II

104TH CONGRESS

1ST SESSION S. 959

To amend the Internal Revenue Code of 1986 to encourage capital formation

through reductions in taxes on capital gains, and for other purposes.

IN THE SENATE OF THE UNITED STATES

JUNE 22 (legislative day, JUNE 19), 1995

Mr. HATCH (for himself, Mr. LIEBERMAN, and Mr. FAIRCLOTH) introduced

the following bill; which was read twice and referred to the Committee

on Finance

A BILL

To amend the Internal Revenue Code of 1986 to encourage

capital formation through reductions in taxes on capital

gains, and for other purposes.

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 ‘‘Capital Formation Act of 1995’’.

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 TITLE I—CAPITAL GAINS

4 REFORM

5 Subtitle A—Capital Gains Deduc6 tion for Taxpayers Other Than

7 Corporations

8 SEC. 101. CAPITAL GAINS DEDUCTION.

9 (a) IN GENERAL.—Part I of subchapter P of chapter

10 1 (relating to treatment of capital gains) is amended by

11 redesignating section 1202 as section 1203 and by insert12 ing after section 1201 the following new section:

13 ‘‘SEC. 1202. CAPITAL GAINS DEDUCTION.

14 ‘‘(a) GENERAL RULE.—If for any taxable year a tax15 payer other than a corporation has a net capital gain, 50

16 percent of such gain shall be a deduction from gross

17 income.

18 ‘‘(b) ESTATES AND TRUSTS.—In the case of an es19 tate or trust, the deduction shall be computed by excluding

20 the portion (if any) of the gains for the taxable year from

21 sales or exchanges of capital assets which, under sections

22 652 and 662 (relating to inclusions of amounts in gross

23 income of beneficiaries of trusts), is includible by the in24 come beneficiaries as gain derived from the sale or ex25 change of capital assets.
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1 ‘‘(c) COORDINATION WITH TREATMENT OF CAPITAL

2 GAIN UNDER LIMITATION ON INVESTMENT INTEREST.—

3 For purposes of this section, the net capital gain for any

4 taxable year shall be reduced (but not below zero) by the

5 amount which the taxpayer takes into account as invest6 ment income under section 163(d)(4)(B)(iii).

7 ‘‘(d) TRANSITIONAL RULE.—

8 ‘‘(1) IN GENERAL.—In the case of a taxable

9 year which includes January 1, 1995—

10 ‘‘(A) the amount taken into account as the

11 net capital gain under subsection (a) shall not

12 exceed the net capital gain determined by only

13 taking into account gains and losses properly

14 taken into account for the portion of the tax15 able year on or after January 1, 1995, and

16 ‘‘(B) if the net capital gain for such year

17 exceeds the amount taken into account under

18 subsection (a), the rate of tax imposed by sec19 tion 1 on such excess shall not exceed 28 per20 cent.

21 ‘‘(2) SPECIAL RULES FOR PASS-THRU ENTI22 TIES.—

23 ‘‘(A) IN GENERAL.—In applying paragraph

24 (1) with respect to any pass-thru entity, the de25 termination of when gains and losses are prop-
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1 erly taken into account shall be made at the en2 tity level.

3 ‘‘(B) PASS-THRU ENTITY DEFINED.—For

4 purposes of subparagraph (A), the term ‘pass5 thru entity’ means—

6 ‘‘(i) a regulated investment company,

7 ‘‘(ii) a real estate investment trust,

8 ‘‘(iii) an S corporation,

9 ‘‘(iv) a partnership,

10 ‘‘(v) an estate or trust, and

11 ‘‘(vi) a common trust fund.’’.

12 (b) DEDUCTION ALLOWABLE IN COMPUTING AD13 JUSTED GROSS INCOME.—Subsection (a) of section 62 is

14 amended by inserting after paragraph (15) the following

15 new paragraph:

16 ‘‘(16) LONG-TERM CAPITAL GAINS.—The de17 duction allowed by section 1202.’’.

18 (c) TECHNICAL AND CONFORMING CHANGES.—

19 (1) Section 1 is amended by striking subsection

20 (h).

