I

103D CONGRESS

1ST SESSION H. R. 902

To amend the Internal Revenue Code of 1986 to provide a capital gains

tax differential for individual and corporate taxpayers who make highrisk, long-term, growth-oriented venture and seed capital investments

in startup and other small enterprises.

IN THE HOUSE OF REPRESENTATIVES

FEBRUARY 16, 1993

Mr. MATSUI (for himself and Mr. HOAGLAND) 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

a capital gains tax differential for individual and corporate taxpayers who make high-risk, long-term, growthoriented venture and seed capital investments in startup

and other small enterprises.

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 ‘‘Enterprise Capital Formation Act of 1993’’.

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

2 to, or repeal of, a section or other provision, the reference

3 shall be considered to be made to a section or other provi4 sion of the Internal Revenue Code of 1986.

5 SEC. 2. EXCLUSION FOR GAIN FROM CERTAIN SMALL BUSI6 NESS STOCK.

7 (a) GENERAL RULE.—Part I of subchapter P of

8 chapter 1 (relating to capital gains and losses) is amended

9 by adding at the end thereof the following new section:

10 ‘‘SEC. 1202. EXCLUSION FOR GAIN FROM CERTAIN SMALL

11 BUSINESS STOCK.

12 ‘‘(a) EXCLUSION.—

13 ‘‘(1) IN GENERAL.—Gross income shall not in14 clude the sum of—

15 ‘‘(A) 50 percent of any gain from the sale

16 or exchange of qualified small business stock

17 (other than seed capital stock) held for more

18 than 5 years, plus

19 ‘‘(B) the amounts determined by applying

20 the applicable percentages to the appropriate

21 categories of gain from the sale or exchange of

22 qualified small business stock which is seed cap23 ital stock held for more than 5 years.
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1 ‘‘(2) APPLICABLE PERCENTAGE.—For purposes

2 of paragraph (1), the applicable percentage shall be

3 computed as follows:

The applicable

‘‘In the case of: percentage is:

5-year gain ................................................................... 50

6-year gain ................................................................... 60

7-year gain ................................................................... 70

8-year gain ................................................................... 80

9-year gain ................................................................... 90

10-year gain ................................................................. 100.

4 ‘‘(3) CATEGORIES OF GAIN.—

5 ‘‘(A) 10-YEAR GAIN.—The term ‘10-year

6 gain’ means gain determined by taking into ac7 count only gain from qualified small business

8 stock with a holding period of more than 10

9 years at the time of the sale or exchange.

10 ‘‘(B) OTHER GAIN.—The terms ‘5-, 6-,

11 7-, 8-, and 9-year gain’ mean the gain deter12 mined by taking into account only gain from

13 qualified small business stock with a holding pe14 riod of more than 5, 6, 7, 8, or 9 years but not

15 more than 6, 7, 8, 9, or 10 years, respectively.

16 ‘‘(b) QUALIFIED SMALL BUSINESS STOCK; SEED

17 CAPITAL STOCK.—For purposes of this section—

18 ‘‘(1) IN GENERAL.—Except as otherwise pro19 vided in this section, the term ‘qualified small busi20 ness stock’ means any stock in a corporation which

21 is originally issued on or after January 1, 1993, if—
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1 ‘‘(A) as of the date of issuance, such cor2 poration is a qualified small business, and

3 ‘‘(B) except as provided in subsections (e),

4 (f), and (g), such stock is acquired by the tax5 payer at its original issue (directly or through

6 an underwriter)—

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

8 property (not including stock), or

9 ‘‘(ii) as compensation for services

10 (other than services performed as an un11 derwriter of such stock).

12 ‘‘(2) ACTIVE BUSINESS REQUIREMENT.—Stock

13 in a corporation shall not be treated as qualified

14 small business stock unless, during substantially all

15 of the taxpayer’s holding period for such stock, such

16 corporation meets the active business requirements

17 of subsection (d).

