I

103D CONGRESS

1ST SESSION H. R. 850

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

for the establishment of tax enterprise zones.

IN THE HOUSE OF REPRESENTATIVES

FEBRUARY 4, 1993

Mr. MOAKLEY (for himself and Mr. STUDDS) 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 for the establishment of tax 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; AMENDMENT OF 1986 CODE.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Tax Enterprise Zone Act of 1993’’.

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment

9 to, or repeal of, a section or other provision, the reference
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1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986.

3 SEC. 2. STATEMENT OF PURPOSE.

4 It is the purpose of this Act to establish a demonstra5 tion program of providing incentives for the creation of

6 tax enterprise zones in order—

7 (1) to revitalize economically and physically dis8 tressed areas, primarily by encouraging the forma9 tion of new businesses and the retention and expan10 sion of existing businesses,

11 (2) to promote meaningful employment for tax

12 enterprise zone residents, and

13 (3) to encourage individuals to reside in the tax

14 enterprise zones in which they are employed.

15 SEC. 3. DESIGNATION AND TREATMENT OF URBAN TAX

16 ENTERPRISE ZONES AND RURAL DEVELOP17 MENT INVESTMENT ZONES.

18 (a) IN GENERAL.—Chapter 1 (relating to normal

19 taxes and surtaxes) is amended by inserting after sub20 chapter T the following new subchapter:

21 ‘‘Subchapter U—Designation and Treatment

22 of Tax Enterprise Zones

‘‘Part I. Designation of tax enterprise zones.

‘‘Part II. Incentives for tax enterprise zones.
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1 ‘‘PART I—DESIGNATION OF TAX ENTERPRISE

2 ZONES

‘‘Sec. 1391. Designation procedure.

‘‘Sec. 1392. Eligibility and selection criteria.

‘‘Sec. 1393. Definitions and special rules.

3 ‘‘SEC. 1391. DESIGNATION PROCEDURE.

4 ‘‘(a) IN GENERAL.—For purposes of this title, the

5 term ‘tax enterprise zone’ means any area which is, under

6 this part—

7 ‘‘(1) nominated by 1 or more local governments

8 and the State in which it is located for designation

9 as a tax enterprise zone, and

10 ‘‘(2) designated by—

11 ‘‘(A) the Secretary of Housing and Urban

12 Development in the case of an urban tax enter13 prise zone, or

14 ‘‘(B) the Secretary of Agriculture, in con15 sultation with the Secretary of Commerce, in

16 the case of a rural development investment

17 zone.

18 ‘‘(b) NUMBER OF DESIGNATIONS.—

19 ‘‘(1) AGGREGATE LIMIT.—The appropriate Sec20 retaries may designate in the aggregate 50 nomi21 nated areas as tax enterprise zones under this sec22 tion, subject to the availability of eligible nominated

23 areas. Not more than 25 urban tax enterprise zones
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1 may be designated and not more than 25 rural de2 velopment investment zones may be designated.

3 Such designations may be made only during cal4 endar years after 1992 and before 1998.

5 ‘‘(2) ANNUAL LIMITS.—

6 ‘‘(A) URBAN TAX ENTERPRISE ZONES.—

7 The number of urban tax enterprise zones des8 ignated under paragraph (1)—

9 ‘‘(i) before 1995 shall not exceed 8,

10 ‘‘(ii) before 1996 shall not exceed 15,

11 and

12 ‘‘(iii) before 1997 shall not exceed 21.

13 ‘‘(B) RURAL DEVELOPMENT INVESTMENT

14 ZONES.—The number of rural development in15 vestment zones designated under paragraph

16 (1)—

17 ‘‘(i) before 1995 shall not exceed 8,

18 ‘‘(ii) before 1996 shall not exceed 15,

19 and

20 ‘‘(iii) before 1997 shall not exceed 21.

21 ‘‘(3) ADVANCE DESIGNATIONS PERMITTED.—

22 For purposes of this subchapter, a designation dur23 ing any calendar year shall be treated as made on

24 January 1 of the following calendar year if the ap25 propriate Secretary, in making such designation,
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1 specifies that such designation is effective as

2 of such January 1.

3 ‘‘(c) LIMITATIONS ON DESIGNATIONS.—The appro4 priate Secretary may not make any designation under sub5 section (a) unless—

6 ‘‘(1) the local governments and the State in

7 which the nominated area is located have the au8 thority—

9 ‘‘(A) to nominate the area for designation

10 as a tax enterprise zone, and

11 ‘‘(B) to provide assurances satisfactory to

12 the appropriate Secretary that the commit13 ments under section 1392(c) will be fulfilled,

14 ‘‘(2) a nomination of the area is submitted

15 within a reasonable time before the calendar year for

16 which designation as a tax enterprise zone is sought

17 (or, if later, a reasonable time after the date of the

18 enactment of this subchapter),

19 ‘‘(3) the appropriate Secretary determines that

20 any information furnished is reasonably accurate,

21 and

22 ‘‘(4) the State and local governments certify

23 that no portion of the area nominated is already in24 cluded in a tax enterprise zone or in an area other25 wise nominated to be a tax enterprise zone.
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1 ‘‘(d) PERIOD FOR WHICH DESIGNATION IS IN EF2 FECT.—

3 ‘‘(1) IN GENERAL.—Any designation of an area

4 as a tax enterprise zone shall remain in effect during

5 the period beginning on the date of the designation

6 and ending on the earliest of—

7 ‘‘(A) December 31 of the 15th calendar

8 year following the calendar year in which such

9 date occurs,

10 ‘‘(B) the termination date designated by

11 the State and local governments as provided for

12 in their nomination, or

13 ‘‘(C) the date the appropriate Secretary re14 vokes the designation under paragraph (2).

15 ‘‘(2) REVOCATION OF DESIGNATION.—

16 ‘‘(A) IN GENERAL.—The appropriate Sec17 retary shall revoke the designation of an area

18 as a tax enterprise zone if such Secretary deter19 mines that the local government or the State in

20 which it is located—

21 ‘‘(i) has modified the boundaries of

22 the area, or

23 ‘‘(ii) is not complying substantially

24 with the State and local commitments pur25 suant to section 1392(c).
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1 ‘‘(B) APPLICABLE PROCEDURES.—A des2 ignation may be revoked by the appropriate

3 Secretary under subparagraph (A) only after a

4 hearing on the record involving officials of the

5 State or local government involved.

6 ‘‘SEC. 1392. ELIGIBILITY AND SELECTION CRITERIA.

7 ‘‘(a) IN GENERAL.—The appropriate Secretary may

8 make a designation of any nominated area under section

9 1391 only on the basis of the eligibility and selection cri10 teria set forth in this section.

11 ‘‘(b) ELIGIBILITY CRITERIA.—

12 ‘‘(1) URBAN TAX ENTERPRISE ZONES.—A nom13 inated area which is not a rural area shall be eligible

14 for designation under section 1391 only if it meets

15 the following criteria:

16 ‘‘(A) POPULATION.—The nominated area

17 has a population (as determined by the most re18 cent census data available) of not less than

19 4,000.

20 ‘‘(B) DISTRESS.—The nominated area is

21 one of pervasive poverty, unemployment, and

22 general distress. For purposes of determining

23 whether any area is an area of general distress,

24 the factors to be taken into account may in25 clude high crime rates, high vacancy rates, and
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1 designation as a disaster area or high density

2 drug trafficking area.

3 ‘‘(C) SIZE.—The nominated area—

4 ‘‘(i) does not exceed 20 square miles,

5 ‘‘(ii) has a boundary which is continu6 ous, or consists of not more than 3 non7 contiguous parcels within the same metro8 politan area, and

9 ‘‘(iii) is located entirely within 1

10 State.

11 ‘‘(D) UNEMPLOYMENT RATE.—The unem12 ployment rate (as determined by the appro13 priate available data) is not less than 1.5 times

14 the national unemployment rate.

15 ‘‘(E) POVERTY RATE.—The poverty rate

16 (as determined by the most recent census data

17 available) for not less than 90 percent of the

18 population census tracts (or where not tracted,

19 the equivalent county divisions as defined by

20 the Bureau of the Census for the purposes of

21 defining poverty areas) within the nominated

22 area is not less than 20 percent.

23 ‘‘(F) COURSE OF ACTION.—There has been

24 adopted for the nominated area a course of ac-
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1 tion which meets the requirements of subsection

2 (c).

3 ‘‘(2) RURAL DEVELOPMENT INVESTMENT

4 ZONES.—A nominated area which is a rural area

5 shall be eligible for designation under section 1391

6 only if it meets the following criteria:

7 ‘‘(A) POPULATION.—The nominated area

8 has a population (as determined by the most re9 cent census data available) of not less than

10 1,000.

11 ‘‘(B) DISTRESS.—The nominated area is

12 one of general distress.

13 ‘‘(C) SIZE.—The nominated area—

14 ‘‘(i) does not exceed 10,000 square

15 miles,

16 ‘‘(ii) consists of areas within not more

17 than 4 contiguous counties,

18 ‘‘(iii) has a boundary which is contin19 uous, or consists of not more than 3 non20 contiguous parcels, and

21 ‘‘(iv) is located entirely within 1

22 State.

23 ‘‘(D) ADDITIONAL CRITERIA.—Not less

24 than 2 of the following criteria:
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1 ‘‘(i) UNEMPLOYMENT RATE.—The cri2 terion set forth in paragraph (1)(D).

