II 

109TH CONGRESS 

2D SESSION S. 3950 

To amend the Internal Revenue Code of 1986 to allow a credit against 

income tax for qualified equity investments in certain small businesses. 

IN THE SENATE OF THE UNITED STATES 

SEPTEMBER 27, 2006 

Ms. SNOWE (for herself and Mr. KERRY) 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 allow a 

credit against income tax for qualified equity investments 

in certain small businesses. 

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

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Access to Capital for 

5 Entrepreneurs Act of 2006’’. 

6 SEC. 2. EQUITY INVESTMENT IN SMALL BUSINESS TAX 

7 CREDIT. 

8 (a) IN GENERAL.—Subpart D of part IV of sub9 chapter A of chapter 1 of the Internal Revenue Code of 


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1 1986 (relating to business related credits) is amended by 

2 adding at the end the following new section: 

3 ‘‘SEC. 45N. EQUITY INVESTMENT IN SMALL BUSINESS TAX 

4 CREDIT. 

5 ‘‘(a) GENERAL RULE.—For purposes of section 38, 

6 in the case of a qualified investor, the equity investment 

7 in small business tax credit determined under this section 

8 for the taxable year is an amount equal to 25 percent of 

9 the amount of each qualified equity investment made by 

10 the qualified investor during the taxable year. 

11 ‘‘(b) CREDIT AMOUNT.—For purposes of determining 

12 the small business tax credit under subsection (a)— 

13 ‘‘(1) LIMITATION PER QUALIFIED INVESTOR.— 

14 The amount of qualified equity investments made by 

15 the qualified investor during the taxable year shall 

16 not exceed $500,000. 

17 ‘‘(2) LIMITATION PER QUALIFIED SMALL BUSI18 NESS.—The amount of qualified equity investments 

19 made by the qualified investor in a qualified small 

20 business during the taxable year shall not exceed 

21 $250,000. 

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

23 ‘‘(1) QUALIFIED INVESTOR.—The term ‘quali24 fied investor’ means— 


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1 ‘‘(A) an individual who qualifies as an ac2 credited investor under rules and regulations 

3 prescribed by the Commissioner of the Securi4 ties and Exchange Commission, or 

5 ‘‘(B) a partnership with respect to which 

6 all of the partners are individuals who qualify 

7 as accredited investors under rules and regula8 tions prescribed by the Commissioner of the Se9 curities and Exchange Commission. 

10 ‘‘(2) QUALIFIED EQUITY INVESTMENT.—The 

11 term ‘qualified equity investment’ means the trans12 fer of cash or cash equivalents in exchange for stock 

13 or capital interest in a qualified small business. 

14 ‘‘(3) QUALIFIED SMALL BUSINESS.—The term 

15 ‘qualified small business’ means a private small busi16 ness concern (within the meaning of section 3 of the 

17 Small Business Act)— 

18 ‘‘(A) that meets the applicable size stand19 ard (as in effect on January 1, 2005) estab20 lished by the Administrator of the Small Busi21 ness Administration pursuant to subsection 

22 (a)(2) of such section, and 

23 ‘‘(B) has its principal place of business in 

24 the United States. 


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1 For purposes of this section, all members of the 

2 same controlled group of corporations (within the 

3 meaning of section 267(f)) and all persons under 

4 common control (within the meaning of section 

5 52(b)) shall be treated as 1 qualified small business. 

6 ‘‘(d) ACTIVE BUSINESS REQUIREMENT.— 

7 ‘‘(1) IN GENERAL.—Holding stock in a quali8 fied small business shall not be treated as a qualified 

9 equity investment unless, during substantially all of 

10 the qualified investor’s holding period for such stock, 

11 such qualified small business meets the active busi12 ness requirements of paragraph (2). 

13 ‘‘(2) REQUIREMENTS.— 

14 ‘‘(A) IN GENERAL.—For purposes of para15 graph (1), the requirements of this paragraph 

16 are met by a qualified small business for any 

17 period if during such period at least 80 percent 

18 (by value) of the assets of such qualified small 

19 business are used by such qualified small busi20 ness in the active conduct of 1 or more quali21 fied trades or businesses. 

22 ‘‘(B) SPECIAL RULE FOR CERTAIN ACTIVI23 TIES.—For purposes of subparagraph (A), if, in 

24 connection with any future qualified trade or 


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1 business, a qualified small business is engaged 

2 in— 

3 ‘‘(i) start-up activities described in 

4 section 195(c)(1)(A), 

5 ‘‘(ii) activities resulting in the pay6 ment or incurring of expenditures which 

7 may be treated as research and experi8 mental expenditures under section 174, or 

9 ‘‘(iii) activities with respect to in10 house research expenses described in sec11 tion 41(b)(4), 

12 assets used in such activities shall be treated as 

13 used in the active conduct of a qualified trade 

14 or business. Any determination under this sub15 paragraph shall be made without regard to 

16 whether a qualified small business has any 

17 gross income from such activities at the time of 

18 the determination. 

