I

103D CONGRESS

1ST SESSION H. R. 1636

To provide for line item veto; capital gains tax reduction; enterprise zones;

raising the social security earnings limit workfare.

IN THE HOUSE OF REPRESENTATIVES

APRIL 1, 1993

Mr. STEARNS introduced the following bill; which was referred jointly to the

Committees on Government Operations, Rules, and Ways and Means

A BILL

To provide for line item veto; capital gains tax reduction;

enterprise zones; raising the social security earnings limit

workfare.

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

3 TITLE I—LINE-ITEM VETO

4 SEC. 101. ENHANCEMENT OF SPENDING CONTROL BY THE

5 PRESIDENT.

6 The Impoundment Control Act of 1974 is amended

7 by adding at the end thereof the following new title:
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1 ‘‘TITLE XI—LEGISLATIVE LINE ITEM VETO

2 RESCISSION AUTHORITY

3 ‘‘PART A—LEGISLATIVE LINE ITEM VETO RESCISSION

4 AUTHORITY

5 ‘‘GRANT OF AUTHORITY AND CONDITIONS

6 ‘‘SEC. 1101. (a) IN GENERAL.—(1) Notwithstanding

7 part B of title X and subject to part B of this title, the

8 President may rescind all or part of any budget authority,

9 if the President—

10 ‘‘(A) determines that—

11 ‘‘(i) such rescission would help balance the

12 Federal budget, reduce the Federal budget defi13 cit, or reduce the public debt;

14 ‘‘(ii) such rescission will not impair any es15 sential Government functions; and

16 ‘‘(iii) such rescission will not harm the na17 tional interest; and

18 ‘‘(B)(i) notifies the Congress of such rescission

19 by a special message not later than 20 calendar days

20 (not including Saturdays, Sundays, or holidays)

21 after the date of enactment of a regular or supple22 mental appropriations Act or a joint resolution mak23 ing continuing appropriations providing such budget

24 authority; or
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1 ‘‘(ii) notifies the Congress of such rescission by

2 special message accompanying the submission of the

3 President’s budget to Congress and such rescissions

4 have not been proposed previously for that fiscal

5 year.

6 ‘‘(2) The President shall submit a separate rescission

7 message for each appropriations bill under paragraph

8 (1)(B)(ii).

9 ‘‘(b) RESCISSION EFFECTIVE UNLESS DIS10 APPROVED.—(1)(A) Any amount of budget authority re11 scinded under this title as set forth in a special message

12 by the President shall be deemed canceled unless, during

13 the period described in subparagraph (B), a rescission dis14 approval bill making available all of the amount rescinded

15 is enacted into law.

16 ‘‘(B) The period referred to in subparagraph (A) is—

17 ‘‘(i) a Congressional review period of 20 cal18 endar days of session under part B, during which

19 Congress must complete action on the rescission dis20 approval bill and present such bill to the President

21 for approval or disapproval;

22 ‘‘(ii) after the period provided in clause (i), an

23 additional 10 days (not including Sundays) during

24 which the President may exercise his authority to

25 sign or veto the rescission disapproval bill; and
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1 ‘‘(iii) if the President vetoes the rescission dis2 approval bill during the period described in clause

3 (ii), an additional 5 calendar days of session after

4 the date of the veto.

5 ‘‘(2) If a special message is transmitted by the Presi6 dent under this section during any Congress and the last

7 session of such Congress adjourns sine die before the expi8 ration of the period described in paragraph (1)(B)—

9 ‘‘(A) the rescission shall not take effect;

10 ‘‘(B) the message shall be deemed to have been

11 retransmitted on the first day of the succeeding

12 Congress; and

13 ‘‘(C) the review period described in paragraph

14 (1)(B) (with respect to such message) shall run be15 ginning after such first day.

16 ‘‘DEFINITIONS

17 ‘‘SEC. 1102. For the purposes of this title, the term

18 ‘rescission disapproval bill’ means a bill or joint resolution

19 which only disapproves a rescission of budget authority,

20 in whole, rescinded in a special message transmitted by

21 the President under section 1101.

22 ‘‘PART B—CONGRESSIONAL CONSIDERATION OF

23 LEGISLATIVE LINE ITEM VETO RESCISSIONS

24 ‘‘PRESIDENTIAL SPECIAL MESSAGE

25 ‘‘SEC. 1111. When the President rescinds any budget

26 authority as provided in section 1101, the President shall
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1 transmit to the House of Representatives and to the Sen2 ate a special message specifying—

3 ‘‘(1) the amount of budget authority rescinded;

4 ‘‘(2) any account, department, or establishment

5 of the Government to which such budget authority

6 is available for obligation, and the specific project or

7 governmental functions involved;

8 ‘‘(3) the reasons and justifications for the de9 termination to rescind budget authority pursuant to

10 section 1101(a)(1);

11 ‘‘(4) to the maximum extent practicable, the es12 timated fiscal, economic, and budgetary effect of the

13 rescission; and

14 ‘‘(5) all facts, circumstances, and considerations

15 relating to or bearing upon the rescission and the

16 decision to effect the rescission, and to the maxi17 mum extent practicable, the estimated effect of the

18 rescission upon the objects, purposes, and programs

19 for which the budget authority is provided.

20 ‘‘TRANSMISSION OF MESSAGES; PUBLICATION

21 ‘‘SEC. 1112. (a) DELIVERY TO HOUSE AND SEN22 ATE.—(1) Each special message transmitted under sec23 tions 1101 and 1111 shall be transmitted to the House

24 of Representatives and the Senate on the same day, and

25 shall be delivered to the Clerk of the House of Representa26 tives if the House of Representatives is not in session and
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1 to the Secretary of the Senate if the Senate is not in ses2 sion.

3 ‘‘(2) Each special message transmitted pursuant to

4 paragraph (1) shall be referred to the appropriate commit5 tees of the House of Representatives and the Senate and

6 shall be printed as a document of each House.

7 ‘‘(b) PRINTING IN FEDERAL REGISTER.—A special

8 message transmitted under sections 1101 and 1111 shall

9 be printed in the first issue of the Federal Register pub10 lished after such transmittal.

11 ‘‘PROCEDURE IN THE HOUSE OF REPRESENTATIVES

12 ‘‘SEC. 1113. (a) REFERRAL.—(1) Any rescission dis13 approval bill introduced with respect to a special message

14 shall be referred to the appropriate committees of the

15 House of Representatives or the Senate, as the case may

16 be.

17 ‘‘(2) Any rescission disapproval bill received in the

18 House of Representatives from the Senate shall be consid19 ered in the House of Representatives pursuant to this sec20 tion.

21 ‘‘(b) FLOOR CONSIDERATION IN THE HOUSE.—

22 ‘‘(1) Debate in the House on any rescission dis23 approval bill and debatable motions and appeals in

24 connection therewith, shall be limited to not more

25 than 10 hours, with the time equally divided be-
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1 tween, and controlled by, the majority leader and the

2 minority leader or their designees.

3 ‘‘(2)(A) Debate in the House on any debatable

4 motion or appeal in connection with such a bill shall

5 be limited to 1 hour equally divided between, and

6 controlled by, the mover and the manager of the bill,

7 except that if the manager of the bill is in favor of

8 any such motion or appeal, the time in opposition

9 thereto shall be controlled by the minority leader or

10 the minority leader’s designee.

11 ‘‘(B) Such leaders, or either of them, may, from

12 the time under their control on the passage of the

13 bill, allot additional time to any Representative dur14 ing the consideration of any debatable motion or ap15 peal.

16 ‘‘(3) A motion to further limit debate shall not

17 be debatable, and a motion to recommit (except a

18 motion to recommit with instructions to report back

19 within a specified number of days, not to exceed 1,

20 not counting any day on which the Senate is not in

21 session) shall not be in order.

22 ‘‘(c) POINT OF ORDER.—(1) It shall not be in order

23 in the Senate or the House of Representatives to consider

24 any rescission disapproval bill that relates to any matter
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1 other than the rescission of budget authority transmitted

2 by the President under section 1101.

3 ‘‘(2) It shall not be in order in the Senate or the

4 House of Representatives to consider any amendment to

5 a rescission disapproval bill.

6 ‘‘(3) Paragraphs (1) and (2) may be waived or sus7 pended in the House only by a vote of three-fifths of the

8 members duly chosen and sworn.’’.

9 TITLE II—CAPITAL GAINS

10 SEC. 201. DEDUCTION FOR CAPITAL GAINS ON CERTAIN

11 SMALL BUSINESS STOCK.

12 (a) IN GENERAL.—Subchapter P of chapter 1 of the

13 Internal Revenue Code of 1986 (relating to capital gains

14 and losses) is amended by adding at the end thereof the

15 following new part:

16 ‘‘PART VII—ENTERPRISE CAPITAL INVESTMENT

17 INCENTIVES

‘‘Sec. 1301. Deduction for gain on certain small business stock.

‘‘Sec. 1302. Definitions and special rules.

18 ‘‘SEC. 1301. DEDUCTION FOR GAIN ON CERTAIN SMALL

19 BUSINESS STOCK.

20 ‘‘(a) GENERAL RULE.—If a taxpayer has a qualified

21 small business net capital gain for any taxable year, there

22 shall be allowed as a deduction from gross income an

23 amount equal to the sum of—

24 ‘‘(1) 50 percent of the excess (if any) of—
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1 ‘‘(A) qualified small business net capital

2 gain, over

3 ‘‘(B) the amount of seed capital gain, plus

4 ‘‘(2) the seed capital gain deduction.

5 ‘‘(b) QUALIFIED SMALL BUSINESS NET CAPITAL

6 GAIN.—For purposes of this section, the term ‘qualified

7 small business net capital gain’ means the lesser of—

8 ‘‘(1) the net capital gain for the taxable year,

9 or

10 ‘‘(2) the net capital gain for the taxable year

11 determined by taking into account only gain or loss

12 from sales or exchanges of qualified small business

13 stock with a holding period of more than 5 years at

14 the time of sale or exchange.

15 ‘‘(c) SEED CAPITAL GAIN DEDUCTION.—For pur16 poses of this section—

17 ‘‘(1) IN GENERAL.—The term ‘seed capital gain

18 deduction’ means an amount equal to the sum of the

19 amounts determined by applying the applicable per20 centages to the appropriate categories of seed capital

21 gain under the table contained in paragraph (2).

22 ‘‘(2) COMPUTATION OF AMOUNT.—The seed

23 capital gain deduction shall be computed as follows:

The applicable

‘‘In the case of: percentage is:

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

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

7-year gain ................................................................... 70
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The applicable

‘‘In the case of: percentage is:

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

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

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

1 ‘‘(3) SEED CAPITAL GAIN.—For purposes of

2 this subsection, the term ‘seed capital gain’ means

3 the lesser of—

4 ‘‘(A) the excess (if any) of—

5 ‘‘(i) the net capital gain for the tax6 able year, over

7 ‘‘(ii) the qualified small business net

8 capital gain for the taxable year deter9 mined without regard to gain or loss de10 scribed in subparagraph (B), or

11 ‘‘(B) the net capital gain for the taxable

12 year determined by taking into account only

13 gain or loss from sales or exchanges of stock—

14 ‘‘(i) which is qualified small business

15 stock in a corporation which is a qualified

16 small business (determined by substituting

17 ‘$5,000,000’ for ‘$100,000,000’ in section

18 1302(b)(1)), and

19 ‘‘(ii) with a holding period of more

20 than 5 years at the time of the sale or ex21 change.

22 ‘‘(4) CATEGORIES OF GAIN.—For purposes of

23 this subsection—
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1 ‘‘(A) 10-YEAR GAIN.—The term ‘10-year

2 gain’ means the lesser of—

3 ‘‘(i) the seed capital gain, or

4 ‘‘(ii) the seed capital gain determined

5 by taking into account under paragraph

6 (3)(B) only gain or loss from qualified

7 small business stock with a holding period

8 of more than 10 years at the time of the

9 sale or exchange.

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

11 7-, 8-, and 9-year gain’ mean, with respect to

12 any category, the lesser of—

13 ‘‘(i) the excess (if any) of—

14 ‘‘(I) seed capital gain, over

15 ‘‘(II) the amount determined

16 under this paragraph for categories

17 with a longer holding period, or

18 ‘‘(ii) seed capital gain determined by

19 taking into account under paragraph

20 (3)(B) only gain or loss from qualified

21 small business stock with a holding period

22 of more than 5, 6, 7, 8, or 9 years but not

23 more than 6, 7, 8, 9, or 10 years, respec24 tively.
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1 ‘‘(d) ESTATES AND TRUSTS.—In the case of an es2 tate or trust, the deduction under subsection (a) shall be

3 computed by excluding the portion (if any) of the gains

4 for the taxable year from sales or exchanges of qualified

5 small business stock which, under section 652 and 662

6 (relating to inclusions of amounts in gross income of bene7 ficiaries of trusts), is includible by the income beneficiaries

8 as gains derived from the sale or exchange of capital as9 sets.

10 ‘‘SEC. 1302. DEFINITIONS AND SPECIAL RULES.

11 ‘‘(a) QUALIFIED SMALL BUSINESS STOCK.—For pur12 poses of this part—

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

14 business stock’ means any stock in a corporation

15 which is originally issued after December 31, 1991,

16 if—

17 ‘‘(A) as of the date of issuance, such cor18 poration is a qualified small business, and

19 ‘‘(B) except as provided in subsections (d)

20 and (e), such stock is acquired by the taxpayer

21 at its original issue (directly or through an un22 derwriter)—

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

24 property (not including stock), or
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1 ‘‘(ii) as compensation for services

2 (other than services performed as an un3 derwriter of such stock).

4 ‘‘(2) 5-YEAR ACTIVE BUSINESS REQUIRE5 MENT.—Stock in a corporation shall not be treated

6 as qualified small business stock unless, during the

7 testing period, such corporation meets the active

8 business requirements of subsection (c).

9 ‘‘(3) CERTAIN REDEMPTIONS, EXCHANGES,

10 ETC. DISQUALIFIED.—For purposes of paragraph

11 (1)(B), and except as provided in subsections (d)

12 and (e), stock shall not be treated as acquired by the

13 taxpayer at its original issue if—

14 ‘‘(i) it is issued directly or indirectly in re15 demption of, or otherwise in exchange for, stock

16 which is not qualified small business stock, or

17 ‘‘(ii) it is issued in an exchange described

18 in section 351 in exchange for property other

19 than qualified small business stock, if imme20 diately after the exchange, both the issuer and

21 transferee of the stock are members of the

22 same controlled group of corporations (as de23 fined in section 1563).

24 ‘‘(b) QUALIFIED SMALL BUSINESS.—For purposes of

25 this part—
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1 ‘‘(1) IN GENERAL.—The term ‘qualified small

2 business’ means any domestic corporation with re3 spect to which the sum of—

4 ‘‘(A) the aggregate amount of money,

5 other property, and services received by the cor6 poration for stock, as a contribution to capital,

7 and as paid-in surplus, plus

8 ‘‘(B) the accumulated earnings and profits

9 of the corporation,

10 does not exceed $100,000,000. The determination

11 under the preceding sentence shall be made as of the

12 time of such issuance but shall include amounts re13 ceived in such issuance and all prior issuances.

14 ‘‘(2) AMOUNT TAKEN INTO ACCOUNT WITH RE15 SPECT TO PROPERTY AND SERVICES.—For purposes

16 of paragraph (1)—

17 ‘‘(A) PROPERTY.—The amount taken into

18 account with respect to any property other than

19 money shall be an amount equal to the adjusted

20 basis of such property for determining gain, re21 duced (but not below zero) by any liability to

22 which the property was subject or which was

23 assumed by the corporation. The determination

24 under the preceding sentence shall be made as
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1 of the time the property was received by the

2 corporation.

3 ‘‘(B) COMPENSATION FOR SERVICES.—The

4 amount taken into account with respect to stock

5 issued for services shall be the value of such

6 services.

7 ‘‘(c) ACTIVE BUSINESS REQUIREMENT.—For pur8 poses of this part—

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

10 (a)(2), the requirements of this subsection are met

11 if, during the testing period—

12 ‘‘(A) the corporation is engaged in the ac13 tive conduct of a trade or business, and

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

15 corporation are used in the active conduct of a

16 trade or business.

17 ‘‘(2) SPECIAL RULE FOR CERTAIN ACTIVI18 TIES.—For purposes of paragraph (1), if, in connec19 tion with any future trade or business, a corporation

20 is engaged in—

21 ‘‘(A) start-up activities described in section

22 195(c)(1)(A),

23 ‘‘(B) activities resulting in the payment or

24 incurring of expenditures which may be treated
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1 as research and experimental expenditures

2 under section 174, or

3 ‘‘(C) activities with respect to in-house re4 search expenses described in section 41(b)(4),

5 such corporation shall be treated with respect to

6 such activities as engaged in (and assets used in

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

8 conduct of a trade or business. Any determination

9 under this paragraph shall be made without regard

10 to whether a corporation has any gross income from

11 such activities at the time of the determination.

12 ‘‘(3) STOCK IN OTHER CORPORATIONS.—

13 ‘‘(A) LOOK-THRU IN CASE OF SUBSIDI14 ARIES.—For purposes of this subsection, stock

15 and debt in any subsidiary corporation shall be

16 disregarded and the parent corporation shall be

17 deemed to own its ratable share of the subsidi18 ary’s assets, and to conduct its ratable share of

19 the subsidiary’s activities.

20 ‘‘(B) PORTFOLIO STOCK.—A corporation

21 shall be treated as failing to meet the require22 ments of paragraph (1) if, at any time during

23 the testing period, more than 10 percent of the

24 value of its assets (in excess of liabilities) con-
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1 sist of stock in other corporations which are not

2 subsidiaries of such corporation.

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

4 paragraph, a corporation shall be considered a

5 subsidiary if the parent owns at least 50 per6 cent of the combined voting power of all classes

7 of stock entitled to vote, or at least 50 percent

8 in value of all outstanding stock of such cor9 poration.