3 ‘‘(ii) POVERTY RATE.—The criterion

4 set forth in paragraph (1)(E).

5 ‘‘(iii) JOB LOSS.—The amount of

6 wages attributable to employment in the

7 area, and subject to tax under section

8 3301 during the preceding calendar year,

9 is not more than 95 percent of such wages

10 during the 5th preceding calendar year.

11 ‘‘(iv) OUT-MIGRATION.—The popu12 lation of the area decreased (as determined

13 by the most recent census data available)

14 by 10 percent or more between 1980 and

15 1990.

16 ‘‘(E) COURSE OF ACTION.—There has been

17 adopted for the nominated area a course of ac18 tion which meets the requirements of subsection

19 (c).

20 ‘‘(c) REQUIRED STATE AND LOCAL COURSE OF AC21 TION.—

22 ‘‘(1) IN GENERAL.—No nominated area may be

23 designated as a tax enterprise zone unless the local

24 government and the State in which it is located

25 agree in writing that, during any period during
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1 which the area is a tax enterprise zone, the govern2 ments will follow a specified course of action de3 signed to reduce the various burdens borne by em4 ployers or employees in the area.

5 ‘‘(2) COURSE OF ACTION.—The course of action

6 under paragraph (1) may be implemented by both

7 governments and private nongovernmental entities,

8 may not be funded from proceeds of any Federal

9 program (other than discretionary proceeds), and

10 may include—

11 ‘‘(A) a certification by the State insurance

12 commissioner (or similar State official) that

13 basic commercial property insurance of a type

14 comparable to that insurance generally in force

15 in urban or rural areas, whichever is applicable,

16 throughout the State is available to businesses

17 within the tax enterprise zone,

18 ‘‘(B) a reduction of tax rates or fees apply19 ing within the tax enterprise zone,

20 ‘‘(C) an increase in the level, or efficiency

21 of delivery, of local public services within the

22 tax enterprise zone,

23 ‘‘(D) actions to reduce, remove, simplify,

24 or streamline government paperwork require25 ments applicable within the tax enterprise zone,
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1 ‘‘(E) the involvement in the program by

2 public authorities or private entities, organiza3 tions, neighborhood associations, and commu4 nity groups, particularly those within the nomi5 nated area, including a written commitment to

6 provide jobs and job training for, and technical,

7 financial, or other assistance to, employers, em8 ployees, and residents of the nominated area,

9 ‘‘(F) the giving of special preference to

10 contractors owned and operated by members of

11 any socially and economically disadvantaged

12 group (within the meaning of section 8(a) of

13 the Small Business Act (15 U.S.C. 637(a)),

14 ‘‘(G) the gift (or sale at below fair market

15 value) of surplus land in the tax enterprise zone

16 to neighborhood organizations agreeing to oper17 ate a business on the land,

18 ‘‘(H) the establishment of a program

19 under which employers within the tax enterprise

20 zone may purchase health insurance for their

21 employees on a pooled basis,

22 ‘‘(I) the establishment of a program to en23 courage local financial institutions to satisfy

24 their obligations under the Community Rein25 vestment Act of 1977 (12 U.S.C. 2901 et seq.)
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1 by making loans to enterprise zone businesses,

2 with emphasis on startup and other small-busi3 ness concerns (as defined in section 3(a) of the

4 Small Business Act (15 U.S.C. 632(a)),

5 ‘‘(J) the giving of special preference to

6 qualified low-income housing projects located in

7 tax enterprise zones, in the allocation of the

8 State housing credit ceiling applicable under

9 section 42, and

10 ‘‘(K) the giving of special preference to fa11 cilities located in tax enterprise zones, in the al12 location of the State ceiling on private activity

13 bonds applicable under section 146.

14 ‘‘(3) RECOGNITION OF PAST EFFORTS.—In

15 evaluating courses of action agreed to by any State

16 or local government, the appropriate Secretary shall

17 take into account the past efforts of the State or

18 local government in reducing the various burdens

19 borne by employers and employees in the area in20 volved.

21 ‘‘(4) PROHIBITION OF ASSISTANCE FOR BUSI22 NESS RELOCATIONS.—

23 ‘‘(A) IN GENERAL.—The course of action

24 implemented under paragraph (1) may not in-
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1 clude any action to assist any establishment in

2 relocating from one area to another area.

3 ‘‘(B) EXCEPTION.—The limitation estab4 lished in subparagraph (A) shall not be con5 strued to prohibit assistance for the expansion

6 of an existing business entity through the estab7 lishment of a new branch, affiliate, or subsidi8 ary if—

9 ‘‘(i) the establishment of the new

10 branch, affiliate, or subsidiary will not re11 sult in an increase in unemployment in the

12 area of original location or in any other

13 area where the existing business entity

14 conducts business operations, and

15 ‘‘(ii) there is no reason to believe that

16 the new branch, affiliate, or subsidiary is

17 being established with the intention of clos18 ing down the operations of the existing

19 business entity in the area of its original

20 location or in any other area where the ex21 isting business entity conducts business op22 erations.

23 ‘‘(d) SELECTION CRITERIA.—From among the nomi24 nated areas eligible for designation under subsection (b)

25 by the appropriate Secretary, such appropriate Secretary
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1 shall make designations of tax enterprise zones on the

2 basis of the following factors (each of which is to be given

3 equal weight):

4 ‘‘(1) STATE AND LOCAL COMMITMENTS.—The

5 strength and quality of the commitments which have

6 been promised as part of the course of action rel7 ative to the fiscal ability of the nominating State

8 and local governments.

9 ‘‘(2) IMPLEMENTATION OF COURSE OF AC10 TION.—The effectiveness and enforceability of the

11 guarantees that the course of action will actually be

12 carried out, including the specificity with which the

13 commitments under paragraph (1) are described in

14 order that the applicable Secretary will be better

15 able to determine annually under section

16 1391(d)(2)(A)(ii) whether the commitments are

17 being carried out.

18 ‘‘(3) PRIVATE COMMITMENTS.—The level of

19 commitments by private entities of additional re20 sources and contributions to the economy of the

21 nominated area, including the creation of new or ex22 panded business activities.

23 ‘‘(4) AVERAGE RANKINGS.—The average rank24 ing with respect to—
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1 ‘‘(A) the criteria set forth in subpara2 graphs (D) and (E) of subsection (b)(1), in the

3 case of an area which is not a rural area, or

4 ‘‘(B) the 2 criteria set forth in subsection

5 (b)(2)(D) that give the area a higher average

6 ranking, in the case of a rural area.

7 ‘‘(5) REVITALIZATION POTENTIAL.—The poten8 tial for the revitalization of the nominated area as

9 a result of zone designation, taking into account

10 particularly the number of jobs to be created and re11 tained.

12 ‘‘SEC. 1393. DEFINITIONS AND SPECIAL RULES.

13 For purposes of this subchapter—

14 ‘‘(1) URBAN TAX ENTERPRISE ZONE.—The

15 term ‘urban tax enterprise zone’ means a tax enter16 prise zone which meets the requirements of section

17 1392(b)(1).

18 ‘‘(2) RURAL DEVELOPMENT INVESTMENT

19 ZONE.—The term ‘rural development investment

20 zone’ means a tax enterprise zone which meets the

21 requirements of section 1392(b)(2).

22 ‘‘(3) GOVERNMENTS.—If more than 1 local gov23 ernment seeks to nominate an area as a tax enter24 prise zone, any reference to, or requirement of, this

25 subchapter shall apply to all such governments.
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1 ‘‘(4) LOCAL GOVERNMENT.—The term ‘local

2 government’ means—

3 ‘‘(A) any county, city, town, township, par4 ish, village, or other general purpose political

5 subdivision of a State, and

6 ‘‘(B) any combination of political subdivi7 sions described in subparagraph (A) recognized

8 by the appropriate Secretary.

9 ‘‘(5) NOMINATED AREA.—The term ‘nominated

10 area’ means an area which is nominated by 1 or

11 more local governments and the State in which it is

12 located for designation as a tax enterprise zone

13 under this subchapter.

14 ‘‘(6) RURAL AREA.—The term ‘rural area’

15 means any area which is—

16 ‘‘(A) outside of a metropolitan statistical

17 area (within the meaning of section

18 143(k)(2)(B)), or

19 ‘‘(B) determined by the Secretary of Agri20 culture, after consultation with the Secretary of

21 Commerce, to be a rural area.

22 ‘‘(7) APPROPRIATE SECRETARY.—The term ‘ap23 propriate Secretary’ means—
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1 ‘‘(A) the Secretary of Housing and Urban

2 Development in the case of urban tax enterprise

3 zones, and

4 ‘‘(B) the Secretary of Agriculture in the

5 case of rural development investment zones.

6 ‘‘(8) STATE-CHARTERED DEVELOPMENT COR7 PORATIONS.—An area shall be treated as nominated

8 by a State and a local government if it is nominated

9 by an economic development corporation chartered

10 by the State.