18 ‘‘(3) CERTAIN PURCHASES BY CORPORATION OF

19 ITS OWN STOCK.—

20 ‘‘(A) IN GENERAL.—Stock issued by a cor21 poration shall not be treated as qualified small

22 business stock if such corporation has pur23 chased or purchases any of its stock within the

24 2-year period beginning 1 year before the date

25 of the issuance of such stock.
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1 ‘‘(B) EXCEPTION WHERE BUSINESS PUR2 POSE.—Subparagraph (A) shall not apply

3 where the issuing corporation establishes that

4 there was a business purpose for the purchase

5 of the stock and such purchase is not inconsist6 ent with the purposes of this section. Except as

7 provided in regulations, the preceding sentence

8 shall not apply to any purchase which—

9 ‘‘(i) is part of a transaction or series

10 of transactions in which the corporation

11 purchases not more than 5 percent (by

12 vote or value) of the outstanding shares of

13 the corporation, or

14 ‘‘(ii) is a purchase by the corporation

15 of convertible preferred stock of the cor16 poration but only if such purchase is re17 quired by the terms of the stock being pur18 chased.

19 ‘‘(C) MEMBERS OF AFFILIATED GROUP.—

20 For purposes of this paragraph, the purchase of

21 any stock of the issuing corporation by any cor22 poration which, as of the time of the purchase,

23 is a member of the same affiliated group (with24 in the meaning of section 1504) as the issuing
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1 corporation shall be treated as a purchase by

2 the issuing corporation of its stock.

3 ‘‘(4) SEED CAPITAL STOCK.—The term ‘seed

4 capital stock’ means stock which is qualified small

5 business stock in a qualified small business, as de6 termined under subsection (c) by substituting

7 ‘$5,000,000’ for ‘$100,000,000’ each place it ap8 pears in subsection (c)(1).

9 ‘‘(c) QUALIFIED SMALL BUSINESS.—For purposes of

10 this section—

11 ‘‘(1) IN GENERAL.—The term ‘qualified small

12 business’ means any domestic corporation if—

13 ‘‘(A) the aggregate capitalization of such

14 corporation (or any predecessor thereof) at all

15 times on or after January 1, 1993, and before

16 the issuance did not exceed $100,000,000, and

17 ‘‘(B) the aggregate capitalization of such

18 corporation immediately after the issuance (de19 termined by taking into account amounts to be

20 received in the issuance) does not exceed

21 $100,000,000.

22 ‘‘(2) AGGREGATE CAPITALIZATION.—For pur23 poses of paragraph (1), the term ‘aggregate capital24 ization’ means the excess of—
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1 ‘‘(A) the amount of cash and the aggregate

2 adjusted bases of other property held by the

3 corporation, over

4 ‘‘(B) the aggregate amount of the short5 term indebtedness of the corporation.

6 For purposes of the preceding sentence, the term

7 ‘short-term indebtedness’ means any indebtedness

8 which, when incurred, did not have a term in excess

9 of 1 year.

10 ‘‘(3) LOOK-THRU IN CASE OF SUBSIDIARIES.—

11 In determining whether a corporation meets the re12 quirements of this subsection—

13 ‘‘(A) stock and debt of any subsidiary (as

14 defined in subsection (d)(4)(C)) held by such

15 corporation shall be disregarded, and

16 ‘‘(B) such corporation shall be treated as

17 holding its ratable share of the assets of such

18 subsidiary and as being liable for its ratable

19 share of the indebtedness of such subsidiary.

20 For purposes of subparagraph (B), a corporation’s

21 ratable share shall be based on its share of the total

22 combined voting power of the stock of the subsidi23 ary.

24 ‘‘(4) COST-OF-LIVING ADJUSTMENT.—In the

25 case of any taxable year beginning after 1993, each
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1 dollar amount contained in paragraph (1) and sub2 section (b)(4) shall be increased by an amount equal

3 to such dollar amount multiplied by the cost-of-living

4 adjustment determined under section 1(f)(3) for the

5 calendar year in which the taxable year begins, ex6 cept that section 1(f)(3)(B) shall be applied by sub7 stituting ‘1992’ for ‘1989’.

8 ‘‘(d) ACTIVE BUSINESS REQUIREMENT.—For pur9 poses of this section—

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

11 (b)(2), the requirements of this subsection are met

12 for any period if during such period—

13 ‘‘(A) the corporation is engaged in the ac14 tive conduct of a trade or business,

15 ‘‘(B) substantially all of the assets of such

16 corporation are used in the active conduct of a

17 trade or business, and

18 ‘‘(C) such corporation is an eligible cor19 poration.