10 ‘‘(4) WORKING CAPITAL.—For purposes of

11 paragraph (1)(B), any assets which—

12 ‘‘(A) are held for investment, and

13 ‘‘(B) are to be used to finance future re14 search and experimentation or working capital

15 needs of the corporation,

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

17 trade or business.

18 ‘‘(5) MAXIMUM REAL ESTATE HOLDINGS.—A

19 corporation shall not be treated as meeting the re20 quirements of paragraph (1) if, at any time during

21 the testing period, more than 10 percent of the total

22 value of its assets is real property which is not used

23 in the active conduct of a trade or business. For

24 purposes of the preceding sentence, the ownership

25 of, dealing in, or renting of real property shall not
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1 be treated as the active conduct of a trade or busi2 ness.

3 ‘‘(6) SMALL BUSINESS INVESTMENT COMPA4 NIES.—Paragraph (1) shall not apply to any small

5 business investment company operating under the

6 Small Business Investment Act of 1958.

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

8 purposes of paragraph (1), rights to computer soft9 ware which produces income described in section

10 543(d) shall be treated as an asset used in the active

11 conduct of a trade or business.

12 ‘‘(8) TESTING PERIOD.—For purposes of this

13 section, the term ‘testing period’ means, with respect

14 to any stock held by a taxpayer, the 5-year period

15 beginning with the first day of the taxpayer’s hold16 ing period for such stock.

17 ‘‘(d) SPECIAL RULES FOR OPTIONS, WARRANTS, AND

18 CERTAIN CONVERTIBLE INVESTMENTS.— For purposes

19 of this part—

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

21 is acquired by the taxpayer through the exercise of

22 an applicable option or warrant, through the conver23 sion of convertible debt, or in exchange for securities

24 of the corporation in a transaction described in sec25 tion 368—
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1 ‘‘(A) such stock shall be treated as ac2 quired by the taxpayer at original issue, and

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

4 been held during the period such option, war5 rant, or debt was held, or such security was

6 outstanding.

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

8 SECURITY.—For purposes of section 1302(b)(1) and

9 notwithstanding section 1302(b)(2), in the case of a

10 debt instrument converted to stock, or stock issued

11 in exchange for securities in a transaction described

12 in section 368, such stock shall be treated as issued

13 for an amount equal to the sum of—

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

15 security as of the time of the conversion or ex16 change, and

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

18 loan or security.

19 ‘‘(3) APPLICABLE OPTION OR WARRANT.—For

20 purposes of this subsection, the term ‘applicable op21 tion or warrant’ means an option or warrant

22 which—

23 ‘‘(A) was issued in exchange for the per24 formance of services for the corporation issuing

25 it, and
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1 ‘‘(B) is nontransferrable.

2 ‘‘(e) CERTAIN TAX-FREE AND OTHER TRANS3 FERS.—For purposes of this part—

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

5 stock to which this subsection applies, the transferee

6 shall be treated as—

7 ‘‘(A) having acquired such stock in the

8 same manner as the transferor, and

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

10 continuous period immediately preceding the

11 transfer during which it was held (or treated as

12 held under this subsection) by the transferor.

13 ‘‘(2) TRANSFERS TO WHICH SUBSECTION AP14 PLIES.—This subsection shall apply to any trans15 fer—

16 ‘‘(A) by gift,

17 ‘‘(B) at death,

18 ‘‘(C) 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), 723, or 732, or

23 ‘‘(D) of qualified small business stock for

24 other qualified small business stock in a trans-
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1 action described in section 351 or a reorganiza2 tion described in section 368.

3 ‘‘(3) INCORPORATIONS AND REORGANIZATIONS

4 INVOLVING NONQUALIFIED STOCK.—

5 ‘‘(A) IN GENERAL.—In the case of a trans6 action described in section 351 or a reorganiza7 tion described in section 368, if a qualified

8 small business stock is transferred for other

9 stock which is not qualified small business

10 stock, such transfer shall be treated as a trans11 fer to which this subsection applies solely with

12 respect to the person receiving such other stock.

13 ‘‘(B) LIMITATION.—This part shall apply

14 to the sale or exchange of stock treated as

15 qualified small business stock by reason of sub16 paragraph (A) only to the extent of the gain (if

17 any) which would have been recognized at the

18 time of the transfer described in subparagraph

19 (A) if section 351 or 368 had not applied at

20 such time.

21 ‘‘(C) SUCCESSIVE APPLICATION.—For pur22 poses of this paragraph, stock treated as quali23 fied small business stock under subparagraph

24 (A) shall be so treated for subsequent trans25 actions or reorganizations, except that the limi-
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1 tation of subparagraph (B) shall be applied as

2 of the time of the first transfer to which sub3 paragraph (A) applied.

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

5 of a transaction described in section 368, this

6 paragraph shall apply only if, immediately after

7 the transaction, the corporation issuing the

8 stock owns directly or indirectly stock rep9 resenting control (within the meaning of section

10 368(c)) of the corporation whose stock was

11 transferred.

12 ‘‘(f) STOCK EXCHANGED FOR PROPERTY.—For pur13 poses of this part, in the case where the taxpayer transfers

14 property (other than money or stock) to a corporation in

15 exchange for stock in such corporation—

16 ‘‘(1) such stock shall be treated as having been

17 acquired by the taxpayer on the date of such ex18 change, and

19 ‘‘(2) the basis of such stock in the hands of the

20 taxpayer shall be treated as equal to the fair market

21 value of the property exchanged.

22 ‘‘(g) PASS-THRU ENTITIES.—For purposes of this

23 part, any gain or loss of a pass-thru entity which is treated

24 for purposes of this subtitle as a gain or loss of any person

25 holding an interest in such entity shall retain its character
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1 as qualified small business or seed capital gain or loss in

2 the hands of such person.

3 ‘‘(h) INDEXING.—In the case of any stock issued in

4 a calendar year after 1992, the $5,000,000 and

5 $100,000,000 amounts in section 1301(c)(3)(B)(i) and

6 subsection (b)(1) of this section shall be increased by an

7 amount equal to—

8 ‘‘(1) such dollar amount, multiplied by

9 ‘‘(2) the cost-of-living adjustment determined

10 under section 1(f)(3) for such calendar year by sub11 stituting ‘1991’ for ‘1987’ in subparagraph (B)

12 thereof.’’.

13 (b) MAXIMUM 14 PERCENT TAX RATE.—

14 (1) INDIVIDUALS.—Section 1(h) of such Code

15 (relating to maximum capital gains rate) is amended

16 to read as follows:

17 ‘‘(h) MAXIMUM CAPITAL GAINS RATE.—

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

19 capital gain for any taxable year, then the tax im20 posed by this section shall not exceed the sum of—

21 ‘‘(A) a tax computed at the rate and in the

22 same manner as if this subsection had not been

23 enacted on the greater of—

24 ‘‘(i) taxable income reduced by the

25 amount of the net capital gain, or
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1 ‘‘(ii) the amount of taxable income

2 taxed at a rate below 28 percent, plus

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

4 taxable income in excess of the amount deter5 mined under subparagraph (A).

6 ‘‘(2) SPECIAL RULE WHERE TAXPAYER HAS

7 QUALIFIED SMALL BUSINESS NET CAPITAL OR SEED

8 CAPITAL GAIN.—

9 ‘‘(A) IN GENERAL.—If a taxpayer has

10 qualified small business net capital gain or seed

11 capital gain for any taxable year, then the tax

12 imposed by this section shall not exceed the

13 lesser of—

14 ‘‘(i) the amount determined under

15 paragraph (1), or

16 ‘‘(ii) the sum of—

17 ‘‘(I) the amount determined

18 under paragraph (1) without taking

19 into account qualified small business

20 net capital gain and seed capital gain

21 for purposes of subparagraphs (A)

22 and (B) thereof, plus

23 ‘‘(II) 14 percent of the qualified

24 small business net capital gain and

25 seed capital gain.
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1 ‘‘(B) DEFINITIONS.—For purposes of this

2 paragraph, the terms ‘qualified small business

3 net capital gain’ and ‘seed capital gain’ have

4 the meanings given such terms by section 1301

5 (b) and (c), respectively.’’.

6 (2) CORPORATIONS.—Section 1201(a) of such

7 Code (relating to alternative tax for corporations) is

8 amended—

9 (A) by inserting ‘‘or the corporation has a

10 qualified small business net capital gain or seed

11 capital gain’’ before ‘‘, then’’, and

12 (B) by striking paragraph (2) and insert13 ing:

14 ‘‘(2) a tax equal to the sum of—

15 ‘‘(A) 34 percent of the sum of the net cap16 ital gain, reduced by qualified small business

17 net capital gain and seed capital gain, plus

18 ‘‘(B) 17 percent of the qualified small

19 business net capital gain and seed capital

20 gain.’’.

21 (c) TREATMENT AS PREFERENCE ITEM FOR MINI22 MUM TAX.—Section 57(a) of such Code (relating to items

23 of tax preference under the alternative minimum tax) is

24 amended by adding at the end thereof the following new

25 paragraph:
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1 ‘‘(8) CAPITAL GAINS ON SALE OF CERTAIN

2 SMALL BUSINESS STOCK.—An amount equal to the

3 deduction for the taxable year determined under sec4 tion 1301(a)(1).’’.

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

6 1244(c)(3)(A) of such Code (defining small business cor7 poration) is amended by striking ‘‘$1,000,000’’ and insert8 ing ‘‘$5,000,000 (adjusted at the same time and manner

9 as under section 1302(g))’’.

10 (e) CONFORMING AMENDMENTS.—

11 (1) Section 62(a) of such Code is amended by

12 adding after paragraph (13) the following new para13 graph:

14 ‘‘(14) LONG-TERM CAPITAL GAINS.—The de15 duction allowed by section 1301.’’.

16 (2) Subparagraph (B) of section 170(e)(1) of

17 such Code is amended by inserting ‘‘(or, in the case

18 of qualified small business stock under section 1301,

19 50 percent of the amount)’’ after ‘‘the amount’’.

20 (3) Section 172(d)(2) of such Code is amended

21 to read as follows:

22 ‘‘(2) CAPITAL GAINS AND LOSSES OF TAX23 PAYERS OTHER THAN CORPORATIONS.—In the case

24 of a taxpayer other than a corporation—
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1 ‘‘(A) the amount deductible on account of

2 losses from sales or exchanges of capital assets

3 shall not exceed the amount includible on ac4 count of gains from sales or exchanges of cap5 ital assets; and

6 ‘‘(B) the deduction for long-term capital

7 gains provided by section 1301 shall not be al8 lowed.’’.

9 (4) Subparagraph (B) of section 172(d)(4) of

10 such Code is amended by inserting ‘‘, (2)(B),’’ after

11 ‘‘paragraph (1)’’.

12 (5)(A) Section 220 of such Code is amended to

13 read as follows:

14 ‘‘SEC. 220. CROSS REFERENCES.

15 ‘‘(1) For deduction for long-term capital gains

16 in the case of sale of qualified small business stock,

17 see section 1301.

18 ‘‘(2) For deductions in respect of a decedent,

19 see section 691.’’.

20 (B) The table of sections for part VII of sub21 chapter B of chapter 1 of such Code is amended by

22 striking out ‘‘reference’’ in the item relating to sec23 tion 220 and inserting ‘‘references’’.

24 (6) Paragraph (4) of section 642(c) of such

25 Code is amended to read as follows:
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1 ‘‘(4) ADJUSTMENTS.—To the extent that the

2 amount otherwise allowable as a deduction under

3 this subsection consists of gain from the sale or ex4 change of qualified small business stock held for

5 more than 5 years, proper adjustment shall be made

6 for any deduction allowable to the estate or trust

7 under section 1301 (relating to deduction for excess

8 of capital gains over capital losses). In the case of

9 a trust, the deduction allowed by this subsection

10 shall be subject to section 681 (relating to unrelated

11 business income).’’.

12 (7) Paragraph (3) of section 643(a) of such

13 Code is amended by adding at the end thereof the

14 following new sentence: ‘‘The deduction under sec15 tion 1301 (relating to deduction for gain on quali16 fied small business stock) shall not be taken into ac17 count.’’.

18 (8) Paragraph (4) of section 691(c) of such

19 Code is amended by striking out ‘‘1(h), 1201, and

20 1211’’ and inserting in lieu thereof ‘‘1(h), 1201,

21 1211, and 1301, and for purposes of section

22 57(a)(8)’’.

23 (9) Clause (iii) of section 852(b)(3)(D) of such

24 Code is amended by striking out ‘‘66 percent’’ and
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1 inserting ‘‘the rate differential portion (within the

2 meaning of section 904(b)(3)(E))’’.

3 (10) The second sentence of paragraph (2) of

4 section 871(a) of such Code is amended by inserting

5 ‘‘such gains and losses shall be determined without

6 regard to section 1301 (relating to deduction for

7 qualified small business net capital gains) and’’ after

8 ‘‘except that’’.

9 (11) Section 1402(i)(1) of such Code is amend10 ed to read as follows:

11 ‘‘(1) IN GENERAL.—In determining the net

12 earnings from self-employment of any options dealer

13 or commodities dealer—

14 ‘‘(A) notwithstanding subsection (a)(3)(A),

15 there shall not be excluded any gain or loss (in

16 the normal course of the taxpayer’s activity of

17 dealing in or trading section 1256 contracts)

18 from section 1256 contracts or property related

19 to such contracts, and

20 ‘‘(B) the deduction provided by section

21 1301 shall not apply.’’.

22 (12) Section 1445(e)(1) of such Code is amend23 ed by striking out ‘‘34 percent (or, to the extent pro24 vided in regulations, 28 percent)’’ and inserting ‘‘34

25 percent (or, to the extent provided in regulations,
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1 the alternative tax rate determined under section

2 904(b)(3)(E)(iii))’’.

3 (f) EFFECTIVE DATE.—

4 (1) IN GENERAL.—The amendments made by

5 this section shall apply to stock issued after Decem6 ber 31, 1993.

7 (2) APPLICATION OF TAX INCENTIVE TO CUR8 RENT STOCK HOLDINGS OF INVESTORS.—

9 (A) IN GENERAL.—If—

10 (i) a taxpayer holds any stock on any

11 date on or after the date determined under

12 paragraph (1) which, at the time it was is13 sued, would be treated as qualified small

14 business stock (as defined in section

15 1302(a) of the Internal Revenue Code of

16 1986) without regard to the time it was is17 sued, and

18 (ii) the value of such stock on such

19 date exceeds its adjusted basis,

20 the taxpayer may elect to treat such stock as

21 having been sold on such date for an amount

22 equal to its value on such date (and as having

23 been reacquired on such date for an amount

24 equal to such value). The gain from such sale

25 shall be treated as received or accrued (and the
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1 holding period of the reacquired stock shall be

2 treated as beginning) on such date. For pur3 poses of applying section 1301 of such Code,

4 such stock shall be treated after such reacquisi5 tion as acquired in the same manner and at the

6 same time as the original acquisition and the

7 requirement of section 1302(a)(1) that the

8 stock must have been issued after December

9 31, 1993, shall not apply.

10 (B) ELECTION.—An election under sub11 paragraph (A) with respect to any stock shall

12 be made in such manner as the Secretary may

13 prescribe. Such an election, once made with re14 spect to any stock, shall be irrevocable.

15 TITLE III—SOCIAL SECURITY

16 EARNINGS TEST

17 SEC. 301. RETIREMENT TEST EXEMPT AMOUNT INCREASED.

18 (a) IN GENERAL.—Section 203(f)(8)(D) of the Social

19 Security Act (42 U.S.C. 403(f)(8)(D)) is amended to read

20 as follows:

21 ‘‘(D) Notwithstanding any other provision of this

22 subsection, the exempt amount which is applicable to an

23 individual who has attained retirement age (as defined in

24 section 216(l)) before the close of the taxable year involved

25 shall be—
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1 ‘‘(i) $925 for each month of any taxable year

2 ending after 1992 and before 1994,

3 ‘‘(ii) $1,020 for each month of any taxable year

4 ending after 1993 and before 1995,

5 ‘‘(iii) $1,130 for each month of any taxable

6 year ending after 1994 and before 1996,

7 ‘‘(iv) $1,450 for each month of any taxable year

8 ending after 1995 and before 1997,

9 ‘‘(v) $1,750 for each month of any taxable year

10 ending after 1996 and before 1998,

11 ‘‘(vi) $2,250 for each month of any taxable year

12 ending after 1997 and before 1999,

13 ‘‘(vii) $2,670 for each month of any taxable

14 year ending after 1998 and before 2000,

15 ‘‘(viii) $3,500 for each month of any taxable

16 year ending after 1999 and before 2001, and

17 ‘‘(ix) $4,250 for each month of any taxable year

18 ending after 2000 and before 2002.’’.

19 (b) CONFORMING AMENDMENT.—Section

20 203(f)(8)(B)(ii)(II) of such Act (42 U.S.C.

21 403(f)(8)(B)(ii)(II)) is amended by striking ‘‘for the cal22 endar year before the most recent calendar year in which

23 an increase in the exempt amount was enacted or a deter24 mination resulting in such an increase was made under

25 subparagraph (A)’’ and inserting ‘‘for the second calendar
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1 year before the calendar year in which the determination

2 under subparagraph (A) is made’’.

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

4 this section shall apply to taxable years ending after De5 cember 31, 1992.

6 SEC. 302. REDUCTION FACTOR WITH RESPECT TO CERTAIN

7 EARNINGS LOWERED TO 25 PERCENT.

8 (a) IN GENERAL.—Section 203(f)(3) of the Social

9 Security Act (42 U.S.C. 403(f)(3)) is amended by striking

‘‘331 10 ⁄3 percent’’ and all that follows through ‘‘paragraph

11 (8)’’ and inserting ‘‘equal to the sum of (A) 25 percent

12 of so much of his earnings for such year in excess of the

13 product of the applicable exempt amount as determined

14 under paragraph (8) as does not exceed $5,000, and (B)

331 15 ⁄3 percent of so much of such earnings in excess of

16 such product as exceeds $5,000,’’.