11 ‘‘PART II—INCENTIVES FOR TAX ENTERPRISE

12 ZONES

‘‘SUBPART A. Enterprise zone employment credit.

‘‘SUBPART B. Investment incentives.

‘‘SUBPART C. Regulations.

13 ‘‘Subpart A—Enterprise Zone Employment Credit

‘‘Sec. 1394. Enterprise zone employment credit.

‘‘Sec. 1395. Other definitions and special rules.

14 ‘‘SEC. 1394. ENTERPRISE ZONE EMPLOYMENT CREDIT.

15 ‘‘(a) AMOUNT OF CREDIT.—For purposes of section

16 38, the amount of the enterprise zone employment credit

17 determined under this section with respect to any em18 ployer for any taxable year is 15 percent of the qualified

19 zone wages paid or incurred during such taxable year.

20 ‘‘(b) QUALIFIED ZONE WAGES.—
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1 ‘‘(1) IN GENERAL.—For purposes of this sec2 tion, the term ‘qualified zone wages’ means any

3 wages paid or incurred by an employer for services

4 performed by an employee while such employee is a

5 qualified zone employee.

6 ‘‘(2) ONLY FIRST $20,000 OF WAGES PER YEAR

7 TAKEN INTO ACCOUNT.—With respect to each quali8 fied zone employee, the amount of qualified zone

9 wages which may be taken into account for the tax10 able year shall not exceed $20,000.

11 ‘‘(3) COORDINATION WITH TARGETED JOBS

12 CREDIT.—The term ‘qualified zone wages’ shall not

13 include wages attributable to service rendered during

14 the 1-year period beginning with the day the individ15 ual begins work for the employer if any portion of

16 such wages is taken into account in determining the

17 credit under section 51.

18 ‘‘(c) QUALIFIED ZONE EMPLOYEE.—For purposes of

19 this section—

20 ‘‘(1) IN GENERAL.—Except as otherwise pro21 vided in this subsection, the term ‘qualified zone em22 ployee’ means, with respect to any period, any em23 ployee of an employer if—

24 ‘‘(A) substantially all of the services per25 formed during such period by such employee for
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1 such employer are performed within a tax en2 terprise zone in a trade or business of the em3 ployer, and

4 ‘‘(B) the principal place of abode of such

5 employee while performing such services is

6 within such tax enterprise zone.

7 ‘‘(2) CERTAIN INDIVIDUALS NOT ELIGIBLE.—

8 The term ‘qualified zone employee’ shall not in9 clude—

10 ‘‘(A) any individual described in subpara11 graph (A), (B), or (C) of section 51(i)(1),

12 ‘‘(B) any 5-percent owner (as defined in

13 section 416(i)(1)(B)),

14 ‘‘(C) any individual employed by the em15 ployer at any facility described in section

16 144(c)(6)(B), and

17 ‘‘(D) any individual employed by the em18 ployer in a trade or business the principal activ19 ity of which is farming (within the meaning of

20 subparagraphs (A) or (B) of section

21 2032A(e)(5)), but only if, as of the close of the

22 taxable year, the sum of—

23 ‘‘(i) the aggregate unadjusted bases

24 (or, if greater, the fair market value) of
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1 the assets owned by the employer which

2 are used in such a trade or business, and

3 ‘‘(ii) the aggregate value of assets

4 leased by the employer which are used in

5 such a trade or business (as determined

6 under regulations prescribed by the Sec7 retary),

8 exceeds $500,000.

9 ‘‘(d) EARLY TERMINATION OF EMPLOYMENT BY EM10 PLOYER.—

11 ‘‘(1) IN GENERAL.—If the employment of any

12 employee is terminated by the taxpayer before the

13 day 1 year after the day on which such employee

14 began work for the employer—

15 ‘‘(A) no wages with respect to such em16 ployee shall be taken into account under sub17 section (a) for the taxable year in which such

18 employment is terminated, and

19 ‘‘(B) the tax under this chapter for the

20 taxable year in which such employment is ter21 minated shall be increased by the aggregate

22 credits (if any) allowed under section 38(a) for

23 prior taxable years by reason of wages taken

24 into account with respect to such employee.
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1 ‘‘(2) CARRYBACKS AND CARRYOVERS AD2 JUSTED.—In the case of any termination of employ3 ment to which paragraph (1) applies, the carrybacks

4 and carryovers under section 39 shall be properly

5 adjusted.

6 ‘‘(3) SUBSECTION NOT TO APPLY IN CERTAIN

7 CASES.—

8 ‘‘(A) IN GENERAL.—Paragraph (1) shall

9 not apply to—

10 ‘‘(i) a termination of employment of

11 an employee who voluntarily leaves the em12 ployment of the taxpayer,

13 ‘‘(ii) a termination of employment of

14 an individual who before the close of the

15 period referred to in paragraph (1) be16 comes disabled to perform the services of

17 such employment unless such disability is

18 removed before the close of such period

19 and the taxpayer fails to offer reemploy20 ment to such individual, or

21 ‘‘(iii) a termination of employment of

22 an individual if it is determined under the

23 applicable State unemployment compensa24 tion law that the termination was due to

25 the misconduct of such individual.
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1 ‘‘(B) CHANGES IN FORM OF BUSINESS.—

2 For purposes of paragraph (1), the employment

3 relationship between the taxpayer and an em4 ployee shall not be treated as terminated—

5 ‘‘(i) by a transaction to which section

6 381(a) applies if the employee continues to

7 be employed by the acquiring corporation,

8 or

9 ‘‘(ii) by reason of a mere change in

10 the form of conducting the trade or busi11 ness of the taxpayer if the employee con12 tinues to be employed in such trade or

13 business and the taxpayer retains a sub14 stantial interest in such trade or business.

15 ‘‘(4) SPECIAL RULE.—Any increase in tax

16 under paragraph (1) shall not be treated as a tax

17 imposed by this chapter for purposes of—

18 ‘‘(A) determining the amount of any credit

19 allowable under this chapter, and

20 ‘‘(B) determining the amount of the tax

21 imposed by section 55.

22 ‘‘SEC. 1395. OTHER DEFINITIONS AND SPECIAL RULES.

23 ‘‘(a) WAGES.—For purposes of this subpart, the term

24 ‘wages’ has the same meaning as when used in section

25 51.
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1 ‘‘(b) CONTROLLED GROUPS.—For purposes of this

2 subpart—

3 ‘‘(1) all employers treated as a single employer

4 under subsection (a) or (b) of section 52 shall be

5 treated as a single employer for purposes of this

6 subpart, and

7 ‘‘(2) the credit (if any) determined under sec8 tion 1394 with respect to each such employer shall

9 be its proportionate share of the wages giving rise

10 to such credit.

11 ‘‘(c) CERTAIN OTHER RULES MADE APPLICABLE.—

12 For purposes of this subpart, rules similar to the rules

13 of section 51(k) and subsections (c), (d), and (e) of section

14 52 shall apply.

15 ‘‘(d) NOTICE OF AVAILABILITY OF ADVANCE PAY16 MENT OF EARNED INCOME CREDIT.—Each employer

17 shall take reasonable steps to notify all qualified zone em18 ployees of the availability to eligible individuals of receiv19 ing advanced payments of the credit under section 32 (re20 lating to the earned income credit).

21 ‘‘Subpart B—Investment Incentives

‘‘Sec. 1396. Deduction for purchase of enterprise zone stock.

‘‘Sec. 1397. 50 percent exclusion for gain from new zone investments.

‘‘Sec. 1397A. Nonrecognition of gain from new zone investments.

‘‘Sec. 1397B. Other incentives.

‘‘Sec. 1397C. Enterprise zone business defined.
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1 ‘‘SEC. 1396. DEDUCTION FOR PURCHASE OF ENTERPRISE

2 ZONE STOCK.

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

4 there shall be allowed as a deduction an amount equal to

5 50 percent of the aggregate amount paid in cash by the

6 taxpayer during the taxable year for the purchase of enter7 prise zone stock.

8 ‘‘(b) LIMITATION.—

9 ‘‘(1) IN GENERAL.—The maximum amount al10 lowed as a deduction under subsection (a) to a tax11 payer for the taxable year shall not exceed the lesser

12 of—

13 ‘‘(A) $25,000, or

14 ‘‘(B) the excess of $250,000 over the

15 amount allowed as a deduction under this sec16 tion to the taxpayer for all prior taxable years.

17 ‘‘(2) EXCESS AMOUNTS.—If the amount other18 wise deductible by any person under subsection (a)

19 exceeds the limitation under paragraph (1)(A)—

20 ‘‘(A) the amount of such excess shall be

21 treated as an amount paid to which subsection

22 (a) applies during the next taxable year, and

23 ‘‘(B) the deduction allowed for any taxable

24 year shall be allocated proportionately among

25 the enterprise zone stock purchased by such
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1 person on the basis of the respective purchase

2 prices per share.

3 ‘‘(3) AGGREGATION WITH FAMILY MEMBERS.—

4 The taxpayer and members of the taxpayer’s family

5 shall be treated as one person for purposes of para6 graph (1), and the limitations contained in such

7 paragraph shall be allocated among the taxpayer and

8 such members in accordance with their respective

9 purchases of enterprise zone stock. For purposes of

10 this paragraph, an individual’s family includes only

11 such individual’s spouse and minor children.