20 ‘‘(2) SPECIAL RULE FOR CERTAIN ACTIVI21 TIES.—For purposes of paragraph (1), if, in connec22 tion with any future trade or business, a corporation

23 is engaged in—

24 ‘‘(A) startup activities described in section

25 195(c)(1)(A),
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1 ‘‘(B) activities resulting in the payment or

2 incurring of expenditures which may be treated

3 as research and experimental expenditures

4 under section 174, or

5 ‘‘(C) activities with respect to in-house re6 search expenses described in section 41(b)(4),

7 such corporation shall be treated with respect to

8 such activities as engaged in (and assets used in

9 such activities shall be treated as used in) the active

10 conduct of a trade or business. Any determination

11 under this paragraph shall be made without regard

12 to whether a corporation has any gross income from

13 such activities at the time of the determination.

14 ‘‘(3) ELIGIBLE CORPORATION.—For purposes

15 of this subsection—

16 ‘‘(A) IN GENERAL.—The term ‘eligible cor17 poration’ means any domestic corporation; ex18 cept that such term shall not include—

19 ‘‘(i) any corporation predominantly

20 engaged in a disqualified business,

21 ‘‘(ii) any personal service corporation

22 (within the meaning of section 269A(b)),

23 ‘‘(iii) a DISC,
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1 ‘‘(iv) a corporation with respect to

2 which an election under section 936 is in

3 effect,

4 ‘‘(v) any regulated investment com5 pany, real estate investment trust, or

6 REMIC,

7 ‘‘(vi) any cooperative, and

8 ‘‘(vii) in the case of a corporate share9 holder, any corporation which at any time

10 was a subsidiary (as defined in paragraph

11 (4)(C)) of such corporate shareholder.

12 ‘‘(B) DISQUALIFIED BUSINESS.—The term

13 ‘disqualified business’ means—

14 ‘‘(i) any banking, insurance, financ15 ing, or similar business,

16 ‘‘(ii) any farming business (other than

17 the business of raising or harvesting trees),

18 ‘‘(iii) any business involving the pro19 duction or extraction of products of a char20 acter with respect to which a deduction is

21 allowable under section 613 or 613A, and

22 ‘‘(iv) any business of franchising or

23 operating a hotel, motel, or restaurant or

24 similar business.

25 ‘‘(4) STOCK IN OTHER CORPORATIONS.—
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1 ‘‘(A) LOOK-THRU IN CASE OF SUBSIDI2 ARIES.—For purposes of this subsection, stock

3 and debt in any subsidiary corporation shall be

4 disregarded and the parent corporation shall be

5 deemed to own its ratable share of the subsidi6 ary’s assets, and to conduct its ratable share of

7 the subsidiary’s activities. For purposes of the

8 preceding sentence, a corporation’s ratable

9 share shall be based on its share of the total

10 combined voting power of the stock of the sub11 sidiary.

12 ‘‘(B) PORTFOLIO STOCK OR SECURITIES.—

13 A corporation shall be treated as failing to meet

14 the requirements of paragraph (1) for any pe15 riod during which more than 10 percent of the

16 value of its assets consists of stock or securities

17 in other corporations which are not subsidiaries

18 of such corporation (other than assets described

19 in paragraph (5)).

20 ‘‘(C) SUBSIDIARY.—For purposes of this

21 paragraph, a corporation shall be considered a

22 subsidiary if the parent corporation owns more

23 than 50 percent of the combined voting power

24 of all classes of stock entitled to vote, or more
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1 than 50 percent in value of all outstanding

2 stock, of such corporation.

3 ‘‘(5) WORKING CAPITAL.—For purposes of

4 paragraph (1)(B), any assets which—

5 ‘‘(A) are held for investment, and

6 ‘‘(B) are to be used to finance future re7 search and experimentation or working capital

8 needs of the corporation,

9 shall be treated as used in the active conduct of a

10 trade or business.

