I

103D CONGRESS

1ST SESSION H. R. 2064

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

defense conversion.

IN THE HOUSE OF REPRESENTATIVES

MAY 11, 1993

Ms. HARMAN (for herself, Mr. MATSUI, Mr. BROWN of California, Mr.

MCKEON, Mr. LEWIS of California, and Mr. HUNTER) 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 allow a

tax credit for defense conversion.

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 ‘‘Defense Reinvestment

5 and High-Tech Job Creation Act of 1993’’.

6 SEC. 2. DEFENSE CONVERSION CREDIT.

7 (a) GENERAL RULE.—Section 46 of the Internal

8 Revenue Code of 1986 (relating to amount of investment

9 credit) is amended—
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1 (1) by striking ‘‘and’’ at the end of paragraph

2 (2),

3 (2) by striking the period at the end of para4 graph (3) and inserting ‘‘, and’’, and

5 (3) by adding at the end thereof the following

6 new paragraph:

7 ‘‘(4) the defense conversion credit.’’

8 (b) DEFENSE CONVERSION CREDIT.—Section 48 of

9 such Code is amended by adding at the end thereof the

10 following new subsection:

11 ‘‘(c) DEFENSE CONVERSION CREDIT.—

12 ‘‘(1) IN GENERAL.—For purposes of section 46,

13 the defense conversion credit for any taxable year is

14 the sum of—

15 ‘‘(A) the defense conversion employment

16 credit for the taxable year, and

17 ‘‘(B) the defense conversion investment

18 credit for the taxable year.

19 ‘‘(2) DEFENSE CONVERSION EMPLOYMENT

20 CREDIT.—

21 ‘‘(A) IN GENERAL.—The defense conver22 sion employment credit for any taxable year is

23 10 percent of the qualified wages paid or in24 curred by a qualified employer during such

25 year.
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1 ‘‘(B) QUALIFIED WAGES.—For purposes of

2 this subsection—

3 ‘‘(i) IN GENERAL.—The term ‘quali4 fied wages’ means the wages (as defined in

5 clause (ii)) paid or incurred by the quali6 fied employer during the taxable year to,

7 and amounts paid or incurred by the quali8 fied employer to third parties for retrain9 ing expenses with respect to, qualified con10 version employees during the period com11 mencing on July 31, 1993, and ending on

12 December 31, 1995 (‘the qualified period’).

13 ‘‘(ii) WAGES DEFINED.—Except as

14 provided in subparagraph (C)(ii), the term

15 ‘wages’ has the meaning given to such

16 term by subsection (b) of section 3306 (de17 termined without regard to any dollar limi18 tation contained in such section), but the

19 amount of wages during any taxable year

20 which may be taken into account with re21 spect to any individual shall not exceed 25

22 percent of the wages (determined without

23 regard to this subsection) paid to such in24 dividual during such taxable year or por-
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1 tion thereof included within the qualified

2 period.

3 ‘‘(iii) RETRAINING EXPENSES.—The

4 term ‘retraining expenses’ includes all

5 amounts paid or incurred with respect to

6 educational or training programs in which

7 a qualified conversion employee partici8 pates to learn or improve skills necessary

9 or useful to such employee’s employment in

10 the qualified employer’s nondefense-related

11 business.

12 ‘‘(C) QUALIFIED CONVERSION EMPLOY13 EES.—

14 ‘‘(i) IN GENERAL.—For purposes of

15 this subsection, the term ‘qualified conver16 sion employees’ means an employee of a

17 qualified employer who had been employed

18 by the qualified employer or another em19 ployer in a defense-related business and

20 who is employed by the qualified employer

21 in a nondefense-related business during the

22 taxable year.

23 ‘‘(ii) PRORATION IN CASE OF DUAL

24 EMPLOYMENT.—If a qualified conversion

25 employee is employed by the qualified em-
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1 ployer in both a defense-related business

2 and a nondefense-related business during

3 the taxable year, only the portion of the

4 employee’s wages properly allocable to em5 ployment in the nondefense-related busi6 ness shall be treated as ‘wages’ for pur7 poses of subparagraph (B)(ii).

8 ‘‘(D) QUALIFIED EMPLOYER.—For pur9 poses of this paragraph, a qualified employer is

10 an employer which is engaged in a qualified

11 business (as defined in paragraph (3)(D)).

12 ‘‘(3) DEFENSE CONVERSION INVESTMENT

13 CREDIT.—

14 ‘‘(A) IN GENERAL.—The defense conver15 sion investment credit for any taxable year is

16 the applicable percentage of the qualified con17 version investment by a qualified business dur18 ing the taxable year.

19 ‘‘(B) APPLICABLE PERCENTAGE.—For

20 purposes of this paragraph—

21 ‘‘(i) IN GENERAL.—The applicable

22 percentage shall be 7 percent for all tax23 able years ending after December 31,

24 1992, and on or before December 31,

25 1994, and shall be 5 percent for all taxable
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1 years ending after December 31, 1994,

2 and on or before December 31, 1999.

3 ‘‘(ii) INCREMENTAL EMPLOYMENT IN4 CENTIVE PERCENTAGE.—The applicable

5 percentage shall be 10 percent for any tax6 able year ending after December 31, 1992,

7 and on or before December 31, 1994, and

8 shall be 8 percent for any taxable year

9 ending after December 31, 1994, and on

10 or before December 31, 1999, if in such

11 year the number of employees of the quali12 fied business increases 4 percent or more

13 over the average number of employees of

14 the qualified business during the 3 preced15 ing years (the ‘qualifying increase’).