21 (2) Paragraph (1) of section 170(e) is amended

22 by striking ‘‘the amount of gain’’ in the material fol23 lowing subparagraph (B)(ii) and inserting ‘‘50 percent (25 24 ⁄35 in the case of a corporation) of the

25 amount of gain’’.
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1 (3) Subparagraph (B) of section 172(d)(2) is

2 amended to read as follows:

3 ‘‘(B) the deduction under section 1202 and

4 the exclusion under section 1203 shall not be

5 allowed.’’.

6 (4) The last sentence of section 453A(c)(3) is

7 amended by striking all that follows ‘‘long-term cap8 ital gain,’’ and inserting ‘‘the maximum rate on net

9 capital gain under section 1201 or the deduction

10 under section 1202 (whichever is appropriate) shall

11 be taken into account.’’.

12 (5) Paragraph (4) of section 642(c) is amended

13 to read as follows:

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

15 amount otherwise allowable as a deduction under

16 this subsection consists of gain from the sale or ex17 change of capital assets held for more than 1 year

18 or gain described in section 1203(a), proper adjust19 ment shall be made for any deduction allowable to

20 the estate or trust under section 1202 (relating to

21 deduction for excess of capital gains over capital

22 losses) or for the exclusion allowable to the estate or

23 trust under section 1203 (relating to exclusion for

24 gain from certain small business stock). In the case

25 of a trust, the deduction allowed by this subsection
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1 shall be subject to section 681 (relating to unrelated

2 business income).’’.

3 (6) The last sentence of section 643(a)(3) is

4 amended to read as follows: ‘‘The deduction under

5 section 1202 (relating to deduction of excess of cap6 ital gains over capital losses) and the exclusion

7 under section 1203 (relating to exclusion for gain

8 from certain small business stock) shall not be taken

9 into account.’’.

10 (7) Subparagraph (C) of section 643(a)(6) is

11 amended by inserting ‘‘(i)’’ before ‘‘there shall’’ and

12 by inserting before the period ‘‘, and (ii) the deduc13 tion under section 1202 (relating to capital gains de14 duction) and the exclusion under section 1203 (re15 lating to exclusion for gain from certain small busi16 ness stock) shall not be taken into account’’.

17 (8) Paragraph (4) of section 691(c) is amended

18 by striking ‘‘sections 1(h), 1201, 1202, and 1211’’

19 and inserting ‘‘sections 1201, 1202, 1203, and

20 1211’’.

21 (9) The second sentence of section 871(a)(2) is

22 amended by inserting ‘‘or 1203’’ after ‘‘section

23 1202’’.

24 (10)(A) Paragraph (2) of section 904(b) is

25 amended by striking subparagraph (A), by redesig-
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1 nating subparagraph (B) as subparagraph (A), and

2 by inserting after subparagraph (A) (as so redesig3 nated) the following new subparagraph:

4 ‘‘(B) OTHER TAXPAYERS.—In the case of

5 a taxpayer other than a corporation, taxable in6 come from sources outside the United States

7 shall include gain from the sale or exchange of

8 capital assets only to the extent of foreign

9 source capital gain net income.’’.

10 (B) Subparagraph (A) of section 904(b)(2), as

11 so redesignated, is amended—

12 (i) by striking all that precedes clause (i)

13 and inserting the following:

14 ‘‘(A) CORPORATIONS.—In the case of a

15 corporation—’’, and

16 (ii) by striking in clause (i) ‘‘in lieu of ap17 plying subparagraph (A),’’.

18 (C) Paragraph (3) of section 904(b) is amended

19 by striking subparagraphs (D) and (E) and inserting

20 the following new subparagraph:

21 ‘‘(D) RATE DIFFERENTIAL PORTION.—The

22 rate differential portion of foreign source net

23 capital gain, net capital gain, or the excess of

24 net capital gain from sources within the United

25 States over net capital gain, as the case may
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1 be, is the same proportion of such amount as

2 the excess of the highest rate of tax specified in

3 section 11(b) over the alternative rate of tax

4 under section 1201(a) bears to the highest rate

5 of tax specified in section 11(b).’’.

6 (D) Clause (v) of section 593(b)(2)(D) is

7 amended—

8 (i) by striking ‘‘if there is a capital gain

9 rate differential (as defined in section

10 904(b)(3)(D)) for the taxable year,’’, and

11 (ii) by striking ‘‘section 904(b)(3)(E)’’ and

12 inserting ‘‘section 904(b)(3)(D)’’.

