALIFIED SMALL BUSINESS ENTITY.—
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1 ‘‘(A) IN GENERAL.—The term ‘qualified

2 small business entity’ means any domestic cor3 poration or partnership if—

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

5 in which the stock or partnership interest

6 was issued and each prior taxable year,

7 such entity (and any predecessor thereof)

8 had gross receipts of less than $5,000,000,

9 ‘‘(ii) the primary activity of such en10 tity (and any predecessor thereof) for the

11 taxable year of such issuance and each

12 prior taxable year was an activity listed in

13 the Standard Industrial Classification

14 Manual, 1987 (SIC), as published by the

15 Office of Management and Budget, Execu16 tive Office of the President, as being—

17 ‘‘(I) agriculture, forestry or fish18 ing (Division A),

19 ‘‘(II) mining (Division B),

20 ‘‘(III) construction (Division C),

21 ‘‘(IV) manufacturing (Division

22 D),

23 ‘‘(V) transportation, communica24 tions, electric, gas or sanitary service

25 (Division E),
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1 ‘‘(VI) wholesale trade (Division

2 F),

3 ‘‘(VII) retail trade (Division (G),

4 ‘‘(VIII) personal services (Major

5 Group 72, Division I),

6 ‘‘(IX) business services (Major

7 Group 73, Division I),

8 ‘‘(X) automotive repair, services

9 or parking (Major Group 75, Division

10 I),

11 ‘‘(XI) miscellaneous repair serv12 ices (Major Group 76, Division I), or

13 ‘‘(XII) engineering, accounting,

14 research, management or related serv15 ices (Major Group 87, Division I),

16 ‘‘(iii) such entity generates income

17 from investment property only as an inci18 dental effect of the management of a work19 ing capital pool aggregated and directed

20 toward investing in any qualified small

21 business entity, and

22 ‘‘(iv) the majority of full-time employ23 ees employed by such entity and the larg24 est percentage, by dollar value, of inde-
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1 pendent contractors under contract to such

2 entity are located in the United States.

3 For purposes of clause (iii), ownership interests

4 in entities controlled by such entity or directly

5 involved in the primary activity referred to in

6 clause (ii) with respect to such entity do not

7 constitute investment property, and the Sec8 retary may further define by regulation what

9 constitutes an incidental holding of investment

10 property.

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

12 treated as a single employer under subsection

13 (a) or (b) of section 52 shall be treated as one

14 person for purposes of subparagraph (A).

15 ‘‘(C) SPECIAL RULES FOR DETERMINING

16 GROSS RECEIPTS.—The rules of subparagraphs

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

18 purposes of subparagraph (A)(i).

19 ‘‘(c) INAPPLICABILITY TO CERTAIN GAIN.—Sub20 section (a) shall not apply to any of the following types

21 of gain:

22 ‘‘(1) Gain from the sale or other disposition of

23 property received in lieu of salary, wages, or other

24 compensation for services performed by the tax-
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1 payer, to the extent of the fair market value of the

2 property at the time of receipt by the taxpayer.

3 ‘‘(2) Gain from the sale of property that is not

4 held for the production of income.

5 ‘‘(3) Gain from investment property.

6 ‘‘(4) Gain that is treated or characterized as or7 dinary income for purposes of this title.

8 ‘‘(5) Gain, to the extent the gain is not recog9 nized under section 1044 or 1202, notwithstanding

10 that the gain is derived from the sale of expansion

11 shares.

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

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

14 of section 1202 (without regard to any 5-year holding pe15 riod requirement) shall apply for purposes of this section.

16 ‘‘(e) PROHIBITION OF BASIS ADJUSTMENTS.—If gain

17 from any sale is not recognized by reason of subsection

18 (a), such gain shall not be applied to reduce the basis for

19 determining gain or loss of any eligible small business in20 vestment which is purchased by the taxpayer during the

21 12-month period described in subsection (a).

22 ‘‘(f) STATUTE OF LIMITATIONS.—If any gain is real23 ized by the taxpayer on the sale or exchange of any eligible

24 small business investment and there is in effect an election

25 under subsection (a) with respect to such gain, then—
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1 ‘‘(1) the statutory period for the assessment of

2 any deficiency with respect to such gain shall not ex3 pire before the expiration of 3 years from the date

4 the Secretary is notified by the taxpayer (in such

5 manner as the Secretary may by regulations pre6 scribe) of—

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

8 eligible small business investment which the

9 taxpayer claims results in nonrecognition of any

10 part of such gain,

11 ‘‘(B) the taxpayer’s intention not to pur12 chase any eligible small business investment

13 within the 12-month period described in sub14 section (a), or

15 ‘‘(C) a failure to make such purchase with16 in such 12-month period, and

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

18 expiration of such 3-year period notwithstanding the

19 provisions of any other law or rule of law which

20 would otherwise prevent such assessment.

21 ‘‘(g) REGULATIONS.—The Secretary shall prescribe

22 such regulations as may be appropriate to carry out the

23 purposes of this section, including regulations to prevent

24 the avoidance of the purposes of this section through

25 splitups, shell corporations, partnerships, or otherwise.
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1 ‘‘(h) TERMINATION.—Subsection (a) shall not apply

2 to any taxable year beginning on or after January 1,

3 2003.’’

4 (b) REPORT BY SECRETARY.—Not later than Decem5 ber 31, 2001, the Secretary of the Treasury shall submit

6 to each House of the Congress a report detailing the ef7 fects of section 1045 of such Code, as added by this Act.

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

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

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

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

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

12 this section shall apply to investments purchased after the

13 date of the date of the enactment of this Act, for taxable

14 years ending after such date and before January 1, 2003.

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