11 ‘‘(6) MAXIMUM REAL ESTATE HOLDINGS.—A

12 corporation shall be treated as failing to meet the re13 quirements of paragraph (1) for any period during

14 which more than 10 percent of the total value of its

15 assets consists of real property which is not used (or

16 to be used) in the active conduct of a trade or busi17 ness. For purposes of the preceding sentence—

18 ‘‘(A) the ownership of, dealing in, or rent19 ing of real property shall not be treated as the

20 active conduct of a trade or business; and

21 ‘‘(B) the total value of the assets and of

22 any real property shall be reduced by all liabil23 ities to which the property is subject.

24 ‘‘(7) COMPUTER SOFTWARE ROYALTIES.—For

25 purposes of paragraph (1), rights to computer soft-
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1 ware which produces income described in section

2 543(d) shall be treated as an asset used in the active

3 conduct of a trade or business.

4 ‘‘(8) EXCEPTION FOR SMALL BUSINESS INVEST5 MENT COMPANIES.—This subsection shall not apply

6 to any small business investment company described

7 in section 301(d) of the Small Business Investment

8 Act of 1958 (15 U.S.C. 682(d)).

9 ‘‘(e) STOCK ACQUIRED ON CONVERSION OF OTHER

10 STOCK.—If any stock is acquired through the conversion

11 of other stock which is qualified small business stock in

12 the hands of the taxpayer—

13 ‘‘(1) the stock so acquired shall be treated as

14 qualified small business stock in the hands of the

15 taxpayer, and

16 ‘‘(2) the stock so acquired shall be treated as

17 having been held during the period during which the

18 converted stock was held.

19 ‘‘(f) SPECIAL RULES FOR WARRANTS AND CERTAIN

20 CONVERTIBLE INVESTMENTS.—For purposes of this sec21 tion—

22 ‘‘(1) IN GENERAL.—In the case of stock which

23 is acquired by the taxpayer through the exercise of

24 an applicable warrant, through the conversion of

25 convertible debt, or in exchange for securities of the
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1 corporation in a transaction described in section

2 368—

3 ‘‘(A) such stock shall be treated as ac4 quired by the taxpayer at original issue,

5 ‘‘(B) the holding period of such stock shall

6 be treated for purposes of subsection (a) as in7 cluding the period such warrant or debt was

8 held by the taxpayer, or such security was out9 standing, and

10 ‘‘(C) such stock shall be treated as meeting

11 the requirements of subsection (c) if such re12 quirements were met at the time the warrant,

13 debt, or security was acquired by the taxpayer.

14 ‘‘(2) ISSUE PRICE FOR CONVERTIBLE DEBT OR

15 SECURITY.—For purposes of subsection (c)(1), in

16 the case of a debt instrument converted to stock, or

17 stock issued in exchange for securities in a trans18 action described in section 368, such stock shall be

19 treated as issued for an amount equal to the sum

20 of—

21 ‘‘(A) the principal amount of the debt or

22 security as of the time of the conversion or ex23 change, and

24 ‘‘(B) accrued but unpaid interest on such

25 debt or security.
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1 ‘‘(3) APPLICABLE WARRANT.—For purposes of

2 this subsection, the term ‘applicable warrant’ means

3 a warrant which—

4 ‘‘(A) was granted in connection with the

5 performance of services for the corporation

6 granting it (or its parent or subsidiary), and

7 ‘‘(B) by its terms is not transferable other

8 than by will or the laws of descent or distribu9 tion.

10 ‘‘(g) SPECIAL RULE FOR OPTIONS.—

11 ‘‘(1) IN GENERAL.—For purposes of this sec12 tion, in the case of stock which is acquired by the

13 taxpayer through the exercise of an applicable op14 tion—

15 ‘‘(A) such stock shall be treated as ac16 quired by the taxpayer at original issue,

17 ‘‘(B) such stock shall be treated as having

18 been held during the period such option was

19 held by the taxpayer, and

20 ‘‘(C) such stock shall be treated as meeting

21 the requirements of subsection (c) if such re22 quirements were met at the time the option was

23 granted.
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1 ‘‘(2) APPLICABLE OPTION.—For purposes of

2 this subsection, the term ‘applicable option’ means

3 an option which—

4 ‘‘(A) was granted in connection with the

5 performance of services for the corporation

6 granting it (or its parent or subsidiary), and

7 ‘‘(B) by its terms is not transferable other

8 than by will or the laws of descent or distribu9 tion.