13 (11) The last sentence of section 1044(d) is

14 amended by striking ‘‘1202’’ and inserting ‘‘1203’’.

15 (12)(A) Paragraph (2) of section 1211(b) is

16 amended to read as follows:

17 ‘‘(2) the sum of—

18 ‘‘(A) the excess of the net short-term cap19 ital loss over the net long-term capital gain, and

20 ‘‘(B) one-half of the excess of the net long21 term capital loss over the net short-term capital

22 gain.’’.

23 (B) So much of paragraph (2) of section

24 1212(b) as precedes subparagraph (B) thereof is

25 amended to read as follows:
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1 ‘‘(2) SPECIAL RULES.—

2 ‘‘(A) ADJUSTMENTS.—

3 ‘‘(i) For purposes of determining the

4 excess referred to in paragraph (1)(A),

5 there shall be treated as short-term capital

6 gain in the taxable year an amount equal

7 to the lesser of—

8 ‘‘(I) the amount allowed for the

9 taxable year under paragraph (1) or

10 (2) of section 1211(b), or

11 ‘‘(II) the adjusted taxable income

12 for such taxable year.

13 ‘‘(ii) For purposes of determining the

14 excess referred to in paragraph (1)(B),

15 there shall be treated as short-term capital

16 gain in the taxable year an amount equal

17 to the sum of—

18 ‘‘(I) the amount allowed for the

19 taxable year under paragraph (1) or

20 (2) of section 1211(b) or the adjusted

21 taxable income for such taxable year,

22 whichever is the least, plus

23 ‘‘(II) the excess of the amount

24 described in subclause (I) over the net

25 short-term capital loss (determined
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1 without regard to this subsection) for

2 such year.’’.

3 (C) Subsection (b) of section 1212 is amended

4 by adding at the end the following new paragraph:

5 ‘‘(3) TRANSITIONAL RULE.—In the case of any

6 amount which, under this subsection and section

7 1211(b) (as in effect for taxable years beginning be8 fore January 1, 1996), is treated as a capital loss

9 in the first taxable year beginning after December

10 31, 1995, paragraph (2) and section 1211(b) (as so

11 in effect) shall apply (and paragraph (2) and section

12 1211(b) as in effect for taxable years beginning

13 after December 31, 1995, shall not apply) to the ex14 tent such amount exceeds the total of any capital

15 gain net income (determined without regard to this

16 subsection) for taxable years beginning after Decem17 ber 31, 1995.’’.

18 (13) Paragraph (1) of section 1402(i) is amend19 ed by inserting ‘‘, and the deduction provided by sec20 tion 1202 and the exclusion provided by section

21 1203 shall not apply’’ before the period at the end

22 thereof.

23 (14) Subsection (e) of section 1445 is amend24 ed—
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1 (A) in paragraph (1) by striking ‘‘35 per2 cent (or, to the extent provided in regulations,

3 28 percent)’’ and inserting ‘‘25 percent (or, to

4 the extent provided in regulations, 19.8 per5 cent)’’, and

6 (B) in paragraph (2) by striking ‘‘35 per7 cent’’ and inserting ‘‘25 percent’’.

8 (15)(A) The second sentence of section

9 7518(g)(6)(A) is amended—

10 (i) by striking ‘‘during a taxable year to

11 which section 1(h) or 1201(a) applies’’, and

12 (ii) by striking ‘‘28 percent (34 percent’’

13 and inserting ‘‘19.8 percent (25 percent’’.

14 (B) The second sentence of section

15 607(h)(6)(A) of the Merchant Marine Act, 1936 is

16 amended—

17 (i) by striking ‘‘during a taxable year to

18 which section 1(h) or 1201(a) of such Code ap19 plies’’, and

20 (ii) by striking ‘‘28 percent (34 percent’’

21 and inserting ‘‘19.8 percent (25 percent’’.

22 (d) CLERICAL AMENDMENT.—The table of sections

23 for part I of subchapter P of chapter 1 is amended by

24 striking the item relating to section 1202 and by inserting
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1 after the item relating to section 1201 the following new

2 items:

‘‘Sec. 1202. Capital gains deduction.

‘‘Sec. 1203. 50-percent exclusion for gain from certain small

business stock.’’.

