I

103D CONGRESS

1ST SESSION H. R. 3643

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

to encourage corporations to provide financing and management support

services to enable welfare recipients to leave welfare and operate small

business concerns.

IN THE HOUSE OF REPRESENTATIVES

NOVEMBER 22, 1993

Mr. FRANKS of Connecticut 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 to encourage corporations to provide financing and management support services to enable welfare recipients to leave welfare and operate small business concerns.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Welfare Opportunities

5 and Pay Back Act’’.
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1 SEC. 2. TAX INCENTIVES FOR WELFARE OPPORTUNITY

2 FINANCING SUBSIDIARIES.

3 (a) GENERAL RULE.—Part VIII of subchapter B of

4 chapter 1 of the Internal Revenue Code of 1986 (relating

5 to special deductions for corporations) is amended by add6 ing at the end thereof the following new subpart:

7 ‘‘Subpart B—Tax Incentives for Welfare Financing

8 Subsidiaries

‘‘Sec. 251. Deduction for equity contributions to welfare opportunity financing subsidiaries.

‘‘Sec. 252. Overall limitation on deductions.

‘‘Sec. 253. Definitions and special rules.

9 ‘‘SEC. 251. DEDUCTION FOR EQUITY CONTRIBUTIONS TO

10 WELFARE OPPORTUNITY FINANCING SUB11 SIDIARIES.

12 ‘‘(a) GENERAL RULE.—In the case of a qualified con13 tributing corporation, there shall be allowed as a deduction

14 an amount equal to the equity contributions made by such

15 corporation to a welfare opportunity financing subsidiary

16 of such corporation. Such deduction shall be allowed for

17 the taxable year of the contributing corporation in which

18 the equity contribution is used by the subsidiary in making

19 qualified business loans.

20 ‘‘(b) LIMITATION.—The amount allowed as a deduc21 tion under subsection (a) to any qualified contributing cor22 poration for any taxable year shall not exceed the lesser

23 of—
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1 ‘‘(1) $10,000,000, or

2 ‘‘(2) the portion of the program limitation allo3 cated to such corporation under section 252 to the

4 extent the amount so allocated was not used in a

5 prior taxable year.

6 ‘‘(c) EQUITY CONTRIBUTION.—For purposes of this

7 section, the term ‘equity contribution’ means—

8 ‘‘(1) any amount paid in cash for stock in a

9 welfare opportunity financing subsidiary of the cor10 poration if such stock is acquired at its original issu11 ance, and

12 ‘‘(2) any contribution in cash to the capital of

13 a welfare opportunity financing subsidiary of the

14 corporation.

15 ‘‘(d) RECAPTURE PROVISIONS.—

16 ‘‘(1) BASIS ADJUSTMENT.—The adjusted basis

17 of any stock held by a corporation in a welfare op18 portunity financing subsidiary of such corporation

19 shall be reduced by the amount allowed as a deduc20 tion under subsection (a) in connection with the ac21 quisition of such stock. No increase in the basis of

22 any such stock shall be made on account of any con23 tribution to the capital of such subsidiary for which

24 a deduction is allowed under subsection (a).
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1 ‘‘(2) ORDINARY INCOME RECAPTURE.—Any

2 gain recognized on the sale or other disposition by

3 a corporation of stock in a welfare opportunity fi4 nancing subsidiary of such corporation shall be

5 treated as ordinary income.

6 ‘‘(3) CERTAIN EVENTS TREATED AS DISPOSI7 TIONS.—If any welfare opportunity financing sub8 sidiary of a corporation ceases to qualify as a wel9 fare opportunity financing subsidiary with respect to

10 such corporation, such corporation shall recognize

11 gain as if it sold its stock in such subsidiary for an

12 amount equal to its fair market value immediately

13 before such cessation.

14 ‘‘SEC. 252. OVERALL LIMITATION ON DEDUCTIONS.

15 ‘‘(a) GENERAL RULE.—The Secretary of Health and

16 Human Services shall allocate the program limitation

17 among the qualified contributing corporations submitting

18 applications to such Secretary for allocations under this

19 section.

20 ‘‘(b) PROGRAM LIMITATION.—The program limita21 tion is $250,000,000.

22 ‘‘(c) METHOD OF MAKING ALLOCATIONS.—The Sec23 retary of Health and Human Services shall prescribe regu24 lations setting forth the procedures for making allocations

25 under this section. Such procedures shall—
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1 ‘‘(1) include the criteria used in selecting the

2 corporations to which the allocations are made, and

3 ‘‘(2) be designed to ensure a reasonable avail4 ability, on a geographical basis, of the benefits of

5 this subpart.