16 ‘‘(iii) RECAPTURE IN CASE OF DE17 CREASED EMPLOYMENT.—If a qualified

18 business claims the benefit of the incre19 mental employment incentive percentage

20 under clause (ii), and its average employ21 ment during any of the 3 years following

22 the year in which the benefit of the in23 creased percentage was claimed falls below

24 the qualifying increase level (a ‘disqualify25 ing decrease’), the qualified business shall
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1 increase its tax liability for the year during

2 which the disqualifying decrease occurred

3 by the difference between the credit to

4 which it would have been entitled under

5 clause (i) and the credit claimed under

6 clause (ii).

7 ‘‘(C) QUALIFIED CONVERSION INVEST8 MENT.—For purposes of this paragraph—

9 ‘‘(i) IN GENERAL.—The term ‘quali10 fied conversion investment’ means the

11 costs paid or incurred by a qualified busi12 ness during the taxable year for the pur13 pose of acquiring, constructing, creating,

14 or developing any tangible or intangible as15 sets, in connection with the conduct of the

16 qualified business’ nondefense-related busi17 ness, except that such term shall not in18 clude direct production costs of any prop19 erty held by the qualified business for sale

20 to customers in the ordinary course of its

21 trade or business.

22 ‘‘(ii) INTANGIBLE ASSETS.—The term

23 ‘intangible assets’ includes all ‘intangible

24 property’ as defined in section

25 936(h)(3)(B) (other than literary, musical
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1 or artistic compositions) and specifically

2 includes processes and products, models,

3 and prototypes.

4 ‘‘(D) QUALIFIED BUSINESS.—For pur5 poses of this subsection and pursuant to regula6 tions to be prescribed by the Secretary—

7 ‘‘(i) IN GENERAL.—The term ‘quali8 fied business’ means any corporation, part9 nership, or sole proprietorship or separate

10 unit thereof in existence on January 1,

11 1993, which derived a substantial portion

12 of its gross receipts or incurred a substan13 tial portion of its gross costs during the 5

14 years preceding January 1, 1993, from 1

15 or more defense-related businesses, and

16 which derives a significant portion of its

17 gross receipts from (or incurs a significant

18 amount of costs in acquiring or developing)

19 1 or more nondefense-related businesses

20 during the taxable year.

21 ‘‘(ii) DEFENSE-RELATED BUSINESS.—

22 A ‘defense-related business’ is an activity

23 in connection with the development or pro24 duction (pursuant to a contract or sub25 contract) of any property designed, modi-
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1 fied, or equipped for military purposes (in2 cluding NASA).

3 ‘‘(iii) NONDEFENSE-RELATED BUSI4 NESS.—A ‘nondefense-related business’ is

5 any activity in connection with the develop6 ment or production of any property not de7 signed, modified, or equipped for military

8 purposes which uses a significant portion

9 of assets and employees which had been

10 employed in a defense-related business.’’

11 (c) ACCELERATED DEPRECIATION OF EXCESS DE12 FENSE CONVERSION PROPERTY.—

13 (1) Subsection (b)(3) of section 168 of such

14 Code is amended by adding at the end thereof the

15 following new subparagraph:

16 ‘‘(F) Property described in subsection

17 (e)(3)(B)(vii).’’

18 (2) Subsection (e)(3)(B) of section 168 of such

19 Code is amended by striking ‘‘and’’ at the end of

20 clause (v), by striking the period at the end of clause

21 (vi) and inserting ‘‘, and’’, and by adding at the end

22 thereof the following new clause:

23 ‘‘(vii) any qualifying excess defense

24 conversion property.’’
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1 (3) Subsection (i) of section 168 of such Code

2 is amended by adding at the end thereof the follow3 ing new paragraph:

4 ‘‘(14) QUALIFYING EXCESS DEFENSE CONVER5 SION PROPERTY.—

6 ‘‘(A) The term ‘qualifying excess defense

7 conversion property’ means, with respect to

8 property owned or leased by the taxpayer and

9 otherwise subject to depreciation under this sec10 tion and which is ‘excess defense conversion

11 property’ (as defined in subparagraph (B)), the

12 basis of property (or the portion thereof) con13 stituting excess defense conversion property

14 owned by the taxpayer or the total discounted

15 cost of lease obligations during the remaining

16 term of the lease applicable to excess conversion

17 property leased by the taxpayer.

18 ‘‘(B) The term ‘excess defense conversion

19 property’ means property that—

20 ‘‘(i) has been used by the taxpayer in

21 a defense-related business (as defined in

22 section 48(c)(3)(D)); and

23 ‘‘(ii) is not being used in the taxable

24 year, and is not reasonably expected to be
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1 used in the foreseeable future, in a de2 fense-related business.

3 ‘‘(C) Any deductions claimed by a taxpayer

4 with respect to property reported on its return

5 as qualifying excess defense conversion property

6 and which is later determined as not constitut7 ing excess defense conversion property shall be

8 recaptured at the rate of 150 percent of the de9 ductions so claimed.

10 ‘‘(D) For purposes of this section, the

11 amount of the property’s basis constituting

12 qualifying excess defense conversion property

13 shall be considered to be placed in service on

14 the first day of the taxable year in which the

15 property is determined to constitute qualifying

16 excess defense conversion property.’’

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

18 this section shall take effect on July 31, 1993.

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