12 ‘‘(c) ENTERPRISE ZONE STOCK.—For purposes of

13 this section—

14 ‘‘(1) IN GENERAL.—The term ‘enterprise zone

15 stock’ means stock of a corporation if—

16 ‘‘(A) such stock is acquired on original

17 issue from the corporation, and

18 ‘‘(B) such corporation is, at the time of

19 issue, a qualified enterprise zone issuer.

20 ‘‘(2) PROCEEDS MUST BE INVESTED IN QUALI21 FIED ENTERPRISE ZONE PROPERTY.—

22 ‘‘(A) IN GENERAL.—Such term shall in23 clude such stock only to the extent that the pro24 ceeds of such issuance are used by such issuer

25 during the 12-month period beginning on the
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1 date of issuance to purchase (as defined in sec2 tion 179(d)(2)) qualified enterprise zone prop3 erty.

4 ‘‘(B) QUALIFIED ENTERPRISE ZONE PROP5 ERTY.—For purposes of this section, the term

6 ‘qualified enterprise zone property’ means prop7 erty to which section 168 applies—

8 ‘‘(i) the original use of which in a tax

9 enterprise zone commences with the issuer,

10 and

11 ‘‘(ii) substantially all of the use of

12 which is in a tax enterprise zone.

13 ‘‘(3) REDEMPTIONS.—The term ‘enterprise

14 zone stock’ shall not include any stock acquired from

15 a corporation which made a substantial stock re16 demption or distribution (without a bona fide busi17 ness purpose therefor) in an attempt to avoid the

18 purposes of this section.

19 ‘‘(d) QUALIFIED ENTERPRISE ZONE ISSUER.—For

20 purposes of this section, the term ‘qualified enterprise

21 zone issuer’ means any domestic C corporation if—

22 ‘‘(1) such corporation is an enterprise zone

23 business or, in the case of a new corporation, such

24 corporation is being organized for purposes of being

25 an enterprise zone business,
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1 ‘‘(2) such corporation does not have more than

2 one class of stock,

3 ‘‘(3) the sum of—

4 ‘‘(A) the money,

5 ‘‘(B) the aggregate unadjusted bases of

6 property owned by such corporation, and

7 ‘‘(C) the value of property leased to the

8 corporation (as determined under regulations

9 prescribed by the Secretary),

10 does not exceed $5,000,000, and

11 ‘‘(4) more than 20 percent of the total voting

12 power, and 20 percent of the total value, of the

13 stock of such corporation is owned directly by indi14 viduals or estates or indirectly by individuals

15 through partnerships or trusts.

16 The determination under paragraph (3) shall be made as

17 of the time of issuance of the stock in question but shall

18 include amounts received for such stock.

19 ‘‘(e) DISPOSITIONS OF STOCK.—

20 ‘‘(1) BASIS REDUCTION.—For purposes of this

21 title, the basis of any enterprise zone stock shall be

22 reduced by the amount of the deduction allowed

23 under this section with respect to such stock.

24 ‘‘(2) DEDUCTION RECAPTURED AS ORDINARY

25 INCOME.—For purposes of section 1245—
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1 ‘‘(A) any stock the basis of which is re2 duced under paragraph (1) (and any other

3 property the basis of which is determined in

4 whole or in part by reference to the adjusted

5 basis of such stock) shall be treated as section

6 1245 property, and

7 ‘‘(B) any reduction under paragraph (1)

8 shall be treated as a deduction allowed for de9 preciation.

10 If an exchange of any stock described in paragraph

11 (1) qualifies under section 354(a), 355(a), or

12 356(a), the amount of gain recognized under section

13 1245 by reason of this paragraph shall not exceed

14 the amount of gain recognized in the exchange (de15 termined without regard to this paragraph).

16 ‘‘(3) CERTAIN EVENTS TREATED AS DISPOSI17 TIONS.—For purposes of determining the amount

18 treated as ordinary income under section 1245 by

19 reason of paragraph (2), paragraph (3) of section

20 1245(b) (relating to certain tax-free transactions)

21 shall not apply.

22 ‘‘(4) INTEREST CHARGED IF DISPOSITION

23 WITHIN 5 YEARS OF PURCHASE.—

24 ‘‘(A) IN GENERAL.—If—
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1 ‘‘(i) a taxpayer disposes of any enter2 prise zone stock with respect to which a

3 deduction was allowed under subsection (a)

4 (or any other property the basis of which

5 is determined in whole or in part by ref6 erence to the adjusted basis of such stock)

7 before the end of the 5-year period begin8 ning on the date such stock was purchased

9 by the taxpayer, and

10 ‘‘(ii) section 1245(a) applies to such

11 disposition by reason of paragraph (2),

12 then the tax imposed by this chapter for the

13 taxable year in which such disposition occurs

14 shall be increased by the amount determined

15 under subparagraph (B).

16 ‘‘(B) ADDITIONAL AMOUNT.—For purposes

17 of subparagraph (A), the additional amount

18 shall be equal to the amount of interest (deter19 mined at the rate applicable under section

20 6621(a)(2)) that would accrue—

21 ‘‘(i) during the period beginning on

22 the date the stock was purchased by the

23 taxpayer and ending on the date of such

24 disposition by the taxpayer,
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1 ‘‘(ii) on an amount equal to the aggre2 gate decrease in tax of the taxpayer result3 ing from the deduction allowed under this

4 subsection (a) with respect to such stock.

5 ‘‘(C) SPECIAL RULE.—Any increase in tax

6 under subparagraph (A) shall not be treated as

7 a tax imposed by this chapter for purposes of—

8 ‘‘(i) determining the amount of any

9 credit allowable under this chapter, and

10 ‘‘(ii) determining the amount of the

11 tax imposed by section 55.

12 ‘‘(f) DISQUALIFICATION.—

13 ‘‘(1) ISSUER CEASES TO QUALIFY.—If, during

14 the 10-year period beginning on the date enterprise

15 zone stock was purchased by the taxpayer, the issuer

16 of such stock ceases to be a qualified enterprise zone

17 issuer (determined without regard to subsection

18 (d)(3)), then notwithstanding any provision of this

19 subtitle other than paragraph (2), the taxpayer shall

20 be treated for purposes of subsection (e) as dispos21 ing of such stock (and any other property the basis

22 of which is determined in whole or in part by ref23 erence to the adjusted basis of such stock) during

24 the taxable year during which such cessation occurs
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1 at its fair market value as of the 1st day of such

2 taxable year.

3 ‘‘(2) CESSATION OF ENTERPRISE ZONE STATUS

4 NOT TO CAUSE RECAPTURE.—A corporation shall

5 not fail to be treated as a qualified enterprise zone

6 issuer for purposes of paragraph (1) solely by reason

7 of the termination or revocation of a tax enterprise

8 zone designation.

9 ‘‘(g) OTHER SPECIAL RULES.—

10 ‘‘(1) APPLICATION OF LIMITS TO PARTNER11 SHIPS AND S CORPORATIONS.—In the case of a part12 nership or an S corporation, the limitations under

13 subsection (b) shall apply at the partner and share14 holder level and shall not apply at the partnership

15 or corporation level.

16 ‘‘(2) DEDUCTION NOT ALLOWED TO ESTATES

17 AND TRUSTS.—Estates and trusts shall not be treat18 ed as individuals for purposes of this section.

19 ‘‘SEC. 1397. 50 PERCENT EXCLUSION FOR GAIN FROM NEW

20 ZONE INVESTMENTS.

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

22 gross income shall not include 50 percent of any qualified

23 capital gain recognized on the sale or exchange of a quali24 fied zone asset held for more than 5 years.
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1 ‘‘(b) QUALIFIED ZONE ASSET.—For purposes of this

2 section—

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

4 asset’ means—

5 ‘‘(A) any qualified zone stock,

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

7 and

8 ‘‘(C) any qualified zone partnership inter9 est.

10 ‘‘(2) QUALIFIED ZONE STOCK.—

11 ‘‘(A) IN GENERAL.—Except as provided in

12 subparagraph (B), the term ‘qualified zone

13 stock’ means any stock in a domestic corpora14 tion if—

15 ‘‘(i) such stock is acquired by the tax16 payer on original issue from the corpora17 tion solely in exchange for cash,

18 ‘‘(ii) as of the time such stock was is19 sued, such corporation was an enterprise

20 zone business (or, in the case of a new cor21 poration, such corporation was being orga22 nized for purposes of being an enterprise

23 zone business), and

24 ‘‘(iii) during substantially all of the

25 taxpayer’s holding period for such stock,
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1 such corporation qualified as an enterprise

2 zone business.

3 ‘‘(B) EXCLUSION OF STOCK FOR WHICH

4 DEDUCTION UNDER SECTION 1396 ALLOWED.—

5 The term ‘qualified zone stock’ shall not include

6 any stock the basis of which is reduced under

7 section 1396(e)(1).