10 ‘‘(h) TREATMENT OF PASS-THRU ENTITIES.—

11 ‘‘(1) IN GENERAL.—Any amount included in in12 come by reason of holding an interest in a pass-thru

13 entity shall be treated as gain described in sub14 section (a) if such amount meets the requirements

15 of paragraph (2).

16 ‘‘(2) REQUIREMENTS.—An amount meets the

17 requirements of this paragraph if—

18 ‘‘(A) such amount is attributable to gain

19 on the sale or exchange by the pass-thru entity

20 of stock which is qualified small business stock

21 in the hands of such entity and which was held

22 by such entity for more than 5 years, and

23 ‘‘(B) such amount is includible in the gross

24 income of the taxpayer by reason of the holding

25 of an interest in such entity which was held by
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1 the taxpayer on the date on which such pass2 thru entity acquired such stock and at all times

3 thereafter before the disposition of such stock

4 by such pass-thru entity.

5 ‘‘(3) LIMITATION BASED ON INTEREST ORIGI6 NALLY HELD BY TAXPAYER.—Paragraph (1) shall

7 not apply to any amount to the extent such amount

8 exceeds the amount to which paragraph (1) would

9 have applied if such amount were determined by ref10 erence to the interest the taxpayer held in the pass11 thru entity on the date the qualified small business

12 stock was acquired.

13 ‘‘(4) PASS-THRU ENTITY.—For purposes of this

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

15 ‘‘(A) any partnership,

16 ‘‘(B) any S corporation,

17 ‘‘(C) any regulated investment company,

18 and

19 ‘‘(D) any common trust fund.

20 ‘‘(i) CERTAIN TAX-FREE AND OTHER TRANSFERS.—

21 For purposes of this section—

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

23 stock to which this subsection applies, the transferee

24 shall be treated as—
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1 ‘‘(A) having acquired such stock in the

2 same manner as the transferor, and

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

4 continuous period immediately preceding the

5 transfer during which it was held (or treated as

6 held under this subsection) by the transferor.

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

10 ‘‘(A) by gift,

11 ‘‘(B) at death,

12 ‘‘(C) subject to the limitation of subsection

13 (h)(3), from a partnership to a partner of stock

14 with respect to which the requirements of sub15 section (h) are met at the time of the transfer

16 (without regard to the 5-year holding require17 ment),

18 ‘‘(D) to the extent that the basis of the

19 property in the hands of the transferee is deter20 mined by reference to the basis of the property

21 in the hands of the transferor by reason of sec22 tion 334(b), but only if requirements similar to

23 the requirements of subsection (h) are met with

24 respect to the stock,
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1 ‘‘(E) of qualified small business stock for

2 other qualified small business stock in a trans3 action described in section 351 or a reorganiza4 tion described in section 368, or

5 ‘‘(F) as a stock distribution of qualified

6 small business stock in a transaction not sub7 ject to tax under section 305.

8 ‘‘(3) CERTAIN RULES MADE APPLICABLE.—In

9 the case of distributions or transactions described in

10 subparagraph (E) or (F) of section 368(a)(1), rules

11 similar to the rules of section 1244(d)(2) shall apply

12 for purposes of this section.

13 ‘‘(4) INCORPORATIONS AND REORGANIZATIONS

14 INVOLVING NONQUALIFIED STOCK.—

15 ‘‘(A) IN GENERAL.—In the case of a trans16 action described in section 351 or a reorganiza17 tion described in section 368, if qualified small

18 business stock is transferred for other stock,

19 such transfer shall be treated as a transfer to

20 which this subsection applies solely with respect

21 to the person receiving such other stock.

22 ‘‘(B) LIMITATION.—This section shall

23 apply to the sale or exchange of stock treated

24 as qualified small business stock by reason of

25 subparagraph (A) only to the extent of the gain
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1 (if any) which would have been recognized at

2 the time of the transfer described in subpara3 graph (A) if section 351 or 368 had not applied

4 at such time.

5 ‘‘(C) SUCCESSIVE APPLICATION.—For pur6 poses of this paragraph, stock treated as quali7 fied small business stock under subparagraph

8 (A) shall be so treated for subsequent trans9 actions or reorganizations, except that the limi10 tation of subparagraph (B) shall be applied as

11 of the time of the first transfer to which sub12 paragraph (A) applied.