6 ‘‘SEC. 253. DEFINITIONS AND SPECIAL RULES.

7 ‘‘(a) QUALIFIED CONTRIBUTING CORPORATION.—

8 For purposes of this subpart, the term ‘qualified contrib9 uting corporation’ means any domestic corporation which

10 is not a small business concern; except that such term

11 shall not include any corporation predominantly engaged

12 in a banking, insurance, finance, or similar business.

13 ‘‘(b) WELFARE OPPORTUNITY FINANCING SUBSIDI14 ARY.—For purposes of this subpart, the term ‘welfare fi15 nancing subsidiary’ means any domestic corporation—

16 ‘‘(1) all the stock of which (exclusive of direc17 tors’ qualifying shares) is held directly by one quali18 fied contributing corporation, and

19 ‘‘(2) all the activities of which consist of—

20 ‘‘(A) making qualified business loans,

21 ‘‘(B) providing management, administra22 tive, consulting, and other support services to

23 qualified small business concerns to which such

24 corporation has made qualified business loans,

25 and
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1 ‘‘(C) making temporary investments (for a

2 period not exceeding 6 months) of amounts

3 being held for purposes of making qualified

4 business loans.

5 ‘‘(c) QUALIFIED BUSINESS LOANS.—For purposes of

6 this subpart, the term ‘qualified business loan’ means any

7 loan made by a welfare opportunity financing subsidiary

8 if—

9 ‘‘(1) such loan is made to a qualified small

10 business concern and such concern is not related

11 (within the meaning of section 267(b) or 707(b)) to

12 such subsidiary or the qualified contributing cor13 poration holding such subsidiary,

14 ‘‘(2) the proceeds of such loan are used by such

15 qualified small business concern in the active con16 duct of a trade or business,

17 ‘‘(3) the welfare opportunity financing subsidi18 ary provides (without charge) substantial qualified

19 services to the qualified small business concern in

20 connection with such loan, except that such small

21 business concern may waive the requirements of this

22 paragraph, and

23 ‘‘(4) the interest on such loan does not ex24 ceed—
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1 ‘‘(A) in the case of a secured loan, the

2 prime rate plus 3 percentage points, or

3 ‘‘(B) in the case of any other loan, the

4 prime rate plus 8 percentage points.

5 ‘‘(d) QUALIFIED SMALL BUSINESS CONCERN.—For

6 purposes of this subpart, the term ‘qualified small busi7 ness concern’ means any person if—

8 ‘‘(1) such person is a small business concern

9 within the meaning of section 3 of the Small Busi10 ness Act (15 U.S.C. 632), and

11 ‘‘(2) such person is wholly owned by 1 qualified

12 individual.

13 ‘‘(e) QUALIFIED INDIVIDUAL.—For purposes of this

14 subpart, the term ‘qualified individual’ means an individ15 ual who—

16 ‘‘(1) has become ineligible to receive aid to fam17 ilies with dependent children under a State plan ap18 proved under part A of title IV of the Social Secu19 rity Act, or supplemental security income benefits

20 under title XVI of such Act, by reason of the receipt

21 of a qualified business loan, and

22 ‘‘(2) as a condition of receiving the loan, has

23 agreed to repay (in accordance with section 6306) to

24 the Federal Government an amount equal to the

25 total amount of benefits described in paragraph (1)
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1 received by the individual during the most recent 24

2 months (whether or not consecutive) during which

3 such benefits were so received.

4 ‘‘(f) OTHER DEFINITIONS AND SPECIAL RULES.—

5 ‘‘(1) SUBSTANTIAL QUALIFIED SERVICES.—For

6 purposes of this subpart, the term ‘substantial quali7 fied services’ means, with respect to any loan made

8 by a welfare opportunity financing subsidiary, any

9 management, administrative, consulting, or other

10 support services provided to the borrower under such

11 loan, but only if the amount of such services, to be

12 provided during the first year such loan is outstand13 ing involve at least 1,000 man-hours for each

14 $100,000 principal amount of such loan.

15 ‘‘(2) PRIME RATE.—For purposes of this sub16 part—

17 ‘‘(A) IN GENERAL.—The term ‘prime rate’

18 means the average predominant prime rate

19 quoted by commercial banks to large busi20 nesses, as determined by the Board of Gov21 ernors of the Federal Reserve System.