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

18 subsection (a) shall apply to taxable years beginning after

19 December 31, 1997.
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1 TITLE IV—URBAN TAX ENTER2 PRISE ZONES AND RURAL DE3 VELOPMENT INVESTMENT

4 ZONES

5 SEC. 401. STATEMENT OF PURPOSE.

6 It is the purpose of this title to establish a demonstra7 tion program of providing incentives for the creation of

8 tax enterprise zones in order—

9 (1) to revitalize economically and physically dis10 tressed areas, primarily by encouraging the forma11 tion of new businesses and the retention and expan12 sion of existing businesses,

13 (2) to promote meaningful employment for tax

14 enterprise zone residents, and

15 (3) to encourage individuals to reside in the tax

16 enterprise zones in which they are employed.

17 Subtitle A—Designation and Tax

18 Incentives

19 SEC. 411. DESIGNATION AND TREATMENT OF URBAN TAX

20 ENTERPRISE ZONES AND RURAL DEVELOP21 MENT INVESTMENT ZONES.

22 (a) IN GENERAL.—Chapter 1 of the Internal Reve23 nue Code of 1986 (relating to normal taxes and surtaxes)

24 is amended by inserting after subchapter T the following

25 new subchapter:
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1 ‘‘Subchapter U—Designation and Treatment

2 of Tax Enterprise Zones

‘‘Part I. Designation of tax enterprise zones.

‘‘Part II. Incentives for tax enterprise zones.

3 ‘‘PART I—DESIGNATION OF TAX ENTERPRISE

4 ZONES

‘‘Sec. 1391. Designation procedure.

‘‘Sec. 1392. Eligibility and selection criteria.

‘‘Sec. 1393. Definitions and special rules.

5 ‘‘SEC. 1391. DESIGNATION PROCEDURE.

6 ‘‘(a) IN GENERAL.—For purposes of this title, the

7 term ‘tax enterprise zone’ means any area which is, under

8 this part—

9 ‘‘(1) nominated by 1 or more local governments

10 and the State in which it is located for designation

11 as a tax enterprise zone, and

12 ‘‘(2) designated by—

13 ‘‘(A) the Secretary of Housing and Urban

14 Development in the case of an urban tax enter15 prise zone, or

16 ‘‘(B) the Secretary of Agriculture, in con17 sultation with the Secretary of Commerce, in

18 the case of a rural development investment

19 zone.

20 ‘‘(b) NUMBER OF DESIGNATIONS.—

21 ‘‘(1) AGGREGATE LIMIT.—The appropriate Sec22 retaries may designate in the aggregate 50 nomi-
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1 nated areas as tax enterprise zones under this sec2 tion, subject to the availability of eligible nominated

3 areas. Not more than 25 urban tax enterprise zones

4 may be designated and not more than 25 rural de5 velopment investment zones may be designated.

6 Such designations may be made only during cal7 endar years after 1992 and before 1998.

8 ‘‘(2) ANNUAL LIMITS.—

9 ‘‘(A) URBAN TAX ENTERPRISE ZONES.—

10 The number of urban tax enterprise zones des11 ignated under paragraph (1)—

12 ‘‘(i) before 1995 shall not exceed 8,

13 ‘‘(ii) before 1996 shall not exceed 15,

14 and

15 ‘‘(iii) before 1997 shall not exceed 21.

16 ‘‘(B) RURAL DEVELOPMENT INVESTMENT

17 ZONES.—The number of rural development in18 vestment zones designated under paragraph

19 (1)—

20 ‘‘(i) before 1995 shall not exceed 8,

21 ‘‘(ii) before 1996 shall not exceed 15,

22 and

23 ‘‘(iii) before 1997 shall not exceed 21.

24 ‘‘(3) ADVANCE DESIGNATIONS PERMITTED.—

25 For purposes of this subchapter, a designation dur-
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1 ing any calendar year shall be treated as made on

2 January 1 of the following calendar year if the ap3 propriate Secretary, in making such designation,

4 specifies that such designation is effective as of such

5 January 1.

6 ‘‘(c) LIMITATIONS ON DESIGNATIONS.—The appro7 priate Secretary may not make any designation under sub8 section (a) unless—

9 ‘‘(1) the local governments and the State in

10 which the nominated area is located have the au11 thority—

12 ‘‘(A) to nominate the area for designation

13 as a tax enterprise zone, and

14 ‘‘(B) to provide assurances satisfactory to

15 the appropriate Secretary that the commit16 ments under section 1392(c) will be fulfilled,

17 ‘‘(2) a nomination of the area is submitted

18 within a reasonable time before the calendar year for

19 which designation as a tax enterprise zone is sought

20 (or, if later, a reasonable time after the date of the

21 enactment of this subchapter),

22 ‘‘(3) the appropriate Secretary determines that

23 any information furnished is reasonably accurate,

24 and
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1 ‘‘(4) the State and local governments certify

2 that no portion of the area nominated is already in3 cluded in a tax enterprise zone or in an area other4 wise nominated to be a tax enterprise zone.

5 ‘‘(d) PERIOD FOR WHICH DESIGNATION IS IN EF6 FECT.—

7 ‘‘(1) IN GENERAL.—Any designation of an area

8 as a tax enterprise zone shall remain in effect during

9 the period beginning on the date of the designation

10 and ending on the earliest of—

11 ‘‘(A) December 31 of the 15th calendar

12 year following the calendar year in which such

13 date occurs,

14 ‘‘(B) the termination date designated by

15 the State and local governments as provided for

16 in their nomination, or

17 ‘‘(C) the date the appropriate Secretary re18 vokes the designation under paragraph (2).

19 ‘‘(2) REVOCATION OF DESIGNATION.—

20 ‘‘(A) IN GENERAL.—The appropriate Sec21 retary shall revoke the designation of an area

22 as a tax enterprise zone if such Secretary deter23 mines that the local government or the State in

24 which it is located—
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1 ‘‘(i) has modified the boundaries of

2 the area, or

3 ‘‘(ii) is not complying substantially

4 with the State and local commitments pur5 suant to section 1392(c).

6 ‘‘(B) APPLICABLE PROCEDURES.—A des7 ignation may be revoked by the appropriate

8 Secretary under subparagraph (A) only after a

9 hearing on the record involving officials of the

10 State or local government involved.

11 ‘‘SEC. 1392. ELIGIBILITY AND SELECTION CRITERIA.

12 ‘‘(a) IN GENERAL.—The appropriate Secretary may

13 make a designation of any nominated area under section

14 1391 only on the basis of the eligibility and selection cri15 teria set forth in this section.

16 ‘‘(b) ELIGIBILITY CRITERIA.—

17 ‘‘(1) URBAN TAX ENTERPRISE ZONES.—A nom18 inated area which is not a rural area shall be eligible

19 for designation under section 1391 only if it meets

20 the following criteria:

21 ‘‘(A) POPULATION.—The nominated area

22 has a population (as determined by the most re23 cent census data available) of not less than

24 4,000.
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1 ‘‘(B) DISTRESS.—The nominated area is

2 one of pervasive poverty, unemployment, and

3 general distress.

4 ‘‘(C) SIZE.—The nominated area—

5 ‘‘(i) does not exceed 20 square miles,

6 ‘‘(ii) has a boundary which is continu7 ous, or consists of not more than 3 non8 contiguous parcels within the same metro9 politan area,

10 ‘‘(iii) is located entirely within 1

11 State, and

12 ‘‘(iv) does not include any portion of

13 a central business district (as such term is

14 used for purposes of the most recent Cen15 sus of Retail Trade).

16 ‘‘(D) UNEMPLOYMENT RATE.—The unem17 ployment rate (as determined by the appro18 priate available data) is not less than 1.5 times

19 the national unemployment rate.

20 ‘‘(E) POVERTY RATE.—The poverty rate

21 (as determined by the most recent census data

22 available) for not less than 90 percent of the

23 population census tracts (or where not tracted,

24 the equivalent county divisions as defined by

25 the Bureau of the Census for the purposes of
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1 defining poverty areas) within the nominated

2 area is not less than 20 percent.

3 ‘‘(F) COURSE OF ACTION.—There has been

4 adopted for the nominated area a course of ac5 tion which meets the requirements of subsection

6 (c).

7 ‘‘(2) RURAL DEVELOPMENT INVESTMENT

8 ZONES.—A nominated area which is a rural area

9 shall be eligible for designation under section 1391

10 only if it meets the following criteria:

11 ‘‘(A) POPULATION.—The nominated area

12 has a population (as determined by the most re13 cent census data available) of not less than

14 1,000.

15 ‘‘(B) DISTRESS.—The nominated area is

16 one of general distress.

17 ‘‘(C) SIZE.—The nominated area—

18 ‘‘(i) does not exceed 10,000 square

19 miles,

20 ‘‘(ii) consists of areas within not more

21 than 4 contiguous counties,

22 ‘‘(iii) has a boundary which is contin23 uous, or consists of not more than 3 non24 contiguous parcels, and
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1 ‘‘(iv) is located entirely within 1

2 State.

3 ‘‘(D) ADDITIONAL CRITERIA.—Not less

4 than 2 of the following criteria:

5 ‘‘(i) UNEMPLOYMENT RATE.—The cri6 terion set forth in paragraph (1)(D).

7 ‘‘(ii) POVERTY RATE.—The criterion

8 set forth in paragraph (1)(E).

9 ‘‘(iii) JOB LOSS.—The amount of

10 wages attributable to employment in the

11 area, and subject to tax under section

12 3301 during the preceding calendar year,

13 is not more than 95 percent of such wages

14 during the 5th preceding calendar year.

15 ‘‘(iv) OUT-MIGRATION.—The popu16 lation of the area decreased (as determined

17 by the most recent census data available)

18 by 10 percent or more between 1980 and

19 1990.

20 ‘‘(E) COURSE OF ACTION.—There has been

21 adopted for the nominated area a course of ac22 tion which meets the requirements of subsection

23 (c).

24 ‘‘(3) AREAS WITHIN INDIAN RESERVATIONS IN25 ELIGIBLE.—A nominated area shall not be eligible
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1 for designation under section 1391 if any portion of

2 such area is within an Indian reservation.

3 ‘‘(c) REQUIRED STATE AND LOCAL COURSE OF AC4 TION.—

5 ‘‘(1) IN GENERAL.—No nominated area may be

6 designated as a tax enterprise zone unless the local

7 government and the State in which it is located

8 agree in writing that, during any period during

9 which the area is a tax enterprise zone, the govern10 ments will follow a specified course of action de11 signed to reduce the various burdens borne by em12 ployers or employees in the area.

13 ‘‘(2) COURSE OF ACTION.—The course of action

14 under paragraph (1) may be implemented by both

15 governments and private nongovernmental entities,

16 may not be funded from proceeds of any Federal

17 program (other than discretionary proceeds), and

18 may include—

19 ‘‘(A) a certification by the State insurance

20 commissioner (or similar State official) that

21 basic commercial property insurance of a type

22 comparable to that insurance generally in force

23 in urban or rural areas, whichever is applicable,

24 throughout the State is available to businesses

25 within the tax enterprise zone,
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1 ‘‘(B) a reduction of tax rates or fees apply2 ing within the tax enterprise zone,

3 ‘‘(C) an increase in the level, or efficiency

4 of delivery, of local public services within the

5 tax enterprise zone,

6 ‘‘(D) actions to reduce, remove, simplify,

7 or streamline government paperwork require8 ments applicable within the tax enterprise zone,

9 ‘‘(E) the involvement in the program by

10 public authorities or private entities, organiza11 tions, neighborhood associations, and commu12 nity groups, particularly those within the nomi13 nated area, including a written commitment to

14 provide jobs and job training for, and technical,

15 financial, or other assistance to, employers, em16 ployees, and residents of the nominated area,

17 ‘‘(F) the giving of special preference to

18 contractors owned and operated by members of

19 any socially and economically disadvantaged

20 group (within the meaning of section 8(a) of

21 the Small Business Act (15 U.S.C. 637(a)),

22 ‘‘(G) the gift (or sale at below fair market

23 value) of surplus land in the tax enterprise zone

24 to neighborhood organizations agreeing to oper25 ate a business on the land,
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1 ‘‘(H) the establishment of a program

2 under which employers within the tax enterprise

3 zone may purchase health insurance for their

4 employees on a pooled basis,

5 ‘‘(I) the establishment of a program to en6 courage local financial institutions to satisfy

7 their obligations under the Community Rein8 vestment Act of 1977 (12 U.S.C. 2901 et seq.)

9 by making loans to enterprise zone businesses,

10 with emphasis on startup and other small-busi11 ness concerns (as defined in section 3(a) of the

12 Small Business Act (15 U.S.C. 632(a)),

13 ‘‘(J) the giving of special preference to

14 qualified low-income housing projects located in

15 tax enterprise zones, in the allocation of the

16 State housing credit ceiling applicable under

17 section 42, and

18 ‘‘(K) the giving of special preference to fa19 cilities located in tax enterprise zones, in the al20 location of the State ceiling on private activity

21 bonds applicable under section 146.

22 ‘‘(3) RECOGNITION OF PAST EFFORTS.—In

23 evaluating courses of action agreed to by any State

24 or local government, the appropriate Secretary shall

25 take into account the past efforts of the State or
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1 local government in reducing the various burdens

2 borne by employers and employees in the area in3 volved.

4 ‘‘(4) PROHIBITION OF ASSISTANCE FOR BUSI5 NESS RELOCATIONS.—

6 ‘‘(A) IN GENERAL.—The course of action

7 implemented under paragraph (1) may not in8 clude any action to assist any establishment in

9 relocating from one area to another area.

10 ‘‘(B) EXCEPTION.—The limitation estab11 lished in subparagraph (A) shall not be con12 strued to prohibit assistance for the expansion

13 of an existing business entity through the estab14 lishment of a new branch, affiliate, or subsidi15 ary if—

16 ‘‘(i) the establishment of the new

17 branch, affiliate, or subsidiary will not re18 sult in an increase in unemployment in the

19 area of original location or in any other

20 area where the existing business entity

21 conducts business operations, and

22 ‘‘(ii) there is no reason to believe that

23 the new branch, affiliate, or subsidiary is

24 being established with the intention of clos25 ing down the operations of the existing
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1 business entity in the area of its original

2 location or in any other area where the ex3 isting business entity conducts business op4 erations.

5 ‘‘(d) SELECTION CRITERIA.—From among the nomi6 nated areas eligible for designation under subsection (b)

7 by the appropriate Secretary, such appropriate Secretary

8 shall make designations of tax enterprise zones on the

9 basis of the following factors (each of which is to be given

10 equal weight):

11 ‘‘(1) STATE AND LOCAL COMMITMENTS.—The

12 strength and quality of the commitments which have

13 been promised as part of the course of action rel14 ative to the fiscal ability of the nominating State

15 and local governments.

16 ‘‘(2) IMPLEMENTATION OF COURSE OF AC17 TION.—The effectiveness and enforceability of the

18 guarantees that the course of action will actually be

19 carried out, including the specificity with which the

20 commitments under paragraph (1) are described in

21 order that the applicable Secretary will be better

22 able to determine annually under section

23 1391(d)(2)(A)(ii) whether the commitments are

24 being carried out.
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1 ‘‘(3) PRIVATE COMMITMENTS.—The level of

2 commitments by private entities of additional re3 sources and contributions to the economy of the

4 nominated area, including the creation of new or ex5 panded business activities.

6 ‘‘(4) AVERAGE RANKINGS.—The average rank7 ing with respect to—

8 ‘‘(A) the criteria set forth in subpara9 graphs (D) and (E) of subsection (b)(1), in the

10 case of an area which is not a rural area, or

11 ‘‘(B) the 2 criteria set forth in subsection

12 (b)(2)(D) that give the area a higher average

13 ranking, in the case of a rural area.

14 ‘‘(5) REVITALIZATION POTENTIAL.—The poten15 tial for the revitalization of the nominated area as

16 a result of zone designation, taking into account

17 particularly the number of jobs to be created and re18 tained.

19 ‘‘SEC. 1393. DEFINITIONS AND SPECIAL RULES.

20 For purposes of this subchapter—

21 ‘‘(1) URBAN TAX ENTERPRISE ZONE.—The

22 term ‘urban tax enterprise zone’ means a tax enter23 prise zone which meets the requirements of section

24 1392(b)(1).
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1 ‘‘(2) RURAL DEVELOPMENT INVESTMENT

2 ZONE.—The term ‘rural development investment

3 zone’ means a tax enterprise zone which meets the

4 requirements of section 1392(b)(2).

5 ‘‘(3) GOVERNMENTS.—If more than 1 local gov6 ernment seeks to nominate an area as a tax enter7 prise zone, any reference to, or requirement of, this

8 subchapter shall apply to all such governments.

9 ‘‘(4) LOCAL GOVERNMENT.—The term ‘local

10 government’ means—

11 ‘‘(A) any county, city, town, township, par12 ish, village, or other general purpose political

13 subdivision of a State, and

14 ‘‘(B) any combination of political subdivi15 sions described in subparagraph (A) recognized

16 by the appropriate Secretary.

17 ‘‘(5) NOMINATED AREA.—The term ‘nominated

18 area’ means an area which is nominated by 1 or

19 more local governments and the State in which it is

20 located for designation as a tax enterprise zone

21 under this subchapter.