13 ‘‘(D) CONTROL TEST.—Except in the case

14 of a transaction described in section 368, this

15 paragraph shall apply only if, immediately after

16 the transaction, the corporation issuing the

17 stock owns directly or indirectly stock rep18 resenting control (within the meaning of section

19 368(c)) of the corporation whose stock was

20 transferred.

21 ‘‘(j) BASIS RULES.—

22 ‘‘(1) STOCK EXCHANGED FOR PROPERTY.—For

23 purposes of this section, in the case where the tax24 payer transfers property (other than money or
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1 stock) to a corporation in exchange for stock in such

2 corporation—

3 ‘‘(A) such stock shall be treated as having

4 been acquired by the taxpayer on the date of

5 such exchange, and

6 ‘‘(B) the basis of such stock in the hands

7 of the taxpayer shall in no event be less than

8 the fair market value of the property ex9 changed.

10 Notwithstanding subparagraph (B), for purposes of

11 subsection (c)(1), the adjusted basis to the corpora12 tion of the property received shall be the fair market

13 value of such property at the time of the determina14 tion.

15 ‘‘(2) BASIS OF S CORPORATION STOCK.—For

16 purposes of determining the amount of gain to which

17 this section applies, the adjusted basis of stock in an

18 S corporation shall in no event be less than its ad19 justed basis determined without regard to any ad20 justment to the basis of such stock under section

21 1367.

22 ‘‘(k) APPLICATION OF TAX INCENTIVE TO CURRENT

23 STOCK HOLDINGS OF INVESTORS.—

24 ‘‘(1) IN GENERAL.—If—
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1 ‘‘(A) a taxpayer holds any stock on Decem2 ber 31, 1992, which, at the time it was issued,

3 would have been treated as qualified small busi4 ness stock if such determination had been made

5 without regard to the time such stock was is6 sued, and

7 ‘‘(B) the value of such stock on December

8 31, 1992 exceeds its adjusted basis,

9 the taxpayer may elect to treat such stock as having

10 been sold on such date for an amount equal to its

11 value on such date (and as having been reacquired

12 on such date for an amount equal to such value).

13 The gain attributable to such sale shall be treated

14 as realized and recognized or accrued (and the hold15 ing period of the reacquired stock shall be treated as

16 beginning) on December 31, 1992. For purposes of

17 applying this section, the requirement of subsection

18 (b)(1) that the stock must have been issued on or

19 after January 1, 1993, shall not apply.

20 ‘‘(2) ELECTION.—An election under paragraph

21 (1) with respect to any stock shall be made in such

22 manner as the Secretary may prescribe. Such an

23 election, once made with respect to any stock, shall

24 be irrevocable.
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1 ‘‘(l) 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 split5 ups or otherwise.’’

6 (b) MAXIMUM 14 PERCENT TAX RATE.—

7 (1) INDIVIDUALS.—Section 1(h) is amended to

8 read as follows:

9 ‘‘(h) MAXIMUM CAPITAL GAINS RATE.—

10 ‘‘(1) IN GENERAL.—If a taxpayer has a net

11 capital gain for any taxable year, then the tax im12 posed by this section shall not exceed the sum of—

13 ‘‘(A) a tax computed at the rates and in

14 the same manner as if this subsection had not

15 been enacted on the greater of—

16 ‘‘(i) taxable income reduced by the

17 amount of the net capital gain, or

18 ‘‘(ii) the amount of taxable income

19 taxed at a rate below 28 percent, plus

20 ‘‘(B) a tax of 28 percent of the amount of

21 taxable income in excess of the amount deter22 mined under subparagraph (A).

23 ‘‘(2) SPECIAL RULE WHERE TAXPAYER HAS

24 QUALIFIED SMALL BUSINESS NET CAPITAL OR SEED

25 CAPITAL GAIN.—
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1 ‘‘(A) IN GENERAL.—If a taxpayer has gain

2 for any taxable year attributable to the sale or

3 exchange of any qualified small business stock

4 held for more than 5 years, then the tax im5 posed by this section shall not exceed the lesser

6 of—

7 ‘‘(i) the amount determined under

8 paragraph (1), or

9 ‘‘(ii) the sum of—

10 ‘‘(I) the amount determined

11 under paragraph (1) without taking

12 into account gain or loss from quali13 fied small business stock held for

14 more than 5 years for purposes of

15 subparagraphs (A) and (B) thereof,

16 plus

17 ‘‘(II) 14 percent of the net cap18 ital gain determined by only taking

19 into account such gain or loss.