22 ‘‘(B) WHEN DETERMINATION MADE.—

23 ‘‘(i) Except as provided in clause (ii),

24 the determination of the prime rate shall

25 be made as of the time the loan is made.
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1 ‘‘(ii) If the loan is a variable rate

2 loan, the prime rate taken into account

3 with respect to any change in rate shall be

4 determined as of the time such change

5 takes effect.

6 ‘‘(3) TREATMENT OF CONTROLLED GROUPS.—

7 Any group of corporations treated as a single em8 ployer under section 51(a) or (b) shall be treated as

9 one corporation for purposes of this subpart.

10 ‘‘(g) EMPLOYEES OF BORROWER MAY BE TAKEN

11 INTO ACCOUNT FOR CERTAIN PURPOSES.—If—

12 ‘‘(1) a qualified contributing corporation has

13 provided financing through a welfare opportunity fi14 nancing subsidiary to any qualified small business

15 concern, and

16 ‘‘(2) such qualified small business concern des17 ignates such subsidiary as its primary lender,

18 such qualified contributing corporation may treat the em19 ployees of such qualified small business concern as its own

20 employees for purposes of determining which such quali21 fied contributing corporation is in compliance with the re22 quirements of any Federal law. A qualified small business

23 concern may designate only 1 welfare opportunity financ24 ing subsidiary is its primary lender for any period.’’
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1 (b) CLERICAL AMENDMENT.—Part VIII of sub2 chapter B of chapter 1 of such Code is amended by insert3 ing after the part heading the following:

‘‘Subpart A. General provisions.

‘‘Subpart B. Tax incentives for welfare opportunity financing subsidiaries.

4 ‘‘Subpart A—General Provisions’’.

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

6 this section shall take effect on the date of the enactment

7 of this Act.

8 SEC. 3. INDIVIDUALS RECEIVING LOANS FROM WELFARE

9 OPPORTUNITY FINANCING SUBSIDIARIES RE10 QUIRED TO REPAY CERTAIN WELFARE BENE11 FITS.

12 (a) IN GENERAL.—Subchapter A of chapter 64 of the

13 Internal Revenue Code of 1986 (relating to collection) is

14 amended by adding at the end thereof the following

15 new section:

16 ‘‘SEC. 6306. COLLECTION OF CERTAIN WELFARE BENEFITS

17 FROM INDIVIDUALS RECEIVING QUALIFIED

18 BUSINESS LOANS.

19 ‘‘(a) IN GENERAL.—Each borrower of a qualified

20 business loan shall make the payments required under this

21 section for each taxable year in the repayment period.

22 ‘‘(b) REQUIRED PAYMENT.—

23 ‘‘(1) IN GENERAL.—The amount required to be

24 paid under this section by any borrower for any tax-
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1 able year in the repayment period shall be the sum

2 of—

3 ‘‘(A) the amount determined by dividing

4 the repayable welfare benefits of such individual

5 which were not repaid under this section as of

6 the close of the preceding taxable year by the

7 number of taxable years remaining in the re8 payment period, plus

9 ‘‘(B) interest on such amount determined

10 at the repayment interest rate.

11 ‘‘(2) LIMITATION BASED ON ADJUSTED GROSS

12 INCOME.—The amount required to be paid under

13 this section for any taxable year shall not exceed 5

14 percent of the taxpayer’s adjusted gross income for

15 such taxable year (determined without regard to this

16 section).

17 ‘‘(c) DEFINITIONS.—For purposes of this section—

18 ‘‘(1) REPAYABLE WELFARE BENEFITS.—The

19 term ‘repayable welfare benefits’ means, with respect

20 to any qualified business loan giving rise to a pay21 ment obligation under this section, the aggregate

22 amount received by the borrower as aid to families

23 with dependent children under a State plan ap24 proved under part A of title IV of the Social Secu25 rity Act or as supplemental security income benefits
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1 under title XVI of such Act during the most recent

2 24 months (whether or not consecutive) during

3 which such benefits were so received before the date

4 such loan was made.

5 ‘‘(2) REPAYMENT PERIOD.—

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

7 subparagraph (B), the term ‘repayment period’

8 means the period determined in accordance with

9 the following table:

‘‘If the aggregate repayable welfare

benefits is— The repayment period

is—

At least But less than

1 3,000 2 taxable years

3,001 7,500 5 taxable years

7,501 15,000 10 taxable years

10 ‘‘(B) EXTENSION OF REPAYMENT PERIOD

11 IF ADJUSTED GROSS INCOME LIMITATION ON

12 REPAYMENT AMOUNT APPLIES.—The number of

13 taxable years in the repayment period shall be

14 increased by 1 taxable year for each taxable

15 year that the required payment under this sec16 tion is limited under subsection (b)(2).