22 ‘‘(6) RURAL AREA.—The term ‘rural area’

23 means any area which is—
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1 ‘‘(A) outside of a metropolitan statistical

2 area (within the meaning of section

3 143(k)(2)(B)), or

4 ‘‘(B) determined by the Secretary of Agri5 culture, after consultation with the Secretary of

6 Commerce, to be a rural area.

7 ‘‘(7) APPROPRIATE SECRETARY.—The term ‘ap8 propriate Secretary’ means—

9 ‘‘(A) the Secretary of Housing and Urban

10 Development in the case of urban tax enterprise

11 zones, and

12 ‘‘(B) the Secretary of Agriculture in the

13 case of rural development investment zones.

14 ‘‘(8) STATE-CHARTERED DEVELOPMENT COR15 PORATIONS.—An area shall be treated as nominated

16 by a State and a local government if it is nominated

17 by an economic development corporation chartered

18 by the State.

19 ‘‘PART II—INCENTIVES FOR TAX ENTERPRISE

20 ZONES

‘‘SUBPART A. Enterprise zone employment credit.

‘‘SUBPART B. Investment incentives.

‘‘SUBPART C. Regulations.

21 ‘‘Subpart A—Enterprise Zone Employment Credit

‘‘Sec. 1394. Enterprise zone employment credit.

‘‘Sec. 1395. Other definitions and special rules.
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1 ‘‘SEC. 1394. ENTERPRISE ZONE EMPLOYMENT CREDIT.

2 ‘‘(a) AMOUNT OF CREDIT.—For purposes of section

3 38, the amount of the enterprise zone employment credit

4 determined under this section with respect to any em5 ployer for any taxable year is 15 percent of the qualified

6 zone wages paid or incurred during such taxable year.

7 ‘‘(b) QUALIFIED ZONE WAGES.—

8 ‘‘(1) IN GENERAL.—For purposes of this sec9 tion, the term ‘qualified zone wages’ means any

10 wages paid or incurred by an employer for services

11 performed by an employee while such employee is a

12 qualified zone employee.

13 ‘‘(2) ONLY FIRST $20,000 OF WAGES PER YEAR

14 TAKEN INTO ACCOUNT.—With respect to each quali15 fied zone employee, the amount of qualified zone

16 wages which may be taken into account for the tax17 able year shall not exceed $20,000.

18 ‘‘(3) COORDINATION WITH TARGETED JOBS

19 CREDIT.—The term ‘qualified zone wages’ shall not

20 include wages attributable to service rendered during

21 the 1-year period beginning with the day the individ22 ual begins work for the employer if any portion of

23 such wages is taken into account in determining the

24 credit under section 51.

25 ‘‘(c) QUALIFIED ZONE EMPLOYEE.—For purposes of

26 this section—
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1 ‘‘(1) IN GENERAL.—Except as otherwise pro2 vided in this subsection, the term ‘qualified zone em3 ployee’ means, with respect to any period, any em4 ployee of an employer if—

5 ‘‘(A) substantially all of the services per6 formed during such period by such employee for

7 such employer are performed within a tax en8 terprise zone in a trade or business of the em9 ployer, and

10 ‘‘(B) the principal place of abode of such

11 employee while performing such services is

12 within such tax enterprise zone.

13 ‘‘(2) CERTAIN INDIVIDUALS NOT ELIGIBLE.—

14 The term ‘qualified zone employee’ shall not in15 clude—

16 ‘‘(A) any individual described in subpara17 graph (A), (B), or (C) of section 51(i)(1),

18 ‘‘(B) any 5-percent owner (as defined in

19 section 416(i)(1)(B)),

20 ‘‘(C) any individual employed by the em21 ployer at any facility described in section

22 144(c)(6)(B), and

23 ‘‘(D) any individual employed by the em24 ployer in a trade or business the principal activ25 ity of which is farming (within the meaning of
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1 subparagraphs (A) or (B) of section

2 2032A(e)(5)), but only if, as of the close of the

3 taxable year, the sum of—

4 ‘‘(i) the aggregate unadjusted bases

5 (or, if greater, the fair market value) of

6 the assets owned by the employer which

7 are used in such a trade or business, and

8 ‘‘(ii) the aggregate value of assets

9 leased by the employer which are used in

10 such a trade or business (as determined

11 under regulations prescribed by the Sec12 retary),

13 exceeds $500,000.

14 ‘‘(d) EARLY TERMINATION OF EMPLOYMENT BY EM15 PLOYER.—

16 ‘‘(1) IN GENERAL.—If the employment of any

17 employee is terminated by the taxpayer before the

18 day 1 year after the day on which such employee

19 began work for the employer—

20 ‘‘(A) no wages with respect to such em21 ployee shall be taken into account under sub22 section (a) for the taxable year in which such

23 employment is terminated, and

24 ‘‘(B) the tax under this chapter for the

25 taxable year in which such employment is ter-
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1 minated shall be increased by the aggregate

2 credits (if any) allowed under section 38(a) for

3 prior taxable years by reason of wages taken

4 into account with respect to such employee.

5 ‘‘(2) CARRYBACKS AND CARRYOVERS AD6 JUSTED.—In the case of any termination of employ7 ment to which paragraph (1) applies, the carrybacks

8 and carryovers under section 39 shall be properly

9 adjusted.

10 ‘‘(3) SUBSECTION NOT TO APPLY IN CERTAIN

11 CASES.—

12 ‘‘(A) IN GENERAL.—Paragraph (1) shall

13 not apply to—

14 ‘‘(i) a termination of employment of

15 an employee who voluntarily leaves the em16 ployment of the taxpayer,

17 ‘‘(ii) a termination of employment of

18 an individual who before the close of the

19 period referred to in paragraph (1) be20 comes disabled to perform the services of

21 such employment unless such disability is

22 removed before the close of such period

23 and the taxpayer fails to offer reemploy24 ment to such individual, or
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1 ‘‘(iii) a termination of employment of

2 an individual if it is determined under the

3 applicable State unemployment compensa4 tion law that the termination was due to

5 the misconduct of such individual.

6 ‘‘(B) CHANGES IN FORM OF BUSINESS.—

7 For purposes of paragraph (1), the employment

8 relationship between the taxpayer and an em9 ployee shall not be treated as terminated—

10 ‘‘(i) by a transaction to which section

11 381(a) applies if the employee continues to

12 be employed by the acquiring corporation,

13 or

14 ‘‘(ii) by reason of a mere change in

15 the form of conducting the trade or busi16 ness of the taxpayer if the employee con17 tinues to be employed in such trade or

18 business and the taxpayer retains a sub19 stantial interest in such trade or business.

20 ‘‘(4) SPECIAL RULE.—Any increase in tax

21 under paragraph (1) shall not be treated as a tax

22 imposed by this chapter for purposes of—

23 ‘‘(A) determining the amount of any credit

24 allowable under this chapter, and
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1 ‘‘(B) determining the amount of the tax

2 imposed by section 55.

3 ‘‘SEC. 1395. OTHER DEFINITIONS AND SPECIAL RULES.

4 ‘‘(a) WAGES.—For purposes of this subpart, the term

5 ‘wages’ has the same meaning as when used in section

6 51.

7 ‘‘(b) CONTROLLED GROUPS.—For purposes of this

8 subpart—

9 ‘‘(1) all employers treated as a single employer

10 under subsection (a) or (b) of section 52 shall be

11 treated as a single employer for purposes of this

12 subpart, and

13 ‘‘(2) the credit (if any) determined under sec14 tion 1394 with respect to each such employer shall

15 be its proportionate share of the wages giving rise

16 to such credit.

17 ‘‘(c) CERTAIN OTHER RULES MADE APPLICABLE.—

18 For purposes of this subpart, rules similar to the rules

19 of section 51(k) and subsections (c), (d), and (e) of section

20 52 shall apply.

21 ‘‘(d) NOTICE OF AVAILABILITY OF ADVANCE PAY22 MENT OF EARNED INCOME CREDIT.—Each employer

23 shall take reasonable steps to notify all qualified zone em24 ployees of the availability to eligible individuals of receiv-
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1 ing advanced payments of the credit under section 32 (re2 lating to the earned income credit).

3 ‘‘Subpart B—Investment Incentives

‘‘Sec. 1396. Deduction for purchase of enterprise zone stock.

‘‘Sec. 1397. 50 percent exclusion for gain from new zone investments.

‘‘Sec. 1397A. Nonrecognition of gain from new zone investments.

‘‘Sec. 1397B. Other incentives.

‘‘Sec. 1397C. Enterprise zone business defined.

4 ‘‘SEC. 1396. DEDUCTION FOR PURCHASE OF ENTERPRISE

5 ZONE STOCK.

6 ‘‘(a) GENERAL RULE.—In the case of an individual,

7 there shall be allowed as a deduction an amount equal to

8 50 percent of the aggregate amount paid in cash by the

9 taxpayer during the taxable year for the purchase of enter10 prise zone stock.

11 ‘‘(b) LIMITATION.—

12 ‘‘(1) IN GENERAL.—The maximum amount al13 lowed as a deduction under subsection (a) to a tax14 payer for the taxable year shall not exceed the lesser

15 of—

16 ‘‘(A) $25,000, or

17 ‘‘(B) the excess of $250,000 over the

18 amount allowed as a deduction under this sec19 tion to the taxpayer for all prior taxable years.

20 ‘‘(2) EXCESS AMOUNTS.—If the amount other21 wise deductible by any person under subsection (a)

22 exceeds the limitation under paragraph (1)(A)—
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1 ‘‘(A) the amount of such excess shall be

2 treated as an amount paid to which subsection

3 (a) applies during the next taxable year, and

4 ‘‘(B) the deduction allowed for any taxable

5 year shall be allocated proportionately among

6 the enterprise zone stock purchased by such

7 person on the basis of the respective purchase

8 prices per share.

9 ‘‘(3) AGGREGATION WITH FAMILY MEMBERS.—

10 The taxpayer and members of the taxpayer’s family

11 shall be treated as one person for purposes of para12 graph (1), and the limitations contained in such

13 paragraph shall be allocated among the taxpayer and

14 such members in accordance with their respective

15 purchases of enterprise zone stock. For purposes of

16 this paragraph, an individual’s family includes only

17 such individual’s spouse and minor children.

18 ‘‘(c) ENTERPRISE ZONE STOCK.—For purposes of

19 this section—

20 ‘‘(1) IN GENERAL.—The term ‘enterprise zone

21 stock’ means stock of a corporation if—

22 ‘‘(A) such stock is acquired on original

23 issue from the corporation, and

24 ‘‘(B) such corporation is, at the time of

25 issue, a qualified enterprise zone issuer.
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1 ‘‘(2) PROCEEDS MUST BE INVESTED IN QUALI2 FIED ENTERPRISE ZONE PROPERTY.—

3 ‘‘(A) IN GENERAL.—Such term shall in4 clude such stock only to the extent that the pro5 ceeds of such issuance are used by such issuer

6 during the 12-month period beginning on the

7 date of issuance to purchase (as defined in sec8 tion 179(d)(2)) qualified enterprise zone prop9 erty.

10 ‘‘(B) QUALIFIED ENTERPRISE ZONE PROP11 ERTY.—For purposes of this section, the term

12 ‘qualified enterprise zone property’ means prop13 erty to which section 168 applies—

14 ‘‘(i) the original use of which in a tax

15 enterprise zone commences with the issuer,

16 and

17 ‘‘(ii) substantially all of the use of

18 which is in a tax enterprise zone.

19 ‘‘(3) REDEMPTIONS.—The term ‘enterprise

20 zone stock’ shall not include any stock acquired from

21 a corporation which made a substantial stock re22 demption or distribution (without a bona fide busi23 ness purpose therefor) in an attempt to avoid the

24 purposes of this section.
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1 ‘‘(d) QUALIFIED ENTERPRISE ZONE ISSUER.—For

2 purposes of this section, the term ‘qualified enterprise

3 zone issuer’ means any domestic C corporation if—

4 ‘‘(1) such corporation is an enterprise zone

5 business or, in the case of a new corporation, such

6 corporation is being organized for purposes of being

7 an enterprise zone business,

8 ‘‘(2) such corporation does not have more than

9 one class of stock,

10 ‘‘(3) the sum of—

11 ‘‘(A) the money,

12 ‘‘(B) the aggregate unadjusted bases of

13 property owned by such corporation, and

14 ‘‘(C) the value of property leased to the

15 corporation (as determined under regulations

16 prescribed by the Secretary),

17 does not exceed $5,000,000, and

18 ‘‘(4) more than 20 percent of the total voting

19 power, and 20 percent of the total value, of the

20 stock of such corporation is owned directly by indi21 viduals or estates or indirectly by individuals

22 through partnerships or trusts.

23 The determination under paragraph (3) shall be made as

24 of the time of issuance of the stock in question but shall

25 include amounts received for such stock.
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1 ‘‘(e) DISPOSITIONS OF STOCK.—

2 ‘‘(1) BASIS REDUCTION.—For purposes of this

3 title, the basis of any enterprise zone stock shall be

4 reduced by the amount of the deduction allowed

5 under this section with respect to such stock.

6 ‘‘(2) DEDUCTION RECAPTURED AS ORDINARY

7 INCOME.—For purposes of section 1245—

8 ‘‘(A) any stock the basis of which is re9 duced under paragraph (1) (and any other

10 property the basis of which is determined in

11 whole or in part by reference to the adjusted

12 basis of such stock) shall be treated as section

13 1245 property, and

14 ‘‘(B) any reduction under paragraph (1)

15 shall be treated as a deduction allowed for de16 preciation.

17 If an exchange of any stock described in paragraph

18 (1) qualifies under section 354(a), 355(a), or

19 356(a), the amount of gain recognized under section

20 1245 by reason of this paragraph shall not exceed

21 the amount of gain recognized in the exchange (de22 termined without regard to this paragraph).

23 ‘‘(3) CERTAIN EVENTS TREATED AS DISPOSI24 TIONS.—For purposes of determining the amount

25 treated as ordinary income under section 1245 by
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1 reason of paragraph (2), paragraph (3) of section

2 1245(b) (relating to certain tax-free transactions)

3 shall not apply.

4 ‘‘(4) INTEREST CHARGED IF DISPOSITION

5 WITHIN 5 YEARS OF PURCHASE.—

6 ‘‘(A) IN GENERAL.—If—

7 ‘‘(i) a taxpayer disposes of any enter8 prise zone stock with respect to which a

9 deduction was allowed under subsection (a)

10 (or any other property the basis of which

11 is determined in whole or in part by ref12 erence to the adjusted basis of such stock)

13 before the end of the 5-year period begin14 ning on the date such stock was purchased

15 by the taxpayer, and

16 ‘‘(ii) section 1245(a) applies to such

17 disposition by reason of paragraph (2),

18 then the tax imposed by this chapter for the

19 taxable year in which such disposition occurs

20 shall be increased by the amount determined

21 under subparagraph (B).

22 ‘‘(B) ADDITIONAL AMOUNT.—For purposes

23 of subparagraph (A), the additional amount

24 shall be equal to the amount of interest (deter-
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1 mined at the rate applicable under section

2 6621(a)(2)) that would accrue—

3 ‘‘(i) during the period beginning on

4 the date the stock was purchased by the

5 taxpayer and ending on the date of such

6 disposition by the taxpayer,

7 ‘‘(ii) on an amount equal to the aggre8 gate decrease in tax of the taxpayer result9 ing from the deduction allowed under this

10 subsection (a) with respect to such stock.

11 ‘‘(C) SPECIAL RULE.—Any increase in tax

12 under subparagraph (A) shall not be treated as

13 a tax imposed by this chapter for purposes of—

14 ‘‘(i) determining the amount of any

15 credit allowable under this chapter, and

16 ‘‘(ii) determining the amount of the

17 tax imposed by section 55.

18 ‘‘(f) DISQUALIFICATION.—

19 ‘‘(1) ISSUER CEASES TO QUALIFY.—If, during

20 the 10-year period beginning on the date enterprise

21 zone stock was purchased by the taxpayer, the issuer

22 of such stock ceases to be a qualified enterprise zone

23 issuer (determined without regard to subsection

24 (d)(3)), then notwithstanding any provision of this

25 subtitle other than paragraph (2), the taxpayer shall
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1 be treated for purposes of subsection (e) as dispos2 ing of such stock (and any other property the basis

3 of which is determined in whole or in part by ref4 erence to the adjusted basis of such stock) during

5 the taxable year during which such cessation occurs

6 at its fair market value as of the 1st day of such

7 taxable year.

8 ‘‘(2) CESSATION OF ENTERPRISE ZONE STATUS

9 NOT TO CAUSE RECAPTURE.—A corporation shall

10 not fail to be treated as a qualified enterprise zone

11 issuer for purposes of paragraph (1) solely by reason

12 of the termination or revocation of a tax enterprise

13 zone designation.

14 ‘‘(g) OTHER SPECIAL RULES.—

15 ‘‘(1) APPLICATION OF LIMITS TO PARTNER16 SHIPS AND S CORPORATIONS.—In the case of a part17 nership or an S corporation, the limitations under

18 subsection (b) shall apply at the partner and share19 holder level and shall not apply at the partnership

20 or corporation level.

21 ‘‘(2) DEDUCTION NOT ALLOWED TO ESTATES

22 AND TRUSTS.—Estates and trusts shall not be treat23 ed as individuals for purposes of this section.
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1 ‘‘SEC. 1397. 50 PERCENT EXCLUSION FOR GAIN FROM NEW

2 ZONE INVESTMENTS.

3 ‘‘(a) GENERAL RULE.—In the case of an individual,

4 gross income shall not include 50 percent of any qualified

5 capital gain recognized on the sale or exchange of a quali6 fied zone asset held for more than 5 years.

7 ‘‘(b) QUALIFIED ZONE ASSET.—For purposes of this

8 section—

9 ‘‘(1) IN GENERAL.—The term ‘qualified zone

10 asset’ means—

11 ‘‘(A) any qualified zone stock,

12 ‘‘(B) any qualified zone business property,

13 and

14 ‘‘(C) any qualified zone partnership inter15 est.