3 (e) EFFECTIVE DATE.—

4 (1) IN GENERAL.—Except as otherwise pro5 vided in this subsection, the amendments made by

6 this section shall apply to taxable years ending after

7 December 31, 1994.

8 (2) CONTRIBUTIONS.—The amendment made

9 by subsection (c)(2) shall apply to contributions on

10 or after January 1, 1995.

11 (3) USE OF LONG-TERM LOSSES.—The amend12 ments made by subsection (c)(12) shall apply to tax13 able years beginning after December 31, 1995.

14 (4) WITHHOLDING.—The amendment made by

15 subsection (c)(14) shall apply only to amounts paid

16 after the date of the enactment of this Act.

17 Subtitle B—Capital Gains

18 Reduction for Corporations

19 SEC. 111. REDUCTION OF ALTERNATIVE CAPITAL GAIN TAX

20 FOR CORPORATIONS.

21 (a) IN GENERAL.—Section 1201 is amended to read

22 as follows:
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1 ‘‘SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.

2 ‘‘(a) GENERAL RULE.—If for any taxable year a cor3 poration has a net capital gain, then, in lieu of the tax

4 imposed by sections 11, 511, and 831 (a) and (b) (which5 ever is applicable), there is hereby imposed a tax (if such

6 tax is less than the tax imposed by such sections) which

7 shall consist of the sum of—

8 ‘‘(1) a tax computed on the taxable income re9 duced by the amount of the net capital gain, at the

10 rates and in the manner as if this subsection had

11 not been enacted, plus

12 ‘‘(2) a tax of 25 percent of the net capital gain.

13 ‘‘(b) TRANSITIONAL RULE.—

14 ‘‘(1) IN GENERAL.—In the case of any taxable

15 year ending after December 31, 1994, and beginning

16 before January 1, 1996, in applying subsection (a),

17 net capital gain for such taxable year shall not ex18 ceed such net capital gain determined by taking into

19 account only gain or loss properly taken into account

20 for the portion of the taxable year after December

21 31, 1994.

22 ‘‘(2) SPECIAL RULE FOR PASS-THRU ENTI23 TIES.—Section 1202(d)(2) shall apply for purposes

24 of paragraph (1).
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1 ‘‘(c) CROSS REFERENCES.—

‘‘For computation of the alternative tax—

‘‘(1) in the case of life insurance companies, see

section 801(a)(2),

‘‘(2) in the case of regulated investment companies and their shareholders, see section 852(b)(3)(A)

and (D), and

‘‘(3) in the case of real estate investment trusts,

see section 857(b)(3)(A).’’.

2 (b) TECHNICAL AMENDMENT.—Clause (iii) of section

3 852(b)(3)(D) is amended by striking ‘‘65 percent’’ and in4 serting ‘‘75 percent’’.

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

6 this section shall apply to taxable years ending after De7 cember 31, 1994.

8 Subtitle C—Capital Loss Deduction

9 Allowed With Respect to Sale or

10 Exchange of Principal Resi11 dence

12 SEC. 121. CAPITAL LOSS DEDUCTION ALLOWED WITH RE13 SPECT TO SALE OR EXCHANGE OF PRINCIPAL

14 RESIDENCE.

15 (a) IN GENERAL.—Subsection (c) of section 165 (re16 lating to limitation on losses of individuals) is amended

17 by striking ‘‘and’’ at the end of paragraph (2), by striking

18 the period at the end of paragraph (3) and inserting ‘‘;

19 and’’, and by adding at the end the following new para20 graph:
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1 ‘‘(4) losses arising from the sale or exchange of

2 the principal residence (within the meaning of sec3 tion 1034) of the taxpayer.’’.

4 (b) EFFECTIVE DATE.—The amendment made by

5 subsection (a) shall apply to sales and exchanges after De6 cember 31, 1994, in taxable years ending after such date.

7 TITLE II—SMALL BUSINESS

8 VENTURE CAPITAL STOCK

9 SEC. 201. MODIFICATIONS TO EXCLUSION OF GAIN ON CER10 TAIN SMALL BUSINESS STOCK.

11 (a) INCREASE IN EXCLUSION PERCENTAGE.—

12 (1) IN GENERAL.—Section 1203(a), as redesig13 nated by section 101, is amended—

14 (A) by striking ‘‘50 percent’’ and inserting

15 ‘‘75 percent’’, and

16 (B) by striking ‘‘50-PERCENT’’ in the

17 heading and inserting ‘‘Partial’’.