20 ‘‘(B) DEFINITION.—For purposes of this

21 paragraph, the term ‘qualified small business

22 stock’ has the meaning given such term by sec23 tion 1202.’’

24 (2) CORPORATIONS.—Section 1201(a) is

25 amended—
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1 (A) by inserting ‘‘or the corporation has

2 gain from the sale or exchange of any qualified

3 small business stock held for more than 5

4 years’’ before ‘‘, then’’, and

5 (B) by striking paragraph (2) and insert6 ing:

7 ‘‘(2) a tax equal to the sum of—

8 ‘‘(A) 34 percent of the sum of the net cap9 ital gain, determined by not taking into account

10 any gain or loss from the sale or exchange of

11 any qualified small business stock held for more

12 than 5 years, plus

13 ‘‘(B) 17 percent of the net capital gain de14 termined by only taking into account such gain

15 or loss.

16 For purposes of this subsection, the term ‘qualified small

17 business stock’ has the meaning given such term by sec18 tion 1202.’’

19 (c) MINIMUM TAX TREATMENT.—

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

21 (relating to items of tax preference) is amended by

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

24 ‘‘(8) EXCLUSION FOR GAINS ON SALE OF VEN25 TURE CAPITAL SMALL BUSINESS STOCK.—An
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1 amount equal to the amount excluded from gross in2 come for the taxable year under section

3 1202(a)(1)(A) (relating to exclusion of gain on small

4 business stock other than seed capital stock).’’

5 (2) CONFORMING AMENDMENT.—Subclause (II)

6 of section 53(d)(2)(B)(ii) is amended by striking

7 ‘‘and (6)’’ and inserting ‘‘(6), and (8)’’.

8 (d) LOSSES ON SMALL BUSINESS STOCK.—Section

9 1244(c)(3)(A) is amended by striking ‘‘$1,000,000’’ and

10 inserting ‘‘$5,000,000 (adjusted at the same time and

11 manner as under section 1202(c)(4))’’.

12 (e) CONFORMING AMENDMENTS.—

13 (1)(A) Section 172(d)(2) (relating to modifica14 tions with respect to net operating loss deduction) is

15 amended to read as follows:

16 ‘‘(2) CAPITAL GAINS AND LOSSES OF TAX17 PAYERS OTHER THAN CORPORATIONS.—In the case

18 of a taxpayer other than a corporation—

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

20 losses from sales or exchanges of capital assets

21 shall not exceed the amount includable on ac22 count of gains from sales or exchanges of cap23 ital assets; and

24 ‘‘(B) the exclusion provided by section

25 1202 shall not be allowed.’’
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•HR 902 IH

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

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

3 (1)’’.

4 (2) Paragraph (4) of section 642(c) is amended

5 to read as follows:

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

7 amount otherwise allowable as a deduction under

8 this subsection consists of gain described in section

9 1202(a), proper adjustment shall be made for any

10 exclusion allowable to the estate or trust under sec11 tion 1202. In the case of a trust, the deduction al12 lowed by this subsection shall be subject to section

13 681 (relating to unrelated business income).’’

14 (3) Paragraph (3) of section 643(a) is amended

15 by adding at the end thereof the following new sen16 tence: ‘‘The exclusion under section 1202 shall not

17 be taken into account.’’

18 (4) Paragraph (4) of section 691(c) is amended

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

20 1202, and 1211, and for purposes of section

21 57(a)(8)’’.

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

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

24 and losses shall be determined without regard to sec25 tion 1202 and’’ after ‘‘except that’’.
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•HR 902 IH

1 (6) The table of sections for part I of sub2 chapter P of chapter 1 is amended by adding after

3 the item relating to section 1201 the following new

4 item:

‘‘Sec. 1202. Exclusion for gain from certain small business

stock.’’

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

6 this section shall apply to stock issued (or treated as is7 sued) on or after January 1, 1993.

Æ

HR 902 IH——2