16 ‘‘(2) QUALIFIED ZONE STOCK.—

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

18 subparagraph (B), the term ‘qualified zone

19 stock’ means any stock in a domestic corpora20 tion if—

21 ‘‘(i) such stock is acquired by the tax22 payer on original issue from the corpora23 tion solely in exchange for cash,

24 ‘‘(ii) as of the time such stock was is25 sued, such corporation was an enterprise

26 zone business (or, in the case of a new cor-
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1 poration, such corporation was being orga2 nized for purposes of being an enterprise

3 zone business), and

4 ‘‘(iii) during substantially all of the

5 taxpayer’s holding period for such stock,

6 such corporation qualified as an enterprise

7 zone business.

8 ‘‘(B) EXCLUSION OF STOCK FOR WHICH

9 DEDUCTION UNDER SECTION 1396 ALLOWED.—

10 The term ‘qualified zone stock’ shall not include

11 any stock the basis of which is reduced under

12 section 1396(e)(1).

13 ‘‘(C) REDEMPTIONS.—The term ‘qualified

14 zone stock’ shall not include any stock acquired

15 from a corporation which made a substantial

16 stock redemption or distribution (without a

17 bona fide business purpose therefor) in an at18 tempt to avoid the purposes of this section.

19 ‘‘(3) QUALIFIED ZONE BUSINESS PROPERTY.—

20 ‘‘(A) IN GENERAL.—The term ‘qualified

21 zone business property’ means tangible property

22 if—

23 ‘‘(i) such property was acquired by

24 the taxpayer by purchase (as defined in

25 section 179(d)(2)) after the date on which
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1 the designation of the tax enterprise zone

2 took effect,

3 ‘‘(ii) the original use of such property

4 in a tax enterprise zone commences with

5 the taxpayer, and

6 ‘‘(iii) during substantially all of the

7 taxpayer’s holding period for such prop8 erty, substantially all of the use of such

9 property was in a tax enterprise zone and

10 in an enterprise zone business of the tax11 payer.

12 ‘‘(B) SPECIAL RULE FOR SUBSTANTIAL IM13 PROVEMENTS.—The requirements of clauses (i)

14 and (ii) of subparagraph (A) shall be treated as

15 satisfied with respect to—

16 ‘‘(i) property which is substantially

17 improved by the taxpayer, and

18 ‘‘(ii) any land on which such property

19 is located.

20 For purposes of the preceding sentence, prop21 erty shall be treated as substantially improved

22 by the taxpayer if, during any 24-month period

23 beginning after the date on which the designa24 tion of the tax enterprise zone took effect, addi25 tions to basis with respect to such property in
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1 the hands of the taxpayer exceed the greater of

2 (i) an amount equal to the adjusted basis at the

3 beginning of such 24-month period in the hands

4 of the taxpayer, or (ii) $5,000.

5 ‘‘(C) LIMITATION ON LAND.—The term

6 ‘qualified zone business property’ shall not in7 clude land which is not an integral part of a

8 qualified business (as defined in section

9 1397C(c)).

10 ‘‘(4) QUALIFIED ZONE PARTNERSHIP INTER11 EST.—The term ‘qualified zone partnership interest’

12 means any interest in a partnership if—

13 ‘‘(A) such interest is acquired by the tax14 payer from the partnership solely in exchange

15 for cash,

16 ‘‘(B) as of the time such interest was ac17 quired, such partnership was an enterprise zone

18 business (or, in the case of a new partnership,

19 such partnership was being organized for pur20 poses of being an enterprise zone business), and

21 ‘‘(C) during substantially all of the tax22 payer’s holding period for such interest, such

23 partnership qualified as an enterprise zone

24 business.
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1 A rule similar to the rule of paragraph (2)(C) shall

2 apply for purposes of this paragraph.

3 ‘‘(5) TREATMENT OF SUBSEQUENT PUR4 CHASERS.—The term ‘qualified zone asset’ includes

5 any property which would be a qualified zone asset

6 but for paragraph (2)(A)(i), (3)(A)(ii), or (4)(A) in

7 the hands of the taxpayer if such property was a

8 qualified zone asset in the hands of any prior holder.

9 ‘‘(6) 10-YEAR SAFE HARBOR.—If any property

10 ceases to be a qualified zone asset by reason of para11 graph (2)(A)(iii), (3)(A)(iii), or (4)(C) after the 10-

12 year period beginning on the date the taxpayer ac13 quired such property, such property shall continue to

14 be treated as meeting the requirements of such

15 paragraph; except that the amount of gain to which

16 subsection (a) applies on any sale or exchange of

17 such property shall not exceed the amount which

18 would be qualified capital gain had such property

19 been sold on the date of such cessation.

20 ‘‘(7) TREATMENT OF ZONE TERMINATIONS.—

21 The termination of any designation of an area as a

22 tax enterprise zone shall be disregarded for purposes

23 of determining whether any property is a qualified

24 zone asset.
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1 ‘‘(c) OTHER DEFINITIONS AND SPECIAL RULES.—

2 For purposes of this section—

3 ‘‘(1) QUALIFIED CAPITAL GAIN.—Except as

4 otherwise provided in this subsection, the term

5 ‘qualified capital gain’ means any long-term capital

6 gain.

7 ‘‘(2) CERTAIN GAIN ON REAL PROPERTY NOT

8 QUALIFIED.—The term ‘qualified capital gain’ shall

9 not include any gain which would be treated as ordi10 nary income under section 1250 if section 1250 ap11 plied to all depreciation rather than the additional

12 depreciation.

13 ‘‘(3) GAIN ATTRIBUTABLE TO PERIODS AFTER

14 TERMINATION OF ZONE DESIGNATION NOT QUALI15 FIED.—The term ‘qualified capital gain’ shall not in16 clude any gain attributable to periods after the ter17 mination of any designation of an area as a tax en18 terprise zone.

19 ‘‘(d) TREATMENT OF PASS-THRU ENTITIES.—

20 ‘‘(1) SALES AND EXCHANGES.—Gain on the

21 sale or exchange of an interest in a pass-thru entity

22 held by the taxpayer (other than an interest in an

23 entity which was an enterprise zone business during

24 substantially all of the period the taxpayer held such

25 interest) for more than 5 years shall be treated as
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1 gain described in subsection (a) to the extent such

2 gain is attributable to amounts which would be

3 qualified capital gain on qualified zone assets (deter4 mined as if such assets had been sold on the date

5 of the sale or exchange) held by such entity for more

6 than 5 years and throughout the period the taxpayer

7 held such interest. A rule similar to the rule of para8 graph (2)(C) shall apply for purposes of the preced9 ing sentence.

10 ‘‘(2) INCOME INCLUSIONS.—

11 ‘‘(A) IN GENERAL.—Any amount included

12 in income by reason of holding an interest in a

13 pass-thru entity (other than an entity which

14 was an enterprise zone business during substan15 tially all of the period the taxpayer held the in16 terest to which such inclusion relates) shall be

17 treated as gain described in subsection (a) if

18 such amount meets the requirements of sub19 paragraph (B).

20 ‘‘(B) REQUIREMENTS.—An amount meets

21 the requirements of this subparagraph if—

22 ‘‘(i) such amount is attributable to

23 qualified capital gain recognized on the

24 sale or exchange by the pass-thru entity of

25 property which is a qualified zone asset in
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1 the hands of such entity and which was

2 held by such entity for the period required

3 under subsection (a), and

4 ‘‘(ii) such amount is includible in the

5 gross income of the taxpayer by reason of

6 the holding of an interest in such entity

7 which was held by the taxpayer on the date

8 on which such pass-thru entity acquired

9 such asset and at all times thereafter be10 fore the disposition of such asset by such

11 pass-thru entity.

12 ‘‘(C) LIMITATION BASED ON INTEREST

13 ORIGINALLY HELD BY TAXPAYER.—Subpara14 graph (A) shall not apply to any amount to the

15 extent such amount exceeds the amount to

16 which subparagraph (A) would have applied if

17 such amount were determined by reference to

18 the interest the taxpayer held in the pass-thru

19 entity on the date the qualified zone asset was

20 acquired.

21 ‘‘(3) PASS-THRU ENTITY.—For purposes of this

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

23 ‘‘(A) any partnership,

24 ‘‘(B) any S corporation,
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1 ‘‘(C) any regulated investment company,

2 and

3 ‘‘(D) any common trust fund.

4 ‘‘(e) SALES AND EXCHANGES OF INTERESTS IN

5 PARTNERSHIPS AND S CORPORATIONS WHICH ARE

6 QUALIFIED ZONE BUSINESSES.—In the case of the sale

7 or exchange of an interest in a partnership, or of stock

8 in an S corporation, which was an enterprise zone business

9 during substantially all of the period the taxpayer held

10 such interest or stock, the amount of qualified capital gain

11 shall be determined without regard to—

12 ‘‘(1) any intangible, and any land, which is not

13 an integral part of any qualified business (as defined

14 in section 1397C(b)), and

15 ‘‘(2) gain attributable to periods before the des16 ignation of an area as a tax enterprise zone.

17 ‘‘(f) CERTAIN TAX-FREE AND OTHER TRANSFERS.—

18 For purposes of this section—

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

20 a qualified zone asset to which this subsection ap21 plies, the transferee shall be treated as—

22 ‘‘(A) having acquired such asset in the

23 same manner as the transferor, and

24 ‘‘(B) having held such asset during any

25 continuous period immediately preceding the
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1 transfer during which it was held (or treated as

2 held under this subsection) by the transferor.

3 ‘‘(2) TRANSFERS TO WHICH SUBSECTION AP4 PLIES.—This subsection shall apply to any trans5 fer—

6 ‘‘(A) by gift,

7 ‘‘(B) at death, or

8 ‘‘(C) from a partnership to a partner

9 thereof of a qualified zone asset with respect to

10 which the requirements of subsection (d)(2) are

11 met at the time of the transfer (without regard

12 to the 5-year holding requirement).

13 ‘‘(3) CERTAIN RULES MADE APPLICABLE.—

14 Rules similar to the rules of section 1244(d)(2) shall

15 apply for purposes of this section.

16 ‘‘(g) CERTAIN BUSINESSES TREATED AS NOT

17 QUALIFIED BUSINESSES.—For purposes of this section

18 and section 1397A, the term ‘enterprise zone business’ has

19 the meaning given such term by section 1397C except

20 that, in applying section 1397C for such purposes, the

21 term ‘qualified business’ shall not include any trade or

22 business of producing property of a character subject to

23 the allowance for depletion under section 611.
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1 ‘‘SEC. 1397A. NONRECOGNITION OF GAIN FROM NEW ZONE

2 INVESTMENTS.

3 ‘‘(a) GENERAL RULE.—At the election of an individ4 ual, qualified capital gain (within the meaning of section

5 1397) from the sale or exchange of a qualified zone asset

6 shall be recognized only to the extent that—

7 ‘‘(1) the amount realized from such sale or ex8 change, exceeds

9 ‘‘(2) the cost (not heretofore taken into account

10 under this subsection) of any qualified zone asset

11 purchased directly by the taxpayer during the rein12 vestment period.

13 ‘‘(b) QUALIFIED ZONE ASSET.—For purposes of this

14 section—

15 ‘‘(1) IN GENERAL.—The term ‘qualified zone

16 asset’ has the meaning given such term by section

17 1397.

18 ‘‘(2) TIME FOR TESTING.—

19 ‘‘(A) SALES.—In the case of a sale or ex20 change of property, the determination of wheth21 er such property is a qualified zone asset shall

22 be made as of the time of the sale or exchange.

23 ‘‘(B) PURCHASES.—In the case of a pur24 chase of property, the determination of whether

25 such property is a qualified zone asset shall be

26 made as of the time of such purchase.
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1 ‘‘(c) OTHER DEFINITIONS.—For purposes of this

2 section—

3 ‘‘(1) REINVESTMENT PERIOD.—The term ‘rein4 vestment period’ means, with respect to any sale or

5 exchange, the 6-month period beginning on the date

6 of such sale or exchange.

7 ‘‘(2) PURCHASE.—The term ‘purchase’ has the

8 meaning given to such term by section 179(d)(2).

9 ‘‘(d) BUSINESS OR PROPERTY CEASES TO QUAL10 IFY.—

11 ‘‘(1) IN GENERAL.—If, during the 10-year pe12 riod beginning on the date any qualified zone re13 placement asset was purchased by the taxpayer,

14 such asset ceases to be a qualified zone asset, not15 withstanding any provision of this subtitle other

16 than paragraph (3), the taxpayer shall be treated as

17 disposing of such asset during the taxable year dur18 ing which such cessation occurs at its fair market

19 value as of the 1st day of such taxable year.

20 ‘‘(2) LIMITATION ON GAIN RECOGNIZED.—The

21 amount of gain recognized pursuant to paragraph

22 (1) with respect to any asset shall not exceed the

23 lesser of—
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1 ‘‘(A) the amount of gain which was not

2 recognized under subsection (a) by the reason

3 of the purchase of such asset, or

4 ‘‘(B) the excess of the fair market value

5 referred to in paragraph (1) over the adjusted

6 basis of such asset.

7 ‘‘(3) CESSATION OF ENTERPRISE ZONE STATUS

8 NOT TO CAUSE RECAPTURE.—An asset shall not fail

9 to be treated as a qualified zone asset for purposes

10 of paragraph (1) solely by reason of the termination

11 of a tax enterprise zone designation.

12 ‘‘(4) QUALIFIED ZONE REPLACEMENT ASSET.—

13 For purposes of paragraph (1), the term ‘qualified

14 zone replacement asset’ means any qualified zone

15 asset the purchase of which resulted in the non16 recognition of gain under subsection (a) with respect

17 to any other property.

18 ‘‘(e) BASIS OF QUALIFIED ZONE REPLACEMENT

19 ASSET.—If gain from the sale or exchange of any property

20 is not recognized by reason of subsection (a), such gain

21 shall be applied to reduce (in the order acquired) the basis

22 of any qualified zone replacement asset (as defined in sub23 section (d)(4)) purchased during the reinvestment period.

24 ‘‘(f) COORDINATION WITH INSTALLMENT METHOD

25 REPORTING.—This section shall not apply to any gain
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1 from any installment sale (as defined in section 453(b))

2 if section 453(a) applies to such sale.

3 ‘‘(g) STATUTE OF LIMITATIONS.—If any gain is real4 ized by the taxpayer on any sale or exchange to which

5 an election under this section applies, then—

6 ‘‘(1) the statutory period for the assessment of

7 any deficiency with respect to such gain shall not ex8 pire before the expiration of 3 years from the date

9 the Secretary is notified by the taxpayer (in such

10 manner as the Secretary may by regulations pre11 scribe) of—

12 ‘‘(A) the taxpayer’s cost of purchasing any

13 qualified zone replacement asset,

14 ‘‘(B) the taxpayer’s intention not to pur15 chase a qualified zone replacement asset within

16 the reinvestment period, or

17 ‘‘(C) a failure to make such purchase with18 in the reinvestment period, and

19 ‘‘(2) such deficiency may be assessed before the

20 expiration of such 3-year period notwithstanding the

21 provisions of any law or rule of law which would oth22 erwise prevent such assessment.

23 ‘‘SEC. 1397B. ADDITIONAL INCENTIVES.

24 ‘‘(a) INCREASE IN EXPENSING UNDER SECTION

25 179.—In the case of an enterprise zone business, section
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1 179(b)(1) shall be applied by substituting ‘$20,000’ for

2 ‘$10,000’.

3 ‘‘(b) ORDINARY LOSS TREATMENT FOR CERTAIN

4 PROPERTY.—

5 ‘‘(1) IN GENERAL.—Loss on any qualified zone

6 asset (as defined in section 1397(b)) held for more

7 than 2 years (5 years in the case of real property)

8 shall be treated as an ordinary loss.

9 ‘‘(2) REAL PROPERTY.—For purposes of para10 graph (1), the term ‘real property’ means any prop11 erty which is section 1250 property (as defined in

12 section 1250(c)).

13 ‘‘(3) SPECIAL RULES.—

14 ‘‘(A) CERTAIN RULES MADE APPLICA15 BLE.—For purposes of this subsection, rules

16 similar to the following rules shall apply:

17 ‘‘(i) Paragraphs (1), (2), and (3) of

18 section 1244(d).

19 ‘‘(ii) Subsections (b)(6), (c)(3), (d),

20 (e), and (f) of section 1397.

21 ‘‘(B) COORDINATION WITH SECTION

22 1231.—Losses treated as ordinary losses by rea23 son of this subsection shall not be taken into

24 account in applying section 1231.
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1 ‘‘SEC. 1397C. ENTERPRISE ZONE BUSINESS DEFINED.

2 ‘‘(a) IN GENERAL.—For purposes of this subpart, the

3 term ‘enterprise zone business’ means—

4 ‘‘(1) any qualified business entity, and

5 ‘‘(2) any qualified proprietorship.

6 ‘‘(b) QUALIFIED BUSINESS ENTITY.—For purposes

7 of this section, the term ‘qualified business entity’ means,

8 with respect to any taxable year, any corporation or part9 nership if for such year—

10 ‘‘(1)(A) every trade or business of such entity

11 is the active conduct of a qualified business within

12 a tax enterprise zone, and

13 ‘‘(B) at least 80 percent of the total gross in14 come of such entity is derived from the active con15 duct of such business,

16 ‘‘(2) substantially all of the use of the tangible

17 property of such entity (whether owned or leased) is

18 within a tax enterprise zone,

19 ‘‘(3) substantially all of the intangible property

20 of such entity is used in, and exclusively related to,

21 the active conduct of any such business,

22 ‘‘(4) substantially all of the services performed

23 for such entity by its employees are performed in a

24 tax enterprise zone,

‘‘(5) at least 1 25 ⁄3 of its employees are residents

26 of a tax enterprise zone,
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1 ‘‘(6) less than 5 percent of the average of the

2 aggregate unadjusted bases of the property of such

3 entity is attributable to collectibles (as defined in

4 section 408(m)(2)) other than collectibles that are

5 held primarily for sale to customers in the ordinary

6 course of such business, and

7 ‘‘(7) less than 5 percent of the average of the

8 aggregate unadjusted bases of the property of such

9 entity is attributable to nonqualified financial prop10 erty.