8 ‘‘(C) REDEMPTIONS.—The term ‘qualified

9 zone stock’ shall not include any stock acquired

10 from a corporation which made a substantial

11 stock redemption or distribution (without a

12 bona fide business purpose therefor) in an at13 tempt to avoid the purposes of this section.

14 ‘‘(3) QUALIFIED ZONE BUSINESS PROPERTY.—

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

16 zone business property’ means tangible property

17 if—

18 ‘‘(i) such property was acquired by

19 the taxpayer by purchase (as defined in

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

21 the designation of the tax enterprise zone

22 took effect,

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

24 in a tax enterprise zone commences with

25 the taxpayer, and
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1 ‘‘(iii) during substantially all of the

2 taxpayer’s holding period for such prop3 erty, substantially all of the use of such

4 property was in a tax enterprise zone and

5 in an enterprise zone business of the tax6 payer.

7 ‘‘(B) SPECIAL RULE FOR SUBSTANTIAL IM8 PROVEMENTS.—The requirements of clauses (i)

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

10 satisfied with respect to—

11 ‘‘(i) property which is substantially

12 improved by the taxpayer, and

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

14 is located.

15 For purposes of the preceding sentence, prop16 erty shall be treated as substantially improved

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

18 beginning after the date on which the designa19 tion of the tax enterprise zone took effect, addi20 tions to basis with respect to such property in

21 the hands of the taxpayer exceed the greater of

22 (i) an amount equal to the adjusted basis at the

23 beginning of such 24-month period in the hands

24 of the taxpayer, or (ii) $5,000.
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1 ‘‘(C) LIMITATION ON LAND.—The term

2 ‘qualified zone business property’ shall not in3 clude land which is not an integral part of a

4 qualified business (as defined in section

5 1397C(c)).

6 ‘‘(4) QUALIFIED ZONE PARTNERSHIP INTER7 EST.—The term ‘qualified zone partnership interest’

8 means any interest in a partnership if—

9 ‘‘(A) such interest is acquired by the tax10 payer from the partnership solely in exchange

11 for cash,

12 ‘‘(B) as of the time such interest was ac13 quired, such partnership was an enterprise zone

14 business (or, in the case of a new partnership,

15 such partnership was being organized for pur16 poses of being an enterprise zone business), and

17 ‘‘(C) during substantially all of the tax18 payer’s holding period for such interest, such

19 partnership qualified as an enterprise zone

20 business.

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

22 apply for purposes of this paragraph.

23 ‘‘(5) TREATMENT OF SUBSEQUENT PUR24 CHASERS.—The term ‘qualified zone asset’ includes

25 any property which would be a qualified zone asset
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1 but for paragraph (2)(A)(i), (3)(A)(ii), or (4)(A) in

2 the hands of the taxpayer if such property was a

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

4 ‘‘(6) 10-YEAR SAFE HARBOR.—If any property

5 ceases to be a qualified zone asset by reason of para6 graph (2)(A)(iii), (3)(A)(iii), or (4)(C) after the 10-

7 year period beginning on the date the taxpayer ac8 quired such property, such property shall continue to

9 be treated as meeting the requirements of such

10 paragraph; except that the amount of gain to which

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

12 such property shall not exceed the amount which

13 would be qualified capital gain had such property

14 been sold on the date of such cessation.

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

16 The termination of any designation of an area as a

17 tax enterprise zone shall be disregarded for purposes

18 of determining whether any property is a qualified

19 zone asset.

20 ‘‘(c) OTHER DEFINITIONS AND SPECIAL RULES.—

21 For purposes of this section—

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

23 otherwise provided in this subsection, the term

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

25 gain.
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1 ‘‘(2) CERTAIN GAIN ON REAL PROPERTY NOT

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

3 not include any gain which would be treated as ordi4 nary income under section 1250 if section 1250 ap5 plied to all depreciation rather than the additional

6 depreciation.

7 ‘‘(3) GAIN ATTRIBUTABLE TO PERIODS AFTER

8 TERMINATION OF ZONE DESIGNATION NOT QUALI9 FIED.—The term ‘qualified capital gain’ shall not in10 clude any gain attributable to periods after the ter11 mination of any designation of an area as a tax en12 terprise zone.

13 ‘‘(d) TREATMENT OF PASS-THRU ENTITIES.—

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

15 sale or exchange of an interest in a pass-thru entity

16 held by the taxpayer (other than an interest in an

17 entity which was an enterprise zone business during

18 substantially all of the period the taxpayer held such

19 interest) for more than 5 years shall be treated as

20 gain described in subsection (a) to the extent such

21 gain is attributable to amounts which would be

22 qualified capital gain on qualified zone assets (deter23 mined as if such assets had been sold on the date

24 of the sale or exchange) held by such entity for more

25 than 5 years and throughout the period the taxpayer
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1 held such interest. A rule similar to the rule of para2 graph (2)(C) shall apply for purposes of the preced3 ing sentence.

4 ‘‘(2) INCOME INCLUSIONS.—

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

6 in income by reason of holding an interest in a

7 pass-thru entity (other than an entity which

8 was an enterprise zone business during substan9 tially all of the period the taxpayer held the in10 terest to which such inclusion relates) shall be

11 treated as gain described in subsection (a) if

12 such amount meets the requirements of sub13 paragraph (B).

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

15 the requirements of this subparagraph if—

16 ‘‘(i) such amount is attributable to

17 qualified capital gain recognized on the

18 sale or exchange by the pass-thru entity of

19 property which is a qualified zone asset in

20 the hands of such entity and which was

21 held by such entity for the period required

22 under subsection (a), and

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

24 gross income of the taxpayer by reason of

25 the holding of an interest in such entity
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1 which was held by the taxpayer on the date

2 on which such pass-thru entity acquired

3 such asset and at all times thereafter be4 fore the disposition of such asset by such

5 pass-thru entity.

6 ‘‘(C) LIMITATION BASED ON INTEREST

7 ORIGINALLY HELD BY TAXPAYER.—Subpara8 graph (A) shall not apply to any amount to the

9 extent such amount exceeds the amount to

10 which subparagraph (A) would have applied if

11 such amount were determined by reference to

12 the interest the taxpayer held in the pass-thru

13 entity on the date the qualified zone asset was

14 acquired.

15 ‘‘(3) PASS-THRU ENTITY.—For purposes of this

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

17 ‘‘(A) any partnership,

18 ‘‘(B) any S corporation,

19 ‘‘(C) any regulated investment company,

20 and

21 ‘‘(D) any common trust fund.

22 ‘‘(e) SALES AND EXCHANGES OF INTERESTS IN

23 PARTNERSHIPS AND S CORPORATIONS WHICH ARE

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

25 or exchange of an interest in a partnership, or of stock
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1 in an S corporation, which was an enterprise zone business

2 during substantially all of the period the taxpayer held

3 such interest or stock, the amount of qualified capital gain

4 shall be determined without regard to—

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

6 an integral part of any qualified business (as defined

7 in section 1397C(b)), and

8 ‘‘(2) gain attributable to periods before the des9 ignation of an area as a tax enterprise zone.

10 ‘‘(f) CERTAIN TAX-FREE AND OTHER TRANSFERS.—

11 For purposes of this section—

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

13 a qualified zone asset to which this subsection ap14 plies, the transferee shall be treated as—

15 ‘‘(A) having acquired such asset in the

16 same manner as the transferor, and

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

18 continuous period immediately preceding the

19 transfer during which it was held (or treated as

20 held under this subsection) by the transferor.

21 ‘‘(2) TRANSFERS TO WHICH SUBSECTION AP22 PLIES.—This subsection shall apply to any trans23 fer—

24 ‘‘(A) by gift,

25 ‘‘(B) at death, or
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1 ‘‘(C) from a partnership to a partner

2 thereof of a qualified zone asset with respect to

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

4 met at the time of the transfer (without regard

5 to the 5-year holding requirement).

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

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

8 apply for purposes of this section.

9 ‘‘(g) CERTAIN BUSINESSES TREATED AS NOT

10 QUALIFIED BUSINESSES.—For purposes of this section

11 and section 1397A, the term ‘enterprise zone business’ has

12 the meaning given such term by section 1397C except

13 that, in applying section 1397C for such purposes, the

14 term ‘qualified business’ shall not include any trade or

15 business of producing property of a character subject to

16 the allowance for depletion under section 611.

17 ‘‘SEC. 1397A. NONRECOGNITION OF GAIN FROM NEW ZONE

18 INVESTMENTS.

19 ‘‘(a) GENERAL RULE.—At the election of an individ20 ual, qualified capital gain (within the meaning of section

21 1397) from the sale or exchange of a qualified zone asset

22 shall be recognized only to the extent that—

23 ‘‘(1) the amount realized from such sale or ex24 change, exceeds
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1 ‘‘(2) the cost (not heretofore taken into account

2 under this subsection) of any qualified zone asset

3 purchased directly by the taxpayer during the rein4 vestment period.

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

6 section—

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

8 asset’ has the meaning given such term by section

9 1397.

10 ‘‘(2) TIME FOR TESTING.—

11 ‘‘(A) SALES.—In the case of a sale or ex12 change of property, the determination of wheth13 er such property is a qualified zone asset shall

14 be made as of the time of the sale or exchange.