19 ‘‘(C) QUALIFIED TRADE OR BUSINESS.— 

20 For purposes of this paragraph, the term 

21 ‘qualified trade or business’ is as defined in sec22 tion 1202(e)(3). 

23 ‘‘(D) STOCK IN OTHER ENTITIES.— 

24 ‘‘(i) LOOK-THRU IN CASE OF SUBSIDI25 ARIES.—For purposes of this subsection, 


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1 stock and debt in any subsidiary entity 

2 shall be disregarded and the parent quali3 fied small business shall be deemed to own 

4 its ratable share of the subsidiary’s assets, 

5 and to conduct its ratable share of the sub6 sidiary’s activities. 

7 ‘‘(ii) PORTFOLIO STOCK OR SECURI8 TIES.—A qualified small business shall be 

9 treated as failing to meet the requirements 

10 of subparagraph (A) for any period during 

11 which more than 10 percent of the value of 

12 its assets (in excess of liabilities) consists 

13 of stock or securities in other entities 

14 which are not subsidiaries of such qualified 

15 small business other than assets described 

16 in subparagraph (E)). 

17 ‘‘(iii) SUBSIDIARY.—For purposes of 

18 this subparagraph, an entity shall be con19 sidered a subsidiary if the parent owns 

20 more than 50 percent of the combined vot21 ing power of all classes of stock entitled to 

22 vote, or more than 50 percent in value of 

23 all outstanding stock, of such entity. 

24 ‘‘(E) WORKING CAPITAL.—For purposes of 

25 subparagraph (A), any assets which— 


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1 ‘‘(i) are held as a part of the reason2 ably required working capital needs of a 

3 qualified trade or business of the qualified 

4 small business, or 

5 ‘‘(ii) are held for investment and are 

6 reasonably expected to be used within 2 

7 years to finance research and experimen8 tation in a qualified trade or business or 

9 increases in working capital needs of a 

10 qualified trade or business, 

11 shall be treated as used in the active conduct of 

12 a qualified trade or business. For periods after 

13 the qualified small business has been in exist14 ence for at least 2 years, in no event may more 

15 than 50 percent of the assets of the qualified 

16 small business qualify as used in the active con17 duct of a qualified trade or business by reason 

18 of this subparagraph. 

19 ‘‘(F) MAXIMUM REAL ESTATE HOLD20 INGS.—A qualified small business shall not be 

21 treated as meeting the requirements of subpara22 graph (A) for any period during which more 

23 than 10 percent of the total value of its assets 

24 consists of real property which is not used in 

25 the active conduct of a qualified trade or busiVerDate Aug 31 2005 05:47 Sep 28, 2006 Jkt 049200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\S3950.IS S3950

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1 ness. For purposes of the preceding sentence, 

2 the ownership of, dealing in, or renting of real 

3 property shall not be treated as the active con4 duct of a qualified trade or business. 

5 ‘‘(G) COMPUTER SOFTWARE ROYALTIES.— 

6 For purposes of subparagraph (A), rights to 

7 computer software which produces active busi8 ness computer software royalties (within the 

9 meaning of section 543(d)(1)) shall be treated 

10 as an asset used in the active conduct of a 

11 trade or business. 

12 ‘‘(e) CERTAIN PURCHASES BY QUALIFIED INVESTOR

13 OF ITS OWN STOCK.— 

14 ‘‘(1) REDEMPTIONS FROM QUALIFIED INVES15 TOR OR RELATED PERSON.—Stock acquired by the 

16 qualified investor shall not be treated as a qualified 

17 equity investment if, at any time during the 4-year 

18 period beginning on the date 2 years before the 

19 issuance of such stock, the qualified small business 

20 issuing such stock purchased (directly or indirectly) 

21 any of its stock from the qualified investor or from 

22 a person related (within the meaning of section 

23 267(b) or 707(b)) to the qualified investor. 

24 ‘‘(2) SIGNIFICANT REDEMPTIONS.—Stock 

25 issued by a qualified small business to a qualified inVerDate Aug 31 2005 05:47 Sep 28, 2006 Jkt 049200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\S3950.IS S3950

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1 vestor shall not be treated as a qualified equity in2 vestment if, during the 2-year period beginning on 

3 the date 1 year before the issuance of such stock, 

4 such qualified small business made 1 or more pur5 chases of its stock with an aggregate value (as of the 

6 time of the respective purchases) exceeding 5 per7 cent of the aggregate value of all of its stock as of 

8 the beginning of such 2-year period. 

9 ‘‘(3) TREATMENT OF CERTAIN TRANS10 ACTIONS.—If any transaction is treated under sec11 tion 304(a) as a distribution in redemption of the 

12 stock of any qualified small business, for purposes of 

13 subparagraphs (A) and (B), such qualified small 

14 business shall be treated as purchasing an amount 

15 of its stock equal to the amount treated as such a 

16 distribution under section 304(a). 