11 ‘‘(c) QUALIFIED PROPRIETORSHIP.—For purposes of

12 this section, the term ‘qualified proprietorship’ means,

13 with respect to any taxable year, any qualified business

14 carried on by an individual as a proprietorship if for such

15 year—

16 ‘‘(1) at least 80 percent of the total gross in17 come of such individual from such business is de18 rived from the active conduct of such business in a

19 tax enterprise zone,

20 ‘‘(2) substantially all of the use of the tangible

21 property of such individual in such business (wheth22 er owned or leased) is within a tax enterprise zone,

23 ‘‘(3) substantially all of the intangible property

24 of such business is used in, and exclusively related

25 to, the active conduct of such business,
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1 ‘‘(4) substantially all of the services performed

2 for such individual in such business by employees of

3 such business are performed in a tax enterprise

4 zone,

‘‘(5) at least 1 5 ⁄3 of such employees are residents

6 of a tax enterprise zone,

7 ‘‘(6) less than 5 percent of the average of the

8 aggregate unadjusted bases of the property of such

9 individual which is used in such business is attrib10 utable to collectibles (as defined in section

11 408(m)(2)) other than collectibles that are held pri12 marily for sale to customers in the ordinary course

13 of such business, and

14 ‘‘(7) less than 5 percent of the average of the

15 aggregate unadjusted bases of the property of such

16 individual which is used in such business is attrib17 utable to nonqualified financial property.

18 For purposes of this subsection, the term ‘employee’ in19 cludes the proprietor.

20 ‘‘(d) QUALIFIED BUSINESS.—For purposes of this

21 section—

22 ‘‘(1) IN GENERAL.—Except as otherwise pro23 vided in this subsection, the term ‘qualified business’

24 means any trade or business.
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1 ‘‘(2) RENTAL OF REAL PROPERTY.—The rental

2 to others of real property located in a tax enterprise

3 zone shall be treated as a qualified business if and

4 only if—

5 ‘‘(A) in the case of real property which is

6 not residential rental property (as defined in

7 section 168(e)(2)), the lessee is an enterprise

8 zone business, or

9 ‘‘(B) in the case of residential rental prop10 erty (as so defined)—

11 ‘‘(i) such property was originally

12 placed in service after the date the tax en13 terprise zone was designated, or

14 ‘‘(ii) such property is rehabilitated

15 after such date in a rehabilitation which

16 meets requirements based on the principles

17 of section 42(e)(3).

18 ‘‘(3) RENTAL OF TANGIBLE PERSONAL PROP19 ERTY.—The rental to others of tangible personal

20 property shall be treated as a qualified business if

21 and only if substantially all of the rental of such

22 property is by enterprise zone businesses or by resi23 dents of a tax enterprise zone.

24 ‘‘(4) TREATMENT OF BUSINESS HOLDING IN25 TANGIBLES.—The term ‘qualified business’ shall not
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1 include any trade or business consisting predomi2 nantly of the development or holding of intangibles

3 for sale or license.

4 ‘‘(5) CERTAIN BUSINESSES EXCLUDED.—The

5 term ‘qualified business’ shall not include—

6 ‘‘(A) any trade or business consisting of

7 the operation of any facility described in section

8 144(c)(6)(B), and

9 ‘‘(B) any trade or business the principal

10 activity of which is farming (within the meaning

11 of subparagraphs (A) or (B) of section

12 2032A(e)(5)), but only if, as of the close of the

13 preceding taxable year, the sum of—

14 ‘‘(i) the aggregate unadjusted bases

15 (or, if greater, the fair market value) of

16 the assets owned by the taxpayer which are

17 used in such a trade or business, and

18 ‘‘(ii) the aggregate value of assets

19 leased by the taxpayer which are used in

20 such a trade or business,

21 exceeds $500,000.

22 For purposes of subparagraph (B), rules similar to

23 the rules of section 1395(b) shall apply.

24 ‘‘(e) NONQUALIFIED FINANCIAL PROPERTY.—For

25 purposes of this section, the term ‘nonqualified financial
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1 property’ means debt, stock, partnership interests, op2 tions, futures contracts, forward contracts, warrants, no3 tional principal contracts, annuities, and other similar

4 property specified in regulations; except that such term

5 shall not include—

6 ‘‘(1) reasonable amounts of working capital

7 held in cash, cash equivalents, or debt instruments

8 with a term of 18 months or less, or

9 ‘‘(2) debt instruments described in section

10 1221(4).

11 ‘‘Subpart C—Regulations

‘‘Sec. 1397C. Regulations.

12 ‘‘SEC. 1397C. REGULATIONS.

13 ‘‘The Secretary shall prescribe such regulations as

14 may be necessary or appropriate to carry out the purposes

15 of this part, including—

16 ‘‘(1) regulations limiting the benefit of this part

17 in circumstances where such benefits, in combination

18 with benefits provided under other Federal pro19 grams, would result in an activity being 100 percent

20 or more subsidized by the Federal Government,

21 ‘‘(2) regulations preventing abuse of the provi22 sions of this part, and

23 ‘‘(3) regulations dealing with inadvertent fail24 ures of entities to be qualified zone businesses.’’.
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1 (b) CLERICAL AMENDMENT.—The table of sub2 chapters for chapter 1 of such Code is amended by insert3 ing after the item relating to subchapter T the following

4 new item:

‘‘Subchapter U. Designation and treatment of tax enterprise

zones.’’.

5 SEC. 412. TECHNICAL AND CONFORMING AMENDMENTS.

6 (a) ENTERPRISE ZONE EMPLOYMENT CREDIT PART

7 OF GENERAL BUSINESS CREDIT.—

8 (1) Subsection (b) of section 38 of the Internal

9 Revenue Code of 1986 (relating to current year

10 business credit) is amended by striking ‘‘plus’’ at the

11 end of paragraph (6), by striking the period at the

12 end of paragraph (7) and inserting ‘‘, plus’’, and by

13 adding at the end the following new paragraph:

14 ‘‘(8) the enterprise zone employment credit de15 termined under section 1394(a).’’.

16 (2) Subsection (d) of section 39 of such Code

17 is amended by adding at the end thereof the follow18 ing new paragraph:

19 ‘‘(3) NO CARRYBACK OF SECTION 1394 CREDIT

20 BEFORE ENACTMENT.—No portion of the unused

21 business credit for any taxable year which is attrib22 utable to the enterprise zone employment credit de23 termined under section 1394 may be carried to a
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1 taxable year ending before the date of the enactment

2 of section 1394.’’.

3 (b) NONITEMIZERS ALLOWED DEDUCTION FOR EN4 TERPRISE ZONE STOCK.—Subsection (a) of section 62 of

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

6 following new paragraph:

7 ‘‘(14) ENTERPRISE ZONE STOCK.—The deduc8 tion allowed by section 1396.’’.

9 (c) DENIAL OF DEDUCTION FOR PORTION OF WAGES

10 EQUAL TO ENTERPRISE ZONE EMPLOYMENT CREDIT.—

11 (1) Subsection (a) of section 280C of such Code

12 (relating to rule for targeted jobs credit) is amend13 ed—

14 (A) by striking ‘‘the amount of the credit

15 determined for the taxable year under section

16 51(a)’’ and inserting ‘‘the sum of the credits

17 determined for the taxable year under sections

18 51(a) and 1394(a)’’, and

19 (B) by striking ‘‘TARGETED JOBS CRED20 IT’’ in the subsection heading and inserting

21 ‘‘EMPLOYMENT CREDITS’’.

22 (2) Subsection (c) of section 196 of such Code

23 (relating to deduction for certain unused business

24 credits) is amended by striking ‘‘and’’ at the end of

25 paragraph (4), by striking the period at the end of
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1 paragraph (5) and inserting ‘‘, and’’, and by adding

2 at the end the following new paragraph:

3 ‘‘(6) the enterprise zone employment credit de4 termined under section 1394(a).’’.

5 (d) OTHER AMENDMENTS.—

6 (1)(A) Section 172(d)(2) of such Code (relating

7 to modifications with respect to net operating loss

8 deduction) is amended to read as follows:

9 ‘‘(2) CAPITAL GAINS AND LOSSES OF TAX10 PAYERS OTHER THAN CORPORATIONS.—In the case

11 of a taxpayer other than a corporation—

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

13 losses from sales or exchanges of capital assets

14 shall not exceed the amount includable on ac15 count of gains from sales or exchanges of cap16 ital assets; and

17 ‘‘(B) the exclusion provided by section

18 1397 shall not be allowed.’’.

19 (B) Subparagraph (B) of section 172(d)(4) of

20 such Code is amended by inserting ‘‘, (2)(B),’’ after

21 ‘‘paragraph (1)’’.

22 (2) Subsection (c) of section 381 of such Code

23 (relating to carryovers in certain corporate acquisi24 tions) is amended by adding at the end the following

25 new paragraph:
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1 ‘‘(26) ENTERPRISE ZONE PROVISIONS.—The

2 acquiring corporation shall take into account (to the

3 extent proper to carry out the purposes of this sec4 tion and subchapter U, and under such regulations

5 as may be prescribed by the Secretary) the items re6 quired to be taken into account for purposes of sub7 chapter U in respect of the distributor or transferor

8 corporation.’’.

9 (3) Paragraph (4) of section 642(c) of such

10 Code is amended to read as follows:

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

12 amount otherwise allowable as a deduction under

13 this subsection consists of gain described in section

14 1397(a), proper adjustment shall be made for any

15 exclusion allowable to the estate or trust under sec16 tion 1397. In the case of a trust, the deduction al17 lowed by this subsection shall be subject to section

18 681 (relating to unrelated business income).’’.

19 (4) Paragraph (3) of section 643(a) of such

20 Code is amended by adding at the end thereof the

21 following new sentence: ‘‘The exclusion under section

22 1397 shall not be taken into account.’’.

23 (5) Paragraph (4) of section 691(c) of such

24 Code is amended by striking ‘‘1201, and 1211’’ and

25 inserting ‘‘1201, 1397, and 1211’’.
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1 (6) The second sentence of paragraph (2) of

2 section 871(a) of such Code is amended by inserting

3 ‘‘such gains and losses shall be determined without

4 regard to section 1397 and’’ after ‘‘except that’’.

5 (7) Paragraph (1) of section 1371(d) of such

6 Code (relating to coordination with investment credit

7 recapture) is amended by inserting before the period

8 at the end the following ‘‘and for purposes of section

9 1394(d)(3)’’.

10 (8) Subsection (a) of section 1016 of such Code

11 (relating to adjustments to basis) is amended by

12 striking ‘‘and’’ at the end of paragraph (23), by

13 striking the period at the end of paragraph (24) and

14 inserting a semicolon, and by adding at the end

15 thereof the following new paragraphs:

16 ‘‘(25) in the case of stock with respect to which

17 a deduction was allowed under section 1396(a), to

18 the extent provided in section 1396(e); and

19 ‘‘(26) in the case of property the acquisition of

20 which resulted under section 1397A in the non21 recognition of any part of the gain realized on the

22 sale or exchange of other property, to the extent pro23 vided in section 1397A(e).’’.

24 (9) Section 1223 of such Code (relating to hold25 ing period of property) is amended by redesignating
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1 paragraph (15) as paragraph (16) and by inserting

2 after paragraph (14) the following new paragraph:

3 ‘‘(15) In determining the period for which the

4 taxpayer has held property the acquisition of which

5 resulted under section 1397A in the nonrecognition

6 of any part of the gain realized on the sale or ex7 change of any qualified zone asset (as defined in sec8 tion 1397A(b)), there shall be included the period

9 for which such asset had been held as of the date

10 of such sale or exchange.’’.

11 SEC. 413. EFFECTIVE DATE.

12 (a) GENERAL RULE.—The amendments made by this

13 subtitle shall take effect on the date of the enactment of

14 this Act.

15 (b) REQUIREMENT FOR RULES.—Not later than the

16 date 4 months after the date of the enactment of this Act,

17 the appropriate Secretaries shall issue rules—

18 (1) establishing the procedures for nominating

19 areas for designation as tax enterprise zones,

20 (2) establishing a method for comparing the

21 factors listed in section 1392(d) of the Internal Rev22 enue Code of 1986 (as added by this part),

23 (3) establishing recordkeeping requirements

24 necessary or appropriate to assist the studies re25 quired by subtitle E, and
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1 (4) providing that State and local governments

2 shall have at least 30 days after such rules are pub3 lished to file applications for nominated areas before

4 such applications are evaluated and compared and

5 any area designated as a tax enterprise zone.

6 Subtitle B—Redevelopment Bonds

7 for Tax Enterprise Zones

8 SEC. 421. SPECIAL RULES FOR REDEVELOPMENT BONDS

9 PROVIDING FINANCING FOR TAX ENTER10 PRISE ZONES.

11 (a) IN GENERAL.—Subsection (c) of section 144 of

12 the Internal Revenue Code of 1986 (relating to qualified

13 redevelopment bonds) is amended by adding at the end

14 thereof the following new paragraph:

15 ‘‘(9) SPECIAL RULES FOR TAX ENTERPRISE

16 ZONES.—For purposes of this subsection, in the case

17 of bonds issued during the 60-month period begin18 ning on the date a tax enterprise zone is des19 ignated—

20 ‘‘(A) TREATMENT AS DESIGNATED

21 BLIGHTED AREA.—Such tax enterprise zone

22 shall be treated as a designated blighted area

23 during such 60-month period (or, if shorter, the

24 period such designation is in effect). Any area

25 designated by reason of the preceding sentence
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1 shall not be taken into account in applying

2 paragraph (4)(C).

3 ‘‘(B) SECURITY FOR BONDS.—The require4 ments of paragraph (2)(B) shall be treated as

5 met with respect to a financed area that is

6 within a tax enterprise zone if the general pur7 pose governmental unit guarantees the payment

8 of principal and interest on the issue either di9 rectly or through insurance, a letter of credit,

10 or a similar agreement but only if the cost

11 thereof is financed other than with proceeds of

12 any tax-exempt private activity bond or earn13 ings on such proceeds.

14 ‘‘(C) EXPANSION OF REDEVELOPMENT

15 PURPOSES.—

16 ‘‘(i) IN GENERAL.—The term ‘redevel17 opment purposes’ includes the making of

18 loans to any enterprise zone business (as

19 defined in section 1397B) for—

20 ‘‘(I) the acquisition of land with21 in the tax enterprise zone for use in

22 such business, or

23 ‘‘(II) the acquisition, construc24 tion, reconstruction, or improvement

25 by such business of land, or property
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1 of a character subject to the allowance

2 for depreciation, for use in such busi3 ness.

4 ‘‘(ii) $2,500,000 LIMITATION.—Clause

5 (i) shall apply to loans made to any enter6 prise zone business only if the aggregate

7 principal amount of such loans (whether or

8 not financed by the same issue) does not

9 exceed $2,500,000. For purposes of the

10 preceding sentence, all persons treated as a

11 single employer under subsection (a) or (b)

12 of section 52 shall be treated as 1 person.

13 ‘‘(iii) LOANS MUST BE MADE WITHIN

14 18 MONTHS AFTER BONDS ISSUED; REPAY15 MENTS MUST BE USED FOR REDEMP16 TIONS.—Clause (i) shall apply only to

17 loans—

18 ‘‘(I) made during the 18-month

19 period beginning on the date of issu20 ance of the issue financing such loan,

21 ‘‘(II) repayments of principal on

22 which are used not later than the

23 close of the 1st semiannual period be24 ginning after the date the repayment
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1 is received to redeem bonds which are

2 part of such issue, and

3 ‘‘(III) the effective rate of inter4 est on which does not exceed the yield

5 on the issue by more than 0.125 per6 centage points.

7 In determining the effective rate of interest

8 for purposes of subclause (III), there shall

9 be taken into account all fees, charges, and

10 other amounts (other than amounts for

11 any credit report) borne by the borrower

12 which are attributable to the loan or the

13 bond issue.

14 ‘‘(iv) HOUSING LOANS EXCLUDED.—

15 Clause (i) shall not apply to any loan to be

16 used directly or indirectly to provide resi17 dential real property.

18 ‘‘(v) COORDINATION WITH RESTRIC19 TIONS ON USE OF PROCEEDS.—Paragraphs

20 (6) and (8) shall apply notwithstanding

21 clause (i); except that in applying para22 graph (6), subsection (a)(8) shall be treat23 ed as not including a reference to a facility

24 the primary purpose of which is retail food

25 services.
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1 ‘‘(D) ISSUER TO DESIGNATE AMOUNT OF

2 ISSUE TO BE USED FOR LOANS.—Subparagraph

3 (C) shall not apply with respect to any issue

4 unless the issuer designates before the date of

5 issuance the amount of the proceeds of such

6 issue which is to be used for loans to which

7 subparagraph (C)(i) applies. If such amount ex8 ceeds the principal amount of loans to which

9 subparagraph (C)(i) applies, an amount of pro10 ceeds equal to such excess shall be used not

11 later than the close of the 1st semiannual pe12 riod beginning after the close of the 18-month

13 period referred to in subparagraph (C)(iii) to

14 redeem bonds which are part of such issue.

15 ‘‘(E) DE MINIMIS REDEMPTIONS NOT RE16 QUIRED.—Subparagraphs (C)(iii) and (D) shall

17 not be construed to require amounts of less

18 than $250,000 to be used to redeem bonds. The

19 Secretary may by regulation treat related issues

20 as 1 issue for purposes of the preceding sen21 tence.