15 ‘‘(B) PURCHASES.—In the case of a pur16 chase of property, the determination of whether

17 such property is a qualified zone asset shall be

18 made as of the time of such purchase.

19 ‘‘(c) OTHER DEFINITIONS.—For purposes of this

20 section—

21 ‘‘(1) REINVESTMENT PERIOD.—The term ‘rein22 vestment period’ means, with respect to any sale or

23 exchange, the 6-month period beginning on the date

24 of such sale or exchange.
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1 ‘‘(2) PURCHASE.—The term ‘purchase’ has the

2 meaning given to such term by section 179(d)(2).

3 ‘‘(d) BUSINESS OR PROPERTY CEASES TO QUAL4 IFY.—

5 ‘‘(1) IN GENERAL.—If, during the 10-year pe6 riod beginning on the date any qualified zone re7 placement asset was purchased by the taxpayer,

8 such asset ceases to be a qualified zone asset, not9 withstanding any provision of this subtitle other

10 than paragraph (3), the taxpayer shall be treated as

11 disposing of such asset during the taxable year dur12 ing which such cessation occurs at its fair market

13 value as of the 1st day of such taxable year.

14 ‘‘(2) LIMITATION ON GAIN RECOGNIZED.—The

15 amount of gain recognized pursuant to paragraph

16 (1) with respect to any asset shall not exceed the

17 lesser of—

18 ‘‘(A) the amount of gain which was not

19 recognized under subsection (a) by the reason

20 of the purchase of such asset, or

21 ‘‘(B) the excess of the fair market value

22 referred to in paragraph (1) over the adjusted

23 basis of such asset.

24 ‘‘(3) CESSATION OF ENTERPRISE ZONE STATUS

25 NOT TO CAUSE RECAPTURE.—An asset shall not fail
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1 to be treated as a qualified zone asset for purposes

2 of paragraph (1) solely by reason of the termination

3 of a tax enterprise zone designation.

4 ‘‘(4) QUALIFIED ZONE REPLACEMENT ASSET.—

5 For purposes of paragraph (1), the term ‘qualified

6 zone replacement asset’ means any qualified zone

7 asset the purchase of which resulted in the non8 recognition of gain under subsection (a) with respect

9 to any other property.

10 ‘‘(e) BASIS OF QUALIFIED ZONE REPLACEMENT

11 ASSET.—If gain from the sale or exchange of any property

12 is not recognized by reason of subsection (a), such gain

13 shall be applied to reduce (in the order acquired) the basis

14 of any qualified zone replacement asset (as defined in sub15 section (d)(4)) purchased during the reinvestment period.

16 ‘‘(f) COORDINATION WITH INSTALLMENT METHOD

17 REPORTING.—This section shall not apply to any gain

18 from any installment sale (as defined in section 453(b))

19 if section 453(a) applies to such sale.

20 ‘‘(g) STATUTE OF LIMITATIONS.—If any gain is real21 ized by the taxpayer on any sale or exchange to which

22 an election under this section applies, then—

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

24 any deficiency with respect to such gain shall not ex25 pire before the expiration of 3 years from the date
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1 the Secretary is notified by the taxpayer (in such

2 manner as the Secretary may by regulations pre3 scribe) of—

4 ‘‘(A) the taxpayer’s cost of purchasing any

5 qualified zone replacement asset,

6 ‘‘(B) the taxpayer’s intention not to pur7 chase qualified zone replacement asset within

8 the reinvestment period, or

9 ‘‘(C) a failure to make such purchase with10 in the reinvestment period, and

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

12 expiration of such 3-year period notwithstanding the

13 provisions of any law or rule of law which would oth14 erwise prevent such assessment.

15 ‘‘SEC. 1397B. ADDITIONAL INCENTIVES.

16 ‘‘(a) INCREASE IN EXPENSING UNDER SECTION

17 179.—In the case of an enterprise zone business, section

18 179(b)(1) shall be applied by substituting ‘$20,000’ for

19 ‘$10,000’.

20 ‘‘(b) ORDINARY LOSS TREATMENT FOR CERTAIN

21 PROPERTY.—

22 ‘‘(1) IN GENERAL.—Loss on any qualified zone

23 asset (as defined in section 1397(b)) held for more

24 than 2 years (5 years in the case of real property)

25 shall be treated as an ordinary loss.
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1 ‘‘(2) REAL PROPERTY.—For purposes of para2 graph (1), the term ‘real property’ means any prop3 erty which is section 1250 property (as defined in

4 section 1250(c)).

5 ‘‘(3) SPECIAL RULES.—

6 ‘‘(A) CERTAIN RULES MADE APPLICA7 BLE.—For purposes of this subsection, rules

8 similar to the following rules shall apply:

9 ‘‘(i) Paragraphs (1), (2), and (3) of

10 section 1244(d).

11 ‘‘(ii) Subsections (b)(6), (c)(3), (d),

12 (e), and (f) of section 1397.

13 ‘‘(B) COORDINATION WITH SECTION

14 1231.—Losses treated as ordinary losses by rea15 son of this subsection shall not be taken into

16 account in applying section 1231.

17 ‘‘SEC. 1397C. ENTERPRISE ZONE BUSINESS DEFINED.

18 ‘‘(a) IN GENERAL.—For purposes of this subpart, the

19 term ‘enterprise zone business’ means—

20 ‘‘(1) any qualified business entity, and

21 ‘‘(2) any qualified proprietorship.

22 ‘‘(b) QUALIFIED BUSINESS ENTITY.—For purposes

23 of this section, the term ‘qualified business entity’ means,

24 with respect to any taxable year, any corporation or part25 nership if for such year—
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1 ‘‘(1)(A) every trade or business of such entity

2 is the active conduct of a qualified business within

3 a tax enterprise zone, and

4 ‘‘(B) at least 80 percent of the total gross in5 come of such entity is derived from the active con6 duct of such business,

7 ‘‘(2) substantially all of the use of the tangible

8 property of such entity (whether owned or leased) is

9 within a tax enterprise zone,

10 ‘‘(3) substantially all of the intangible property

11 of such entity is used in, and exclusively related to,

12 the active conduct of any such business,

13 ‘‘(4) substantially all of the services performed

14 for such entity by its employees are performed in a

15 tax enterprise zone,

‘‘(5) at least 1 16 ⁄3 of its employees are residents

17 of a tax enterprise zone,

18 ‘‘(6) less than 5 percent of the average of the

19 aggregate unadjusted bases of the property of such

20 entity is attributable to collectibles (as defined in

21 section 408(m)(2)) other than collectibles that are

22 held primarily for sale to customers in the ordinary

23 course of such business, and

24 ‘‘(7) less than 5 percent of the average of the

25 aggregate unadjusted bases of the property of such
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1 entity is attributable to nonqualified financial prop2 erty.

3 ‘‘(c) QUALIFIED PROPRIETORSHIP.—For purposes of

4 this section, the term ‘qualified proprietorship’ means,

5 with respect to any taxable year, any qualified business

6 carried on by an individual as a proprietorship if for such

7 year—

8 ‘‘(1) at least 80 percent of the total gross in9 come of such individual from such business is de10 rived from the active conduct of such business in a

11 tax enterprise zone,

12 ‘‘(2) substantially all of the use of the tangible

13 property of such individual in such business (wheth14 er owned or leased) is within a tax enterprise zone,

15 ‘‘(3) substantially all of the intangible property

16 of such business is used in, and exclusively related

17 to, the active conduct of such business,

18 ‘‘(4) substantially all of the services performed

19 for such individual in such business by employees of

20 such business are performed in a tax enterprise

21 zone,

‘‘(5) at least 1 22 ⁄3 of such employees are residents

23 of a tax enterprise zone,

24 ‘‘(6) less than 5 percent of the average of the

25 aggregate unadjusted bases of the property of such
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1 individual which is used in such business is attrib2 utable to collectibles (as defined in section

3 408(m)(2)) other than collectibles that are held pri4 marily for sale to customers in the ordinary course

5 of such business, and

6 ‘‘(7) less than 5 percent of the average of the

7 aggregate unadjusted bases of the property of such

8 individual which is used in such business is attrib9 utable to nonqualified financial property.

10 For purposes of this subsection, the term ‘employee’ in11 cludes the proprietor.

12 ‘‘(d) QUALIFIED BUSINESS.—For purposes of this

13 section—

14 ‘‘(1) IN GENERAL.—Except as otherwise pro15 vided in this subsection, the term ‘qualified business’

16 means any trade or business.

17 ‘‘(2) RENTAL OF REAL PROPERTY.—The rental

18 to others of real property located in a tax enterprise

19 zone shall be treated as a qualified business if and

20 only if—

21 ‘‘(A) in the case of real property which is

22 not residential rental property (as defined in

23 section 168(e)(2)), the lessee is an enterprise

24 zone business, or
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1 ‘‘(B) in the case of residential rental prop2 erty (as so defined)—

3 ‘‘(i) such property was originally

4 placed in service after the date the tax en5 terprise zone was designated, or

6 ‘‘(ii) such property is rehabilitated

7 after such date in a rehabilitation which

8 meets requirements based on the principles

9 of section 42(e)(3).