18 (2) CONFORMING AMENDMENTS.—

19 (A) Section 1203, as so redesignated, is

20 amended by adding at the end the following

21 new subsection:

22 ‘‘(l) CROSS REFERENCE.—

‘‘For treatment of eligible gain not excluded under

subsection (a), see sections 1201 and 1202.’’.
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1 (B) The heading for section 1203, as so

2 redesignated, is amended by striking ‘‘50-PER3 CENT’’ and inserting ‘‘PARTIAL’’.

4 (C) The table of sections for part I of sub5 chapter P of chapter 1, as amended by section

6 101(d), is amended by striking ‘‘50-percent’’ in

7 the item relating to section 1203 and inserting

8 ‘‘Partial’’.

9 (b) EXCLUSION AVAILABLE TO CORPORATIONS.—

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

11 1203, as redesignated by section 101, is amended by

12 striking ‘‘other than a corporation’’.

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

14 of section 1203, as so redesignated, is amended by

15 adding at the end the following new paragraph:

16 ‘‘(4) STOCK HELD AMONG MEMBERS OF CON17 TROLLED GROUP NOT ELIGIBLE.—Stock of a mem18 ber of a parent-subsidiary controlled group (as de19 fined in subsection (d)(3)) shall not be treated as

20 qualified small business stock while held by another

21 member of such group.’’.

22 (c) REPEAL OF MINIMUM TAX PREFERENCE.—

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

24 is amended by striking paragraph (7).
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1 (2) TECHNICAL AMENDMENT.—Subclause (II)

2 of section 53(d)(1)(B)(ii) is amended by striking ‘‘,

3 (5), and (7)’’ and inserting ‘‘and (5)’’.

4 (d) STOCK OF LARGER BUSINESSES ELIGIBLE FOR

5 EXCLUSION.—

6 (1) Paragraph (1) of section 1203(d), as redes7 ignated by section 101, is amended by striking

8 ‘‘$50,000,000’’ each place it appears and inserting

9 ‘‘$100,000,000’’.

10 (2) Subsection (d) of section 1203, as so redes11 ignated, is amended by adding at the end the follow12 ing new paragraph:

13 ‘‘(4) INFLATION ADJUSTMENT OF ASSET LIMI14 TATION.—In the case of stock issued in any calendar

15 year after 1996, the $100,000,000 amount con16 tained in paragraph (1) shall be increased by an

17 amount equal to—

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

19 ‘‘(B) the cost-of-living adjustment deter20 mined under section 1(f)(3) for the calendar

21 year in which the taxable year begins, deter22 mined by substituting ‘calendar year 1995’ for

23 ‘calendar year 1992’ in subparagraph (B)

24 thereof.
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1 If any amount as adjusted under the preceding sen2 tence is not a multiple of $10,000, such amount

3 shall be rounded to the nearest multiple of

4 $10,000.’’.

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

6 1203, as redesignated by section 101, is amended by strik7 ing subsection (b).

8 (f) OTHER MODIFICATIONS.—

9 (1) REPEAL OF WORKING CAPITAL LIMITA10 TION.—Paragraph (6) of section 1203(e), as redesig11 nated by section 101, is amended—

12 (A) by striking ‘‘2 years’’ in subparagraph

13 (B) and inserting ‘‘5 years’’, and

14 (B) by striking the last sentence.

15 (2) EXCEPTION FROM REDEMPTION RULES

16 WHERE BUSINESS PURPOSE.—Paragraph (3) of sec17 tion 1203(c), as so redesignated, is amended by add18 ing at the end the following new subparagraph:

19 ‘‘(D) WAIVER WHERE BUSINESS PUR20 POSE.—A purchase of stock by the issuing cor21 poration shall be disregarded for purposes of

22 subparagraph (B) if the issuing corporation es23 tablishes that there was a business purpose for

24 such purchase and one of the principal purposes
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1 of the purchase was not to avoid the limitations

2 of this section.’’.

3 (g) QUALIFIED TRADE OR BUSINESS.—Section

4 1203(e)(3), as redesignated by section 101, is amended

5 by inserting ‘‘and’’ at the end of subparagraph (C), by

6 striking ‘‘, and’’ at the end of subparagraph (D) and in7 serting a period, and by striking subparagraph (E).