22 ‘‘(F) PENALTY.—

23 ‘‘(i) IN GENERAL.—In the case of

24 property with respect to which financing

25 was provided under this paragraph, if at
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1 any time during the 10-period beginning

2 on the date such financing was provided—

3 ‘‘(I) such property ceases to be in

4 use in an enterprise zone business (as

5 defined in section 1397B), or

6 ‘‘(II) substantially all of the use

7 of such property ceases to be in a tax

8 enterprise zone,

9 there is hereby imposed on the trade or

10 business to which such financing was pro11 vided a penalty equal to 1.25 percent of so

12 much of the face amount of all financing

13 provided (whether or not from the same

14 issue and whether or not such issue is out15 standing) before such cessation to the

16 trade or business using such property.

17 ‘‘(ii) NO PENALTY BY REASON OF

18 ZONE TERMINATION.—No penalty shall be

19 imposed under clause (i) solely by reason

20 of the termination or revocation of a tax

21 enterprise zone designation.

22 ‘‘(iii) EXCEPTION FOR BANK23 RUPTCY.—Clause (i) shall not apply to any

24 cessation resulting from bankruptcy.’’.
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1 (b) VOLUME CAP ONLY CHARGED WITH 50 PER2 CENT OF TAX ENTERPRISE ZONE REDEVELOPMENT

3 BONDS.—Subsection (g) of section 146 of such Code is

4 amended by striking ‘‘and’’ at the end of paragraph (3),

5 by striking the period at the end of paragraph (4) and

6 inserting ‘‘, and’’, and by adding at the end thereof the

7 following new paragraph:

8 ‘‘(5) 50 percent of any qualified redevelopment

9 bond issued—

10 ‘‘(A) as part of an issue 95 percent or

11 more of the net proceeds of which are to be

12 used for 1 or more redevelopment purposes (as

13 defined in section 144(c)) in a tax enterprise

14 zone, and

15 ‘‘(B) during the 60-month period begin16 ning on the date of the designation of such

17 zone.’’.

18 (c) PENALTIES FOR LOANS MADE TO BUSINESSES

19 THAT CEASE TO BE ENTERPRISE ZONE BUSINESSES,

20 ETC.—Subsection (b) of section 150 of such Code is

21 amended by adding at the end thereof the following new

22 paragraph:

23 ‘‘(6) ENTERPRISE ZONE REDEVELOPMENT

24 BONDS.—In the case of any financing provided by
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1 an issue the interest on which is exempt from tax by

2 reason of section 144(c)(9)—

3 ‘‘(A) IN GENERAL.—No deduction shall be

4 allowed under this chapter for interest on such

5 financing which accrues during the period be6 ginning on the first day of the calendar year

7 which includes the date on which—

8 ‘‘(i) the trade or business to which the

9 financing was provided ceases to be an en10 terprise zone business (as defined in sec11 tion 1397B), or

12 ‘‘(ii) substantially all of the use of the

13 property (determined in accordance with

14 subchapter U) with respect to which the fi15 nancing was provided ceases to be in a tax

16 enterprise zone.

17 The preceding sentence shall not apply solely by

18 reason of the termination or revocation of a tax

19 enterprise zone designation.

20 ‘‘(B) EXCEPTION FOR BANKRUPTCY.—This

21 paragraph shall not apply to any cessation re22 sulting from bankruptcy.’’.
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1 Subtitle C—Credit for Contribu2 tions to Certain Community De3 velopment Corporations

4 SEC. 431. CREDIT FOR CONTRIBUTIONS TO CERTAIN COM5 MUNITY DEVELOPMENT CORPORATIONS.

6 (a) IN GENERAL.—For purposes of section 38 of the

7 Internal Revenue Code of 1986, the current year business

8 credit shall include the credit determined under this sec9 tion.

10 (b) DETERMINATION OF CREDIT.—The credit deter11 mined under this section for each taxable year in the credit

12 period with respect to any qualified CDC contribution

13 made by the taxpayer is an amount equal to 5 percent

14 of such contribution.

15 (c) CREDIT PERIOD.—For purposes of this section,

16 the credit period with respect to any qualified CDC con17 tribution is the period of 10 taxable years beginning with

18 the taxable year during which such contribution was made.

19 (d) QUALIFIED CDC CONTRIBUTION.—For purposes

20 of this section—

21 (1) IN GENERAL.—The term ‘‘qualified CDC

22 contribution’’ means any transfer of cash—

23 (A) which is made to a selected community

24 development corporation during the 5-year pe-
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1 riod beginning on the date such corporation was

2 selected for purposes of this section,

3 (B) the amount of which is available for

4 use by such corporation for at least 10 years,

5 (C) which is to be used by such corpora6 tion for qualified low-income assistance within

7 its operational area, and

8 (D) which is designated by such corpora9 tion for purposes of this section.

10 (2) LIMITATIONS ON AMOUNT DESIGNATED.—

11 The aggregate amount of contributions to a selected

12 community development corporation which may be

13 designated by such corporation shall not exceed

14 $2,000,000.

15 (e) SELECTED COMMUNITY DEVELOPMENT COR16 PORATIONS.—

17 (1) IN GENERAL.—For purposes of this section,

18 the term ‘‘selected community development corpora19 tion’’ means any corporation—

20 (A) which is described in section 501(c)(3)

21 of such Code and exempt from tax under sec22 tion 501(a) of such Code,

23 (B) the principal purposes of which include

24 promoting employment of, and business oppor-
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1 tunities for, low-income individuals who are

2 residents of the operational area, and

3 (C) which is selected by the Secretary of

4 Housing and Urban Development for purposes

5 of this section.

6 (2) ONLY 10 CORPORATIONS MAY BE SE7 LECTED.—

8 (A) IN GENERAL.—The Secretary of Hous9 ing and Urban Development may select 10 cor10 porations for purposes of this section, subject to

11 the availability of eligible corporations. Such se12 lections may be made only before January 1,

13 1995. At least 4 of the operational areas of the

14 corporations selected must be rural areas (as

15 defined by section 1393(6) of such Code).

16 (B) PRIORITY OF DESIGNATIONS.—In se17 lecting corporations for purposes of this section,

18 such Secretary shall give priority to corpora19 tions with a demonstrated record of perform20 ance in administering community development

21 programs which target at least 75 percent of

22 the jobs emanating from their investment funds

23 to low income or unemployed individuals.

24 (3) OPERATIONAL AREAS MUST HAVE CERTAIN

25 CHARACTERISTICS.—A corporation may be selected
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1 for purposes of this section only if its operational

2 area meets the following criteria:

3 (A) The area meets the size requirements

4 under paragraph (1)(C) or (2)(C) of section

5 1391(b) which would apply if such area were to

6 be designated as a tax enterprise zone.

7 (B) The unemployment rate (as deter8 mined by the appropriate available data) is not

9 less than the national unemployment rate.

10 (C) The median family income of residents

11 of such area does not exceed 80 percent of the

12 median gross income of residents of the juris13 diction of the local government which includes

14 such area.

15 (f) QUALIFIED LOW-INCOME ASSISTANCE.—For pur16 poses of this section, the term ‘‘qualified low-income as17 sistance’’ means assistance—

18 (1) which is designed to provide employment of,

19 and business opportunities for, low-income individ20 uals who are residents of the operational area of the

21 community development corporation, and

22 (2) which is approved by the Secretary of Hous23 ing and Urban Development.
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1 Subtitle D—Indian Employment

2 and Investment

3 SEC. 441. INVESTMENT TAX CREDIT FOR PROPERTY ON IN4 DIAN RESERVATIONS.

5 (a) ALLOWANCE OF INDIAN RESERVATION CRED6 IT.—Section 46 of the Internal Revenue Code of 1986 (re7 lating to investment credits) is amended by striking ‘‘and’’

8 at the end of paragraph (2), by striking the period at the

9 end of paragraph (3) and inserting ‘‘, and’’, and by adding

10 after paragraph (3) the following new paragraph:

11 ‘‘(4) the Indian reservation credit.’’.

12 (b) AMOUNT OF INDIAN RESERVATION CREDIT.—

13 (1) IN GENERAL.—Section 48 of such Code (re14 lating to the energy credit and the reforestation

15 credit) is amended by adding after subsection (b)

16 the following new subsection:

17 ‘‘(c) INDIAN RESERVATION CREDIT.—

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

19 the Indian reservation credit for any taxable year is

20 the Indian reservation percentage of the qualified in21 vestment in qualified Indian reservation property

22 placed in service during such taxable year, deter23 mined in accordance with the following table:

‘‘In the case of qualified

Indian reservation property The Indian reservation

which is: percentage is:

Reservation personal property ............................... 10

New reservation construction property ................. 15
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Reservation infrastructure investment .................. 15.

1 ‘‘(2) QUALIFIED INVESTMENT IN QUALIFIED

2 INDIAN RESERVATION PROPERTY DEFINED.—For

3 purposes of this subpart—

4 ‘‘(A) IN GENERAL.—The term ‘qualified

5 Indian reservation property’ means property—

6 ‘‘(i) which is—

7 ‘‘(I) reservation personal prop8 erty,

9 ‘‘(II) new reservation construc10 tion property, or

11 ‘‘(III) reservation infrastructure

12 investment, and

13 ‘‘(ii) not acquired (directly or indi14 rectly) by the taxpayer from a person who

15 is related to the taxpayer (within the

16 meaning of section 465(b)(3)(C)).

17 The term ‘qualified Indian reservation property’

18 does not include any property (or any portion

19 thereof) placed in service for purposes of con20 ducting or housing class I, II, or III gaming (as

21 defined in section 4 of the Indian Regulatory

22 Act (25 U.S.C. 2703)).

23 ‘‘(B) QUALIFIED INVESTMENT.—The term

24 ‘qualified investment’ means—
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1 ‘‘(i) in the case of reservation infra2 structure investment, the amount expended

3 by the taxpayer for the acquisition or con4 struction of the reservation infrastructure

5 investment; and

6 ‘‘(ii) in the case of all other qualified

7 Indian reservation property, the tax8 payer’s basis for such property.

9 ‘‘(C) RESERVATION PERSONAL PROP10 ERTY.—The term ‘reservation personal prop11 erty’ means qualified personal property which is

12 used by the taxpayer predominantly in the ac13 tive conduct of a trade or business within an

14 Indian reservation. Property shall not be treat15 ed as ‘reservation personal property’ if it is

16 used or located outside the Indian reservation

17 on a regular basis.

18 ‘‘(D) QUALIFIED PERSONAL PROPERTY.—

19 The term ‘qualified personal property’ means

20 property—

21 ‘‘(i) for which depreciation is allow22 able under section 168,

23 ‘‘(ii) which is not—

24 ‘‘(I) nonresidential real property,
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1 ‘‘(II) residential rental property,

2 or

3 ‘‘(III) real property which is not

4 described in (I) or (II) and which has

5 a class life of more than 12.5 years.

6 For purposes of this subparagraph, the terms

7 ‘nonresidential real property’, ‘residential rental

8 property’, and ‘class life’ have the respective

9 meanings given such terms by section 168.

10 ‘‘(E) NEW RESERVATION CONSTRUCTION

11 PROPERTY.—The term ‘new reservation con12 struction property’ means qualified real prop13 erty—

14 ‘‘(i) which is located in an Indian res15 ervation,

16 ‘‘(ii) which is used by the taxpayer

17 predominantly in the active conduct of a

18 trade or business within an Indian reserva19 tion, and

20 ‘‘(iii) which is originally placed in

21 service by the taxpayer.

22 ‘‘(F) QUALIFIED REAL PROPERTY.—The

23 term ‘qualified real property’ means property

24 for which depreciation is allowable under sec-
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1 tion 168 and which is described in clause (I),

2 (II), or (III) of subparagraph (D)(ii).

3 ‘‘(G) RESERVATION INFRASTRUCTURE IN4 VESTMENT.—

5 ‘‘(i) IN GENERAL.—The term ‘reserva6 tion infrastructure investment’ means

7 qualified personal property or qualified real

8 property which—

9 ‘‘(I) benefits the tribal infrastruc10 ture,

11 ‘‘(II) is available to the general

12 public, and

13 ‘‘(III) is placed in service in con14 nection with the taxpayer’s active con15 duct of a trade or business within an

16 Indian reservation.

17 ‘‘(ii) PROPERTY MAY BE LOCATED

18 OUTSIDE THE RESERVATION.—Qualified

19 personal property and qualified real prop20 erty used or located outside an Indian res21 ervation shall be reservation infrastructure

22 investment only if its purpose is to connect

23 to existing tribal infrastructure in the res24 ervation, and shall include, but not be lim25 ited to, roads, power lines, water systems,
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1 railroad spurs, and communications facili2 ties.

3 ‘‘(H) COORDINATION WITH OTHER CRED4 ITS.—The term ‘qualified Indian reservation

5 property’ shall not include any property with re6 spect to which the energy credit or the rehabili7 tation credit is allowed.

8 ‘‘(3) REAL ESTATE RENTALS.—For purposes of

9 this section, the rental to others of real property lo10 cated within an Indian reservation shall be treated

11 as the active conduct of a trade or business in an

12 Indian reservation.

13 ‘‘(4) INDIAN RESERVATION DEFINED.—For

14 purposes of this subpart, the term ‘Indian reserva15 tion’ means a reservation, as defined in—

16 ‘‘(A) section 3(d) of the Indian Financing

17 Act of 1974 (25 U.S.C. 1452(d)), or

18 ‘‘(B) section 4(10) of the Indian Child

19 Welfare Act of 1978 (25 U.S.C. 1903(10)).

20 ‘‘(5) LIMITATION BASED ON UNEMPLOY21 MENT.—

22 ‘‘(A) GENERAL RULE.—The Indian res23 ervation credit allowed under section 46 for any

24 taxable year shall equal—
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1 ‘‘(i) if the Indian unemployment rate

2 on the applicable Indian reservation for

3 which the credit is sought exceeds 300 per4 cent of the national average unemployment

5 rate at any time during the calendar year

6 in which the property is placed in service

7 or during the immediately preceding 2 cal8 endar years, 100 percent of such credit,

9 ‘‘(ii) if such Indian unemployment

10 rate exceeds 150 percent but not 300 per11 cent, 50 percent of such credit, and

12 ‘‘(iii) if such Indian unemployment

13 rate does not exceed 150 percent, 0 per14 cent of such credit.

15 ‘‘(B) SPECIAL RULE FOR LARGE

16 PROJECTS.—In the case of a qualified Indian

17 reservation property which has (or is a compo18 nent of a project which has) a projected con19 struction period of more than 2 years or a cost

20 of more than $1,000,000, subparagraph (A)

21 shall apply by substituting ‘during the earlier of

22 the calendar year in which the taxpayer enters

23 into a binding agreement to make a qualified

24 investment or the first calendar year in which

25 the taxpayer has expended at least 10 percent
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1 of the taxpayer’s qualified investment, or the

2 preceding calendar year’ for ‘during the cal3 endar year in which the property is placed in

4 service or during the immediately preceding 2

5 calendar years’.

6 ‘‘(C) DETERMINATION OF INDIAN UNEM7 PLOYMENT.—For purposes of this paragraph,

8 with respect to any Indian reservation, the In9 dian unemployment rate shall be based upon

10 Indians unemployed and able to work, and shall

11 be certified by the Secretary of the Interior.

12 ‘‘(6) COORDINATION WITH NONREVENUE

13 LAWS.—Any reference in this subsection to a provi14 sion not contained in this title shall be treated for

15 purposes of this subsection as a reference to such

16 provision as in effect on the date of the enactment

17 of this paragraph.’’.

18 (2) LODGING TO QUALIFY.—Paragraph (2) of

19 section 50(b) of such Code (relating to property used

20 for lodging) is amended—

21 (A) by striking ‘‘and’’ at the end of sub22 paragraph (C),

23 (B) by striking the period at the end of

24 subparagraph (D) and inserting ‘‘; and’’ and
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1 (C) by adding at the end thereof the fol2 lowing subparagraph:

3 ‘‘(E) new reservation construction prop4 erty.’’.

5 (c) RECAPTURE.—Subsection (a) of section 50 of

6 such Code (relating to recapture in case of dispositions,

7 etc.), is amended by adding at the end thereof the follow8 ing new paragraph:

9 ‘‘(6) SPECIAL RULES FOR INDIAN RESERVATION

10 PROPERTY.—

11 ‘‘(A) IN GENERAL.—If, during any taxable

12 year, property with respect to which the tax13 payer claimed an Indian reservation credit—

14 ‘‘(i) is disposed of, or

15 ‘‘(ii) in the case of reservation per16 sonal property—

17 ‘‘(I) otherwise ceases to be in18 vestment credit property with respect

19 to the taxpayer, or

20 ‘‘(II) is removed from the Indian

21 reservation, converted or otherwise

22 ceases to be Indian reservation prop23 erty,
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1 the tax under this chapter for such taxable year

2 shall be increased by the amount described in

3 subparagraph (B).

4 ‘‘(B) AMOUNT OF INCREASE.—The in5 crease in tax under subparagraph (A) shall

6 equal the aggregate decrease in the credits al7 lowed under section 38 by reason of section

8 48(c) for all prior taxable years which would

9 have resulted had the qualified investment

10 taken into account with respect to the property

11 been limited to an amount which bears the

12 same ratio to the qualified investment with re13 spect to such property as the period such prop14 erty was held by the taxpayer bears to the ap15 plicable recovery period under section 168(g).

16 ‘‘(C) COORDINATION WITH OTHER RECAP17 TURE PROVISIONS.—In the case of property to

18 which this paragraph applies, paragraph (1)

19 shall not apply and the rules of paragraphs (3),

20 (4), and (5) shall apply.’’.

21 (d) BASIS ADJUSTMENT TO REFLECT INVESTMENT

22 CREDIT.—Paragraph (3) of section 50(c) of such Code

23 (relating to basis adjustment to investment credit prop24 erty) is amended by striking ‘‘energy credit or reforest25 ation credit’’ and inserting ‘‘energy credit, reforestation
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1 credit or Indian reservation credit other than with respect

2 to any expenditure for new reservation construction prop3 erty’’.