17 ‘‘(f) SPECIAL RULE FOR RELATED PARTIES.— 

18 ‘‘(1) IN GENERAL.—No credit shall be allowed 

19 under subsection (a) with respect to a qualified eq20 uity investment made by a qualified investor in a 

21 qualified small business that is a related party to the 

22 qualified investor. 

23 ‘‘(2) RELATED PARTY.—For purposes of para24 graph (1), a person is a related party with respect 

25 to another person if such person bears a relationship 


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1 to such other person described in section 267(b) or 

2 707(b), or if such persons are engaged in trades or 

3 businesses under common control (within the mean4 ing of subsections (a) and (b) of section 52). 

5 ‘‘(g) RECAPTURE OF CREDIT IN CERTAIN CASES.— 

6 ‘‘(1) IN GENERAL.—If, at any time during the 

7 3-year period beginning on the date that the quali8 fied equity investment is made by the qualified in9 vestor, there is a recapture event with respect to 

10 such investment, then the tax imposed by this chap11 ter for the taxable year in which such event occurs 

12 shall be increased by the credit recapture amount. 

13 ‘‘(2) CREDIT RECAPTURE AMOUNT.—For pur14 poses of paragraph (1), the credit recapture amount 

15 is an amount equal to the sum of— 

16 ‘‘(A) the aggregate decrease in the credits 

17 allowed to the taxpayer under section 38 for all 

18 prior taxable years which would have resulted if 

19 no credit had been determined under this sec20 tion with respect to such investment, plus 

21 ‘‘(B) interest at the underpayment rate es22 tablished under section 6621 on the amount de23 termined under subparagraph (A) for each 

24 prior taxable year for the period beginning on 


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1 the due date for filing the return for the prior 

2 taxable year involved. 

3 No deduction shall be allowed under this chapter for 

4 interest described in subparagraph (B). 

5 ‘‘(3) RECAPTURE EVENT.—For purposes of 

6 paragraph (1), there is a recapture event with re7 spect to a qualified equity investment if such invest8 ment is sold, transferred, or exchanged by the quali9 fied investor, but only to the extent that such sale, 

10 transfer, or exchange is not the direct result of a 

11 complete or partial liquidation of the qualified small 

12 business in which such qualified equity investment is 

13 made. 

14 ‘‘(4) SPECIAL RULES.— 

15 ‘‘(A) TAX BENEFIT RULE.—The tax for 

16 the taxable year shall be increased under para17 graph (1) only with respect to credits allowed 

18 by reason of this section which were used to re19 duce tax liability. In the case of credits not so 

20 used to reduce tax liability, the carryforwards 

21 and carrybacks under section 39 shall be appro22 priately adjusted. 

23 ‘‘(B) NO CREDITS AGAINST TAX.—Any in24 crease in tax under this subsection shall not be 

25 treated as a tax imposed by this chapter for 


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1 purposes of determining the amount of any 

2 credit under this chapter or for purposes of sec3 tion 55. 

4 ‘‘(h) BASIS REDUCTION.—The basis of any qualified 

5 equity investment shall be reduced by the amount of any 

6 credit determined under this section with respect to such 

7 investment. 

8 ‘‘(i) REGULATIONS.— 

9 ‘‘(1) IN GENERAL.—The Secretary shall pre10 scribe such regulations as necessary to carry out the 

11 provisions of this section. 

12 ‘‘(2) CERTIFICATION OF QUALIFIED EQUITY IN13 VESTMENT.—Such regulations shall require that a 

14 qualified investor— 

15 ‘‘(A) certify that the small business in 

16 which the equity investment is made meets the 

17 requirements described in subsection (c)(3), and 

18 ‘‘(B) include the name, address, and tax19 payer identification number of such small busi20 ness on the return claiming the credit under 

21 subsection (a). 

22 ‘‘(j) TERMINATION.—This section shall not apply to 

23 qualified equity investments made in taxable years begin24 ning after December 31, 2011.’’. 


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1 (b) CREDIT MADE PART OF GENERAL BUSINESS

2 CREDIT.—Subsection (b) of section 38 of the Internal 

3 Revenue Code of 1986 is amended by striking ‘‘and’’ at 

4 the end of paragraph (29), by striking the period at the 

5 end of paragraph (30) and inserting ‘‘, and’’, and by add6 ing at the end the following new paragraph: 

7 ‘‘(31) in the case of a taxpayer, the equity in8 vestment in small business tax credit determined 

9 under section 45N(a).’’. 

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

11 for subpart D of part IV of subchapter A of chapter 1 

12 of the Internal Revenue Code of 1986 is amended by add13 ing at the end the following new item: 

‘‘Sec. 45N. Equity investment in small business tax credit.’’. 

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

15 this section shall apply to qualified equity investments 

16 made after December 31, 2006, in taxable years beginning 

17 after such date. 

Æ 


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