8 (h) EFFECTIVE DATES.—

9 (1) IN GENERAL.—Except as provided in para10 graph (2), the amendments made by this section

11 shall apply to stock issued after the date of the en12 actment of this Act.

13 (2) SPECIAL RULE.—The amendments made by

14 subsections (a), (c), (e), and (f) shall apply to stock

15 issued after August 10, 1993.

16 SEC. 202. ROLLOVER OF GAIN FROM SALE OF QUALIFIED

17 STOCK.

18 (a) IN GENERAL.—Part III of subchapter O of chap19 ter 1 is amended by adding at the end the following new

20 section:

21 ‘‘SEC. 1045. ROLLOVER OF GAIN FROM QUALIFIED SMALL

22 BUSINESS STOCK TO ANOTHER QUALIFIED

23 SMALL BUSINESS STOCK.

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

25 sale of qualified small business stock with respect to which
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1 the taxpayer elects the application of this section, eligible

2 gain from such sale shall be recognized only to the extent

3 that the amount realized on such sale exceeds—

4 ‘‘(1) the cost of any qualified small business

5 stock purchased by the taxpayer during the 60-day

6 period beginning on the date of such sale, reduced

7 by

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

9 into account under this section.

10 This section shall not apply to any gain which is treated

11 as ordinary income for purposes of this title.

12 ‘‘(b) DEFINITIONS AND SPECIAL RULES.—For pur13 poses of this section—

14 ‘‘(1) QUALIFIED SMALL BUSINESS STOCK.—The

15 term ‘qualified small business stock’ has the mean16 ing given such term by section 1203(c).

17 ‘‘(2) ELIGIBLE GAIN.—The term ‘eligible gain’

18 means any gain from the sale or exchange of quali19 fied small business stock held for more than 5 years.

20 ‘‘(3) PURCHASE.—A taxpayer shall be treated

21 as having purchased any property if, but for para22 graph (4), the unadjusted basis of such property in

23 the hands of the taxpayer would be its cost (within

24 the meaning of section 1012).’’
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1 ‘‘(4) BASIS ADJUSTMENTS.—If gain from any

2 sale is not recognized by reason of subsection (a),

3 such gain shall be applied to reduce (in the order ac4 quired) the basis for determining gain or loss of any

5 qualified small business stock which is purchased by

6 the taxpayer during the 60-day period described in

7 subsection (a).

8 ‘‘(c) SPECIAL RULES FOR TREATMENT OF REPLACE9 MENT STOCK.—

10 ‘‘(1) HOLDING PERIOD FOR ACCRUED GAIN.—

11 For purposes of this chapter, gain from the disposi12 tion of any replacement qualified small business

13 stock shall be treated as gain from the sale or ex14 change of qualified small business stock held more

15 than 5 years to the extent that the amount of such

16 gain does not exceed the amount of the reduction in

17 the basis of such stock by reason of subsection

18 (b)(4).

19 ‘‘(2) TACKING OF HOLDING PERIOD FOR PUR20 POSES OF DEFERRAL.—Solely for purposes of apply21 ing this section, if any replacement qualified small

22 business stock is disposed of before the taxpayer has

23 held such stock for more than 5 years, gain from

24 such stock shall be treated eligible gain for purposes

25 of subsection (a).
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1 ‘‘(3) REPLACEMENT QUALIFIED SMALL BUSI2 NESS STOCK.—For purposes of this subsection, the

3 term ‘replacement qualified small business stock’

4 means any qualified small business stock the basis

5 of which was reduced under subsection (b)(4).’’.

6 (b) CONFORMING AMENDMENTS.—

7 (1) Section 1016(a)(23) is amended—

8 (A) by striking ‘‘or 1044’’ and inserting ‘‘,

9 1044, or 1045’’, and

10 (B) by striking ‘‘or 1044(d)’’ and inserting

11 ‘‘, 1044(d), or 1045(b)(4)’’.

12 (2) The table of sections for part III of sub13 chapter O of chapter 1 is amended by adding at the

14 end the following new item:

‘‘Sec. 1045. Rollover of gain from qualified small business stock

to another qualified small business stock.’’.

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

16 this section shall apply to stock sold or exchanged after

17 the date of the enactment of this Act.

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