4 (e) CERTAIN GOVERNMENTAL USE PROPERTY TO

5 QUALIFY.—Paragraph (4) of section 50(b) of such Code

6 (relating to property used by governmental units or for7 eign persons or entities) is amended by redesignating sub8 paragraphs (D) and (E) as subparagraphs (E) and (F),

9 respectively, and inserting after subparagraph (C) the fol10 lowing new subparagraph:

11 ‘‘(D) EXCEPTION FOR RESERVATION IN12 FRASTRUCTURE INVESTMENT.—This paragraph

13 shall not apply for purposes of determining the

14 Indian reservation credit with respect to res15 ervation infrastructure investment.’’.

16 (f) APPLICATION OF AT-RISK RULES.—Subpara17 graph (C) of section 49(a)(1) of such Code is amended

18 by striking ‘‘and’’ at the end of clause (ii), by striking

19 the period at the end of clause (iii) and inserting ‘‘, and’’,

20 and by adding at the end the following new clause:

21 ‘‘(iv) the qualified investment in quali22 fied Indian reservation property.’’.

23 (g) CLERICAL AMENDMENTS.—
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1 (1) The caption of section 48 of such Code is

2 amended by deleting the period at the end thereof

3 and adding ‘‘; indian reservation credit.’’

4 (2) The table of sections for subpart E of part

5 IV of subchapter A of chapter 1 of such Code is

6 amended by striking out the item relating to section

7 48 and inserting the following:

‘‘Sec. 48. Energy credit; reforestation credit; Indian reservation

credit.’’.

8 (h) EFFECTIVE DATE.—The amendments made by

9 this section shall apply to property placed in service after

10 December 31, 1993.

11 SEC. 442. INDIAN EMPLOYMENT CREDIT.

12 (a) ALLOWANCE OF INDIAN EMPLOYMENT CRED13 IT.—Section 38(b) of the Internal Revenue Code of 1986

14 (relating to general business credits), as amended by sec15 tion 412, is amended by striking ‘‘plus’’ at the end of

16 paragraph (7), by striking the period at the end of para17 graph (8) and inserting ‘‘, plus’’, and by adding after

18 paragraph (8) the following new paragraph:

19 ‘‘(9) the Indian employment credit as deter20 mined under section 45(a).’’.

21 (b) AMOUNT OF INDIAN EMPLOYMENT CREDIT.—

22 Subpart D of Part IV of subchapter A of chapter 1 of

23 such Code (relating to business related credits) is amended

24 by adding at the end thereof the following new section:
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1 ‘‘SEC. 45. INDIAN EMPLOYMENT CREDIT.

2 ‘‘(a) AMOUNT OF CREDIT.—

3 ‘‘(1) IN GENERAL.—For purposes of section 38,

4 the amount of the Indian employment credit deter5 mined under this section with respect to any em6 ployer for any taxable year is 10 percent (30 percent

7 in the case of an employer with at least 85 percent

8 Indian employees throughout the taxable year) of

9 the sum of—

10 ‘‘(A) the qualified wages paid or incurred

11 during such taxable year, plus

12 ‘‘(B) qualified employee health insurance

13 costs paid or incurred during such taxable year.

14 In no event shall the amount of the Indian employ15 ment credit for any taxable year exceed the credit

16 limitation amount determined under subsection (e)

17 for such taxable year.

18 ‘‘(2) INDIAN EMPLOYEE.—For purposes of

19 paragraph (1), the term ‘Indian employee’ means an

20 employee who is an enrolled member of an Indian

21 tribe or the spouse of such a member.

22 ‘‘(b) QUALIFIED WAGES; QUALIFIED EMPLOYEE

23 HEALTH INSURANCE COSTS.—For purposes of this sec24 tion—

25 ‘‘(1) QUALIFIED WAGES.—
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1 ‘‘(A) IN GENERAL.—The term ‘qualified

2 wages’ means any wages paid or incurred by an

3 employer for services performed by an employee

4 while such employee is a qualified employee.

5 ‘‘(B) COORDINATION WITH TARGETED

6 JOBS CREDIT.—The term ‘qualified wages’ shall

7 not include wages attributable to service ren8 dered during the 1-year period beginning with

9 the day the individual begins work for the em10 ployer if any portion of such wages is taken

11 into account in determining the credit under

12 section 51.

13 ‘‘(2) QUALIFIED EMPLOYEE HEALTH INSUR14 ANCE COSTS.—

15 ‘‘(A) IN GENERAL.—The term ‘qualified

16 employee health insurance costs’ means any

17 amount paid or incurred by an employer for

18 health insurance to the extent such amount is

19 attributable to coverage provided to any em20 ployee while such employee is a qualified em21 ployee.

22 ‘‘(B) EXCEPTION FOR AMOUNTS PAID

23 UNDER SALARY REDUCTION ARRANGEMENTS.—

24 No amount paid or incurred for health insur25 ance pursuant to a salary reduction arrange-
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1 ment shall be taken into account under sub2 paragraph (A).

3 ‘‘(c) QUALIFIED EMPLOYEE.—For purposes of this

4 section—

5 ‘‘(1) IN GENERAL.—Except as otherwise pro6 vided in this subsection, the term ‘qualified em7 ployee’ means, with respect to any period, any em8 ployee of an employer if—

9 ‘‘(A) substantially all of the services per10 formed during such period by such employee for

11 such employer are performed within an Indian

12 reservation,

13 ‘‘(B) the principal place of abode of such

14 employee while performing such services is on

15 or near the reservation in which the services are

16 performed, and

17 ‘‘(C) the employee began work for such

18 employer on or after January 1, 1993.

19 ‘‘(2) CREDIT ALLOWED ONLY FOR FIRST 7

20 YEARS.—An employee shall not be treated as a

21 qualified employee for any period after the date 7

22 years after the day on which such employee first

23 began work for the employer.

24 ‘‘(3) INDIVIDUALS RECEIVING WAGES IN EX25 CESS OF $30,000 NOT ELIGIBLE.—An employee shall
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1 not be treated as a qualified employee for any tax2 able year of the employer if the total amount of the

3 wages paid or incurred by such employer to such

4 employee during such taxable year (whether or not

5 for services within an Indian reservation) exceeds

6 the amount determined at an annual rate of

7 $30,000. The Secretary shall adjust the $30,000

8 amount contained in the preceding sentence for

9 years beginning after 1993 at the same time and in

10 the same manner as under section 415(d).

11 ‘‘(4) EMPLOYMENT MUST BE TRADE OR BUSI12 NESS EMPLOYMENT.—An employee shall be treated

13 as a qualified employee for any taxable year of the

14 employer only if more than 50 percent of the wages

15 paid or incurred by the employer to such employee

16 during such taxable year are for services performed

17 in a trade or business of the employer. Any deter18 mination as to whether the preceding sentence ap19 plies with respect to any employee for any taxable

20 year shall be made without regard to subsection

21 (f)(2).

22 ‘‘(5) CERTAIN EMPLOYEES NOT ELIGIBLE.—

23 The term ‘qualified employee’ shall not include—

24 ‘‘(A) any individual described in subpara25 graph (A), (B), or (C) of section 51(i)(1),
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1 ‘‘(B) any 5-percent owner (as defined in

2 section 416(i)(1)(B)),

3 ‘‘(C) any individual who is neither an en4 rolled member of an Indian tribe nor the spouse

5 of an enrolled member of an Indian tribe, and

6 ‘‘(D) any individual if the services per7 formed by such individual for the employer in8 volve the conduct of class I, II, or III gaming

9 as defined in section 4 of the Indian Gaming

10 Regulatory Act (25 U.S.C. 2703), or are per11 formed in a building housing such gaming ac12 tivity.

13 ‘‘(6) INDIAN TRIBE DEFINED.—The term ‘In14 dian tribe’ means any Indian tribe, band, nation,

15 pueblo, or other organized group or community, in16 cluding any Alaska Native village, or regional or vil17 lage corporation, as defined in, or established pursu18 ant to, the Alaska Native Claims Settlement Act (43

19 U.S.C. 1601 et seq.) which is recognized as eligible

20 for the special programs and services provided by

21 the United States to Indians because of their status

22 as Indians.

23 ‘‘(7) INDIAN RESERVATION DEFINED.—The

24 term ‘Indian reservation’ means a reservation, as de25 fined in—
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1 ‘‘(A) section 3(d) of the Indian Financing

2 Act of 1974 (25 U.S.C. 1452(d)), or

3 ‘‘(B) section 4(10) of the Indian Child

4 Welfare Act of 1978 (25 U.S.C. 1903 (10)).

5 ‘‘(d) EARLY TERMINATION OF EMPLOYMENT BY EM6 PLOYER.—

7 ‘‘(1) IN GENERAL.—If the employment of any

8 employee is terminated by the taxpayer before the

9 day 1 year after the day on which such employee

10 began work for the employer—

11 ‘‘(A) no wages (or qualified employee

12 health insurance costs) with respect to such em13 ployee shall be taken into account under sub14 section (a) for the taxable year in which such

15 employment is terminated, and

16 ‘‘(B) the tax under this chapter for the

17 taxable year in which such employment is ter18 minated shall be increased by the aggregate

19 credits (if any) allowed under section 38(a) for

20 prior taxable years by reason of wages (or

21 qualified employee health insurance costs) taken

22 into account with respect to such employee.

23 ‘‘(2) CARRYBACKS AND CARRYOVERS AD24 JUSTED.—In the case of any termination of employ25 ment to which paragraph (1) applies, the carrybacks
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1 and carryovers under section 39 shall be properly

2 adjusted.

3 ‘‘(3) SUBSECTION NOT TO APPLY IN CERTAIN

4 CASES.—

5 ‘‘(A) IN GENERAL.—Paragraph (1) shall

6 not apply to—

7 ‘‘(i) a termination of employment of

8 an employee who voluntarily leaves the em9 ployment of the taxpayer,

10 ‘‘(ii) a termination of employment of

11 an individual who before the close of the

12 period referred to in paragraph (1) be13 comes disabled to perform the services of

14 such employment unless such disability is

15 removed before the close of such period

16 and the taxpayer fails to offer reemploy17 ment to such individual, or

18 ‘‘(iii) a termination of employment of

19 an individual if it is determined under the

20 applicable State unemployment compensa21 tion law that the termination was due to

22 the misconduct of such individual.

23 ‘‘(B) CHANGES IN FORM OF BUSINESS.—

24 For purposes of paragraph (1), the employment
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1 relationship between the taxpayer and an em2 ployee shall not be treated as terminated—

3 ‘‘(i) by a transaction to which section

4 381(a) applies if the employee continues to

5 be employed by the acquiring corporation,

6 or

7 ‘‘(ii) by reason of a mere change in

8 the form of conducting the trade or busi9 ness of the taxpayer if the employee con10 tinues to be employed in such trade or

11 business and the taxpayer retains a sub12 stantial interest in such trade or business.

13 ‘‘(4) SPECIAL RULE.—Any increase in tax

14 under paragraph (1) shall not be treated as a tax

15 imposed by this chapter for purposes of—

16 ‘‘(A) determining the amount of any credit

17 allowable under this chapter, and

18 ‘‘(B) determining the amount of the tax

19 imposed by section 55.

20 ‘‘(e) CREDIT LIMITATION AMOUNT.—For purposes of

21 this section—

22 ‘‘(1) CREDIT LIMITATION AMOUNT.—The credit

23 limitation amount for a taxable year shall be an

24 amount equal to the credit rate (10 or 30 percent
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1 as determined under subsection (a)) multiplied by

2 the increased credit base.

3 ‘‘(2) INCREASED CREDIT BASE.—The increased

4 credit base for a taxable year shall be the excess

5 of—

6 ‘‘(A) the sum of any qualified wages and

7 qualified employee health insurance costs paid

8 or incurred by the employer during the taxable

9 year with respect to employees whose wages

10 (paid or incurred by the employer) during the

11 taxable year do not exceed the amount deter12 mined under paragraph (3) of subsection (c),

13 over

14 ‘‘(B) the sum of any qualified wages and

15 qualified employee health insurance costs paid

16 or incurred by the employer (or any prede17 cessor) during calendar year 1993 with respect

18 to employees whose wages (paid or incurred by

19 the employer or any predecessor) during 1993

20 did not exceed $30,000.

21 ‘‘(3) SPECIAL RULE FOR SHORT TAXABLE

22 YEARS.—For any taxable year having less than 12

23 months—
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1 ‘‘(A) the amounts paid or incurred by the

2 employer shall be annualized for purposes of de3 termining the increased credit base, and

4 ‘‘(B) the credit limitation amount shall be

5 multiplied by a fraction, the numerator of which

6 is the number of days in the taxable year and

7 the denominator of which is 365.

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

9 For purposes of this section—

10 ‘‘(1) WAGES.—The term ‘wages’ has the same

11 meaning given to such term in section 51.

12 ‘‘(2) CONTROLLED GROUPS.—

13 ‘‘(A) All employers treated as a single em14 ployer under section (a) or (b) of section 52

15 shall be treated as a single employer for pur16 poses of this section.

17 ‘‘(B) The credit (if any) determined under

18 this section with respect to each such employer

19 shall be its proportionate share of the wages

20 and qualified employee health insurance costs

21 giving rise to such credit.

22 ‘‘(3) CERTAIN OTHER RULES MADE APPLICA23 BLE.—Rules similar to the rules of section 51(k)

24 and subsections (c), (d), and (e) of section 52 shall

25 apply.
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1 ‘‘(4) COORDINATION WITH NONREVENUE

2 LAWS.—Any reference in this section to a provision

3 not contained in this title shall be treated for pur4 poses of this section as a reference to such provision

5 as in effect on the date of the enactment of this

6 paragraph.’’.

7 (c) DENIAL OF DEDUCTION FOR PORTION OF WAGES

8 EQUAL TO INDIAN EMPLOYMENT CREDIT.—

9 (1) Subsection (a) of section 280C of such Code

10 (relating to rule for targeted jobs credit) is amended

11 by striking ‘‘51(a)’’ and inserting ‘‘45(a), 51(a),

12 and’’.

13 (2) Subsection (c) of section 196 of such Code

14 (relating to deduction for certain unused business

15 credits) is amended by striking ‘‘and’’ at the end of

16 paragraph (5), by striking the period at the end of

17 paragraph (6) and inserting ‘‘, and’’, and by adding

18 at the end the following new paragraph:

19 ‘‘(7) the Indian employment credit determined

20 under section 45(a).’’.

21 (d) DENIAL OF CARRYBACKS TO PREENACTMENT

22 YEARS.—Subsection (d) of section 39 of such Code is

23 amended by adding at the end thereof the following new

24 paragraph:
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1 ‘‘(4) NO CARRYBACK OF SECTION 45 CREDIT

2 BEFORE ENACTMENT.—No portion of the unused

3 business credit for any taxable year which is attrib4 utable to the Indian employment credit determined

5 under section 45 may be carried to a taxable year

6 ending before the date of the enactment of section

7 45.’’.

8 (e) CLERICAL AMENDMENT.—The table of sections

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

10 of such Code is amended by adding at the end thereof

11 the following:

‘‘Sec. 45. Indian employment credit.’’.

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

13 this section shall apply to wages paid or incurred after

14 December 31, 1993.

15 Subtitle E—Study

16 SEC. 451. STUDY OF EFFECTIVENESS OF TAX ENTERPRISE

17 ZONE INCENTIVES.

18 (a) IN GENERAL.—The Secretary of the Treasury, in

19 consultation with the appropriate Secretary (as defined in

20 section 1393(7) of the Internal Revenue Code of 1986,

21 as added by this title), shall contract within 3 months of

22 the date of the enactment of this Act, with the National

23 Academy of Sciences (hereafter in this section referred to

24 as the ‘‘Academy’’) to conduct a study of the relative effec-
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1 tiveness of the incentives provided by this title in achieving

2 the purposes of such title in tax enterprise zones.

3 (b) CONDUCT OF STUDY.—If the Academy contracts

4 for the conduct of the study described in subsection (a),

5 the Academy shall develop a study methodology and shall

6 oversee and manage the conduct of such study.

7 (c) REPORTS.—The Academy shall submit to the

8 Committee on Ways and Means of the House of Rep9 resentatives and the Committee on Finance of the Sen10 ate—

11 (1) not later than July 1, 1997, an interim re12 port setting forth the findings as a result of such

13 study, and

14 (2) not later than July 1, 2002, a final report

15 setting forth the findings as a result of such study.

16 TITLE V—WORKFARE

17 SEC. 501. DEVELOPMENT OF A COMPREHENSIVE LEGISLA18 TIVE PROPOSAL REQUIRING ADULTS RECEIV19 ING AFDC TO ENTER THE WORKFORCE.

20 (a) IN GENERAL.—The Secretary of Labor (herein21 after referred to as the ‘‘Secretary’’), in consultation with

22 the Secretary of Health and Human Services shall develop

23 a comprehensive legislative proposal which would require

24 adults receiving aid to families with dependent children

25 under title IV of the Social Security Act (hereinafter re-
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1 ferred to as ‘‘AFDC’’) to enter the workforce within two

2 years of receiving such aid.

3 (b) SPECIFIC MATTERS TO BE INCLUDED.—The

4 proposal developed pursuant to subsection (a) shall include

5 plans—

6 (1) for education, training, and child care which

7 would permit adults receiving AFDC to gain the

8 skills necessary to become financially independent;

9 (2) to assist adults receiving AFDC in finding

10 employment in the private sector; and

11 (3) providing for placement in meaningful com12 munity service jobs for those adults receiving AFDC

13 who cannot find employment in the private sector.

14 (c) REPORT.—No later then one hundred days after

15 January 20, 1994, the Secretary shall submit the proposal

16 developed pursuant to subsection (a) to the Congress.

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