17 ‘‘(3) REPAYMENT INTEREST RATE.—The term

18 ‘repayment interest rate’ means, with respect to any

19 taxable year ending during a calendar year, the aver20 age prime rate as of the close of each month during
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1 the preceding calendar year plus 1.5 percentage

2 points.

3 ‘‘(4) OTHER DEFINITIONS.—The terms ‘quali4 fied business loan’ and ‘prime rate’ have the mean5 ings given such terms by section 253.

6 ‘‘(d) NOTICE TO BORROWER.—

7 ‘‘(1) IN GENERAL.—If the records of the Sec8 retary indicate that a borrower of a qualified busi9 ness loan is required to make a payment under this

10 section for a taxable year ending with or within a

11 calendar year, the Secretary shall, during January

12 of such calendar year, furnish to such borrower no13 tice as to—

14 ‘‘(A) the fact that the records of the Sec15 retary indicate that such borrower is required

16 to make a payment under this section for such

17 taxable year,

18 ‘‘(B) the minimum required payment

19 under this section for such taxable year, and

20 ‘‘(C) the total amount which, if paid by the

21 taxpayer on or before the last date described in

22 subsection (e)(1) for such taxable year, would

23 satisfy such taxpayer’s obligation to make fur24 ther payments of this section.
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1 ‘‘(2) FORM, ETC.—The notice under paragraph

2 (1) shall be in such form as the Secretary may by

3 regulations prescribe and shall be sent by mail to the

4 individual’s last known address or shall be left at the

5 dwelling or usual place of business of such individ6 ual.

7 ‘‘(e) PAYMENT OF AMOUNT OWING.—Any amount to

8 be collected from an individual under this section shall be

9 paid—

10 ‘‘(1) not later than the last date (determined

11 without regard to extensions) prescribed for filing

12 his return of tax imposed by chapter 1 for the tax13 able year ending with or within the calendar year

14 during which the notice under subsection (d) is sent,

15 and

16 ‘‘(2)(A) if such return is filed not later than

17 such date, with such return, or

18 ‘‘(B) in any case not described in subparagraph

19 (A), in such manner as the Secretary may by regula20 tions prescribe.

21 ‘‘(f) FAILURE TO PAY AMOUNT OWING.—If an indi22 vidual fails to pay the full amount required to be paid on

23 or before the last date described in subsection (e)(1), the

24 Secretary shall assess and collect the unpaid amount in

25 the same manner, with the same powers, and subject to
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1 the same limitations applicable to a tax imposed by sub2 title C the collection of which would be jeopardized by

3 delay.

4 ‘‘(g) DECEASED AND PERMANENTLY DISABLED

5 BORROWERS; DISCHARGE BY SECRETARY.—If an individ6 ual who is required to make payments under this section

7 dies or becomes permanently and totally disabled (as de8 termined in accordance with regulations of the Secretary),

9 then the Secretary shall discharge the borrower’s liability

10 for any payment under this section.

11 ‘‘(h) CREDITING OF COLLECTIONS; SPECIAL

12 RULES.—

13 ‘‘(1) CREDITING OF COLLECTIONS.—Amounts

14 collected under this section shall be credited to the

15 governments paying the repayable welfare benefits in

16 proportion to each such government’s share of the

17 aggregate welfare benefits required to be repaid

18 under this section.

19 ‘‘(2) FINALITY OF ASSESSMENT AND COLLEC20 TION.—The first sentence of subsection (b) of sec21 tion 6305 shall apply to assessments and collections

22 under subsection (f) of this section.’’

23 (b) APPLICATION OF ESTIMATED TAX.—Subsection

24 (f) of section 6654 of such Code (relating to failure by

25 individual to pay estimated income tax) is amended by
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1 striking ‘‘minus’’ at the end of paragraph (2) and insert2 ing ‘‘plus’’, by redesignating paragraph (3) as paragraph

3 (4), and by inserting after paragraph (2) the following new

4 paragraph:

5 ‘‘(3) the amount required to be repaid under

6 section 6306 (relating to collection of certain welfare

7 benefits from individuals receiving qualified business

8 loans), minus.’’

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

10 for subchapter A of chapter 64 of such Code is amended

11 by adding at the end thereof the following new item:

‘‘Sec. 6306. Collection of certain welfare benefits from individuals

receiving qualified business loans.’’

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