10 ‘‘(3) RENTAL OF TANGIBLE PERSONAL PROP11 ERTY.—The rental to others of tangible personal

12 property shall be treated as a qualified business if

13 and only if substantially all of the rental of such

14 property is by enterprise zone businesses or by resi15 dents of a tax enterprise zone.

16 ‘‘(4) TREATMENT OF BUSINESS HOLDING IN17 TANGIBLES.—The term ‘qualified business’ shall not

18 include any trade or business consisting predomi19 nantly of the development or holding of intangibles

20 for sale or license.

21 ‘‘(5) CERTAIN BUSINESSES EXCLUDED.—The

22 term ‘qualified business’ shall not include—

23 ‘‘(A) any trade or business consisting of

24 the operation of any facility described in section

25 144(c)(6)(B), and
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1 ‘‘(B) any trade or business the principal

2 activity of which is farming (within the meaning

3 of subparagraphs (A) or (B) of section

4 2032A(e)(5)), but only if, as of the close of the

5 preceding taxable year, the sum of—

6 ‘‘(i) the aggregate unadjusted bases

7 (or, if greater, the fair market value) of

8 the assets owned by the taxpayer which are

9 used in such a trade or business, and

10 ‘‘(ii) the aggregate value of assets

11 leased by the taxpayer which are used in

12 such a trade or business,

13 exceeds $500,000.

14 For purposes of subparagraph (B), rules similar to

15 the rules of section 1395(b) shall apply.

16 ‘‘(e) NONQUALIFIED FINANCIAL PROPERTY.—For

17 purposes of this section, the term ‘nonqualified financial

18 property’ means debt, stock, partnership interests, op19 tions, futures contracts, forward contracts, warrants, no20 tional principal contracts, annuities, and other similar

21 property specified in regulations; except that such term

22 shall not include—

23 ‘‘(1) reasonable amounts of working capital

24 held in cash, cash equivalents, or debt instruments

25 with a term of 18 months or less, or
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1 ‘‘(2) debt instruments described in section

2 1221(4).

3 ‘‘Subpart C—Regulations

‘‘Sec. 1397C. Regulations.

4 ‘‘SEC. 1397C. REGULATIONS.

5 ‘‘The Secretary shall prescribe such regulations as

6 may be necessary or appropriate to carry out the purposes

7 of this part, including—

8 ‘‘(1) regulations limiting the benefit of this part

9 in circumstances where such benefits, in combination

10 with benefits provided under other Federal pro11 grams, would result in an activity being 100 percent

12 or more subsidized by the Federal Government,

13 ‘‘(2) regulations preventing abuse of the provi14 sions of this part, and

15 ‘‘(3) regulations dealing with inadvertent fail16 ures of entities to be qualified zone businesses.’’

17 (b) CLERICAL AMENDMENT.—The table of sub18 chapters for chapter 1 is amended by inserting after the

19 item relating to subchapter T the following new item:

‘‘Subchapter U. Designation and treatment of tax enterprise

zones.’’
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1 SEC. 4. SPECIAL RULES FOR REDEVELOPMENT BONDS

2 PROVIDING FINANCING FOR TAX ENTER3 PRISE ZONES.

4 (a) IN GENERAL.—Subsection (c) of section 144 (re5 lating to qualified redevelopment bonds) is amended by

6 adding at the end thereof the following new paragraph:

7 ‘‘(9) SPECIAL RULES FOR TAX ENTERPRISE

8 ZONES.—For purposes of this subsection, in the case

9 of bonds issued during the 60-month period begin10 ning on the date a tax enterprise zone is des11 ignated—

12 ‘‘(A) TREATMENT AS DESIGNATED

13 BLIGHTED AREA.—Such tax enterprise zone

14 shall be treated as a designated blighted area

15 during such 60-month period (or, if shorter, the

16 period such designation is in effect). Any area

17 designated by reason of the preceding sentence

18 shall not be taken into account in applying

19 paragraph (4)(C).

20 ‘‘(B) SECURITY FOR BONDS.—The require21 ments of paragraph (2)(B) shall be treated as

22 met with respect to a financed area that is

23 within a tax enterprise zone if the general pur24 pose governmental unit guarantees the payment

25 of principal and interest on the issue either di26 rectly or through insurance, a letter of credit,
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1 or a similar agreement but only if the cost

2 thereof is financed other than with proceeds of

3 any tax-exempt private activity bond or earn4 ings on such proceeds.

5 ‘‘(C) EXPANSION OF REDEVELOPMENT

6 PURPOSES.—

7 ‘‘(i) IN GENERAL.—The term ‘redevel8 opment purposes’ includes the making of

9 loans to any enterprise zone business (as

10 defined in section 1397B) for—

11 ‘‘(I) the acquisition of land with12 in the tax enterprise zone for use in

13 such business, or

14 ‘‘(II) the acquisition, construc15 tion, reconstruction, or improvement

16 by such business of land, or property

17 of a character subject to the allowance

18 for depreciation, for use in such busi19 ness.

20 ‘‘(ii) $2,500,000 LIMITATION.—Clause

21 (i) shall apply to loans made to any enter22 prise zone business only if the aggregate

23 principal amount of such loans (whether or

24 not financed by the same issue) does not

25 exceed $2,500,000. For purposes of the
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1 preceding sentence, all persons treated as a

2 single employer under subsection (a) or (b)

3 of section 52 shall be treated as 1 person.

4 ‘‘(iii) LOANS MUST BE MADE WITHIN

5 18 MONTHS AFTER BONDS ISSUED; REPAY6 MENTS MUST BE USED FOR REDEMP7 TIONS.—Clause (i) shall apply only to

8 loans—

9 ‘‘(I) made during the 18-month

10 period beginning on the date of issu11 ance of the issue financing such loan,

12 ‘‘(II) repayments of principal on

13 which are used not later than the

14 close of the 1st semiannual period be15 ginning after the date the repayment

16 is received to redeem bonds which are

17 part of such issue, and

18 ‘‘(III) the effective rate of inter19 est on which does not exceed the yield

20 on the issue by more than 0.125 per21 centage points.

22 In determining the effective rate of interest

23 for purposes of subclause (III), there shall

24 be taken into account all fees, charges, and

25 other amounts (other than amounts for
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1 any credit report) borne by the borrower

2 which are attributable to the loan or the

3 bond issue.

4 ‘‘(iv) HOUSING LOANS EXCLUDED.—

5 Clause (i) shall not apply to any loan to be

6 used directly or indirectly to provide resi7 dential real property.

8 ‘‘(v) COORDINATION WITH RESTRIC9 TIONS ON USE OF PROCEEDS.—Paragraphs

10 (6) and (8) shall apply notwithstanding

11 clause (i); except that in applying para12 graph (6), subsection (a)(8) shall be treat13 ed as not including a reference to a facility

14 the primary purpose of which is retail food

15 services.

16 ‘‘(D) ISSUER TO DESIGNATE AMOUNT OF

17 ISSUE TO BE USED FOR LOANS.—Subparagraph

18 (C) shall not apply with respect to any issue

19 unless the issuer designates before the date of

20 issuance the amount of the proceeds of such

21 issue which is to be used for loans to which

22 subparagraph (C)(i) applies. If such amount ex23 ceeds the principal amount of loans to which

24 subparagraph (C)(i) applies, an amount of pro25 ceeds equal to such excess shall be used not
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1 later than the close of the 1st semiannual pe2 riod beginning after the close of the 18-month

3 period referred to in subparagraph (C)(iii) to

4 redeem bonds which are part of such issue.

5 ‘‘(E) DE MINIMIS REDEMPTIONS NOT RE6 QUIRED.—Subparagraphs (C)(iii) and (D) shall

7 not be construed to require amounts of less

8 than $250,000 to be used to redeem bonds. The

9 Secretary may by regulation treat related issues

10 as 1 issue for purposes of the preceding sen11 tence.

12 ‘‘(F) PENALTY.—

13 ‘‘(i) IN GENERAL.—In the case of

14 property with respect to which financing

15 was provided under this paragraph, if at

16 any time during the 10-period beginning

17 on the date such financing was provided—

18 ‘‘(I) such property ceases to be in

19 use in an enterprise zone business (as

20 defined in section 1397B), or

21 ‘‘(II) substantially all of the use

22 of such property ceases to be in a tax

23 enterprise zone,

24 there is hereby imposed on the trade or

25 business to which such financing was pro-
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1 vided a penalty equal to 1.25 percent of so

2 much of the face amount of all financing

3 provided (whether or not from the same

4 issue and whether or not such issue is out5 standing) before such cessation to the

6 trade or business using such property.

7 ‘‘(ii) NO PENALTY BY REASON OF

8 ZONE TERMINATION.—No penalty shall be

9 imposed under clause (i) solely by reason

10 of the termination or revocation of a tax

11 enterprise zone designation.

12 ‘‘(iii) EXCEPTION FOR BANK13 RUPTCY.—Clause (i) shall not apply to any

14 cessation resulting from bankruptcy.’’

15 (b) VOLUME CAP ONLY CHARGED WITH 50 PER16 CENT OF TAX ENTERPRISE ZONE REDEVELOPMENT

17 BONDS.—Subsection (g) of section 146 is amended by

18 striking ‘‘and’’ at the end of paragraph (3), by striking

19 the period at the end of paragraph (4) and inserting ‘‘,

20 and’’, and by adding at the end thereof the following new

21 paragraph:

22 ‘‘(5) 50 percent of any qualified redevelopment

23 bond issued—

24 ‘‘(A) as part of an issue 95 percent or

25 more of the net proceeds of which are to be
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1 used for 1 or more redevelopment purposes (as

2 defined in section 144(c)) in a tax enterprise

3 zone, and

4 ‘‘(B) during the 60-month period begin5 ning on the date of the designation of such

6 zone.’’

7 (c) PENALTIES FOR LOANS MADE TO BUSINESSES

8 THAT CEASE TO BE ENTERPRISE ZONE BUSINESSES,

9 ETC.—Subsection (b) of section 150 is amended by adding

10 at the end thereof the following new paragraph:

11 ‘‘(6) ENTERPRISE ZONE REDEVELOPMENT

12 BONDS.—In the case of any financing provided by

13 an issue the interest on which is exempt from tax by

14 reason of section 144(c)(9)—

15 ‘‘(A) IN GENERAL.—No deduction shall be

16 allowed under this chapter for interest on such

17 financing which accrues during the period be18 ginning on the first day of the calendar year

19 which includes the date on which—

20 ‘‘(i) the trade or business to which the

21 financing was provided ceases to be an en22 terprise zone business (as defined in sec23 tion 1397B), or

24 ‘‘(ii) substantially all of the use of the

25 property (determined in accordance with
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1 subchapter U) with respect to which the fi2 nancing was provided ceases to be in a tax

3 enterprise zone.

4 The preceding sentence shall not apply solely by

5 reason of the termination or revocation of a tax

6 enterprise zone designation.

7 ‘‘(B) EXCEPTION FOR BANKRUPTCY.—This

8 paragraph shall not apply to any cessation re9 sulting from bankruptcy.’’

10 SEC. 5. TECHNICAL AND CONFORMING AMENDMENTS.

11 (a) ENTERPRISE ZONE EMPLOYMENT CREDIT PART

12 OF GENERAL BUSINESS CREDIT.—

13 (1) Subsection (b) of section 38 (relating to

14 current year business credit) is amended by striking

15 ‘‘plus’’ at the end of paragraph (7), by striking the

16 period at the end of paragraph (8) and inserting ‘‘,

17 plus’’, and by adding at the end the following new

18 paragraph:

19 ‘‘(9) the enterprise zone employment credit de20 termined under section 1394(a).’’

21 (2) Subsection (d) of section 39 is amended by

22 adding at the end thereof the following new para23 graph:

24 ‘‘(4) NO CARRYBACK OF SECTION 1394 CREDIT

25 BEFORE ENACTMENT.—No portion of the unused
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1 business credit for any taxable year which is attrib2 utable to the enterprise zone employment credit de3 termined under section 1394 may be carried to a

4 taxable year ending before the date of the enactment

5 of section 1394.’’

6 (b) NONITEMIZERS ALLOWED DEDUCTION FOR EN7 TERPRISE ZONE STOCK.—Subsection (a) of section 62 is

8 amended by inserting after paragraph (14) the following

9 new paragraph:

10 ‘‘(15) ENTERPRISE ZONE STOCK.—The deduc11 tion allowed by section 1396.’’

12 (c) DENIAL OF DEDUCTION FOR PORTION OF WAGES

13 EQUAL TO ENTERPRISE ZONE EMPLOYMENT CREDIT.—

14 (1) Subsection (a) of section 280C (relating to

15 rule for targeted jobs credit) is amended—

16 (A) by striking ‘‘the amount of the credit

17 determined for the taxable year under section

18 51(a)’’ and inserting ‘‘the sum of the credits

19 determined for the taxable year under sections

20 51(a) and 1394(a)’’, and

21 (B) by striking ‘‘TARGETED JOBS CRED22 IT’’ in the subsection heading and inserting

23 ‘‘EMPLOYMENT CREDITS’’.

24 (2) Subsection (c) of section 196 (relating to

25 deduction for certain unused business credits) is
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1 amended by striking ‘‘and’’ at the end of paragraph

2 (4), by striking the period at the end of paragraph

3 (5) and inserting ‘‘, and’’, and by adding at the end

4 the following new paragraph:

5 ‘‘(6) the enterprise zone employment credit de6 termined under section 1394(a).’’

7 (d) OTHER AMENDMENTS.—

8 (1)(A) Section 172(d)(2) (relating to modifica9 tions with respect to net operating loss deduction) is

10 amended to read as follows:

11 ‘‘(2) CAPITAL GAINS AND LOSSES OF TAX12 PAYERS OTHER THAN CORPORATIONS.—In the case

13 of a taxpayer other than a corporation—

14 ‘‘(A) the amount deductible on account of

15 losses from sales or exchanges of capital assets

16 shall not exceed the amount includable on ac17 count of gains from sales or exchanges of cap18 ital assets; and

19 ‘‘(B) the exclusion provided by section

20 1397 shall not be allowed.’’

21 (B) Subparagraph (B) of section 172(d)(4) is

22 amended by inserting ‘‘, (2)(B),’’ after ‘‘paragraph

23 (1)’’.

24 (2) Subsection (c) of section 381 (relating to

25 carryovers in certain corporate acquisitions) is
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1 amended by adding at the end the following new

2 paragraph:

3 ‘‘(26) ENTERPRISE ZONE PROVISIONS.—The

4 acquiring corporation shall take into account (to the

5 extent proper to carry out the purposes of this sec6 tion and subchapter U, and under such regulations

7 as may be prescribed by the Secretary) the items re8 quired to be taken into account for purposes of sub9 chapter U in respect of the distributor or transferor

10 corporation.’’

11 (3) Paragraph (4) of section 642(c) is amended

12 to read as follows:

13 ‘‘(4) ADJUSTMENTS.—To the extent that the

14 amount otherwise allowable as a deduction under

15 this subsection consists of gain described in section

16 1397(a), proper adjustment shall be made for any

17 exclusion allowable to the estate or trust under sec18 tion 1397. In the case of a trust, the deduction al19 lowed by this subsection shall be subject to section

20 681 (relating to unrelated business income).’’

21 (4) Paragraph (3) of section 643(a) is amended

22 by adding at the end thereof the following new sen23 tence: ‘‘The exclusion under section 1397 shall not

24 be taken into account.’’
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1 (5) Paragraph (4) of section 691(c) is amended

2 by striking ‘‘1201, and 1211’’ and inserting ‘‘1201,

3 1397, and 1211’’.

4 (6) The second sentence of paragraph (2) of

5 section 871(a) is amended by inserting ‘‘such gains

6 and losses shall be determined without regard to sec7 tion 1397 and’’ after ‘‘except that’’.

8 (7) Paragraph (1) of section 1371(d) (relating

9 to coordination with investment credit recapture) is

10 amended by inserting before the period at the end

11 the following ‘‘and for purposes of section

12 1394(d)(3)’’.

13 (8) Subsection (a) of section 1016 (relating to

14 adjustments to basis) is amended by striking ‘‘and’’

15 at the end of paragraph (25), by striking the period

16 at the end of paragraph (26) and inserting a semi17 colon, and by adding at the end thereof the following

18 new paragraphs:

19 ‘‘(27) in the case of stock with respect to which

20 a deduction was allowed under section 1396(a), to

21 the extent provided in section 1396(e); and

22 ‘‘(28) in the case of property the acquisition of

23 which resulted under section 1397A in the non24 recognition of any part of the gain realized on the
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1 sale or exchange of other property, to the extent pro2 vided in section 1397A(e).’’

3 (9) Section 1223 (relating to holding period of

4 property) is amended by redesignating paragraph

5 (15) as paragraph (16) and by inserting after para6 graph (14) the following new paragraph:

7 ‘‘(15) In determining the period for which the

8 taxpayer has held property the acquisition of which

9 resulted under section 1397A in the nonrecognition

10 of any part of the gain realized on the sale or ex11 change of any qualified zone asset (as defined in sec12 tion 1397A(b)), there shall be included the period

13 for which such asset had been held as of the date

14 of such sale or exchange.’’

15 SEC. 6. EFFECTIVE DATE.

16 (a) GENERAL RULE.—The amendments made by this

17 Act shall take effect on the date of the enactment of this

18 Act.

19 (b) REQUIREMENT FOR RULES.—Not later than the

20 date 4 months after the date of the enactment of this Act,

21 the appropriate Secretaries shall issue rules—

22 (1) establishing the procedures for nominating

23 areas for designation as tax enterprise zones,
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1 (2) establishing a method for comparing the

2 factors listed in section 1392(d) of the Internal Rev3 enue Code of 1986 (as added by this Act),

4 (3) establishing recordkeeping requirements

5 necessary or appropriate to assist the studies re6 quired by part IV, and

7 (4) providing that State and local governments

8 shall have at least 30 days after such rules are pub9 lished to file applications for nominated areas before

10 such applications are evaluated and compared and

11 any area designated as a tax enterprise zone.

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