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103D CONGRESS

1ST SESSION H. R. 1949

To amend the Internal Revenue Code of 1986 to provide a capital gain

exclusion for investments in qualified businesses with employee stock

ownership programs within Federal enterprise zones.

IN THE HOUSE OF REPRESENTATIVES

APRIL 29, 1993

Mr. WELDON (for himself and Mr. ANDREWS of New Jersey) introduced the

following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to provide

a capital gain exclusion for investments in qualified businesses with employee stock ownership programs within

Federal enterprise zones.

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

3 That (a) chapter 1 of the Internal Revenue Code of 1986

4 (relating to normal taxes and surtaxes) is amended by in5 serting after subchapter T the following new subchapter:

6 Subchapter U—Capital Gain Exclusion For

7 Investments In Enterprise Zones

‘‘Sec. 1391. 100 percent exclusion for gain from new zone investments.
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‘‘Sec. 1392. Enterprise zone business defined.

‘‘Sec. 1393. Tax enterprise zone.

1 ‘‘SEC. 1391. 100 PERCENT EXCLUSION FOR GAIN FROM NEW

2 ZONE INVESTMENTS.

3 ‘‘(a) GENERAL RULE.—Gross income shall not in4 clude 100 percent of any qualified capital gain recognized

5 on the sale or exchange of a qualified zone asset held for

6 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

15 interest.

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,
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1 ‘‘(ii) as of the time such stock was is2 sued, such corporation was an enterprise

3 zone business (or, in the case of a new cor4 poration, such corporation was being orga5 nized for purposes of being an enterprise

6 zone business), and

7 ‘‘(iii) during substantially all of the

8 taxpayer’s holding period for such stock,

9 such corporation qualified as an enterprise

10 zone business.

11 ‘‘(B) REDEMPTIONS.—The term ‘qualified

12 zone stock’ shall not include any stock acquired

13 from a corporation which made a substantial

14 stock redemption or distribution (without a

15 bona fide business purpose therefor) in an at16 tempt to avoid the purposes of this section.

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

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

19 zone business property’ means tangible property

20 if—

21 ‘‘(i) such property was acquired by

22 the taxpayer by purchase (as defined in

23 section 179(d)(2)) after the date on which

24 the designation of the tax enterprise zone

25 took effect,
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1 ‘‘(ii) the original use of such property

2 in a tax enterprise zone commences with

3 the taxpayer, and

4 ‘‘(iii) during substantially all of the

5 taxpayer’s holding period for such prop6 erty, substantially all of the use of such

7 property was in a tax enterprise zone and

8 in an enterprise zone business of the tax9 payer.

10 ‘‘(B) SPECIAL RULE FOR SUBSTANTIAL IM11 PROVEMENTS.—The requirements of clauses (i)

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

13 satisfied with respect to—

14 ‘‘(i) property which is substantially

15 improved by the taxpayer, and

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

17 is located.

18 For purposes of the preceding sentence, prop19 erty shall be treated as subtantially improved

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

21 beginning after the date on which the designa22 tion of the tax enterprise zone took effect, addi23 tions to basis with respect to such property in

24 the hands of the taxpayer exceed the greater of

25 (i) an amount equal to the adjusted basis at the
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1 beginning of such 24-month period in the hands

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

3 ‘‘(C) LIMITATION ON LAND.—The term

4 ‘qualified zone business property’ shall not in5 clude land which is not an integral part of a

6 qualified business (as defined in section

7 1392(c)).

8 ‘‘(4) QUALIFIED ZONE PARTNERSHIP INTER9 EST.—The term ‘qualified zone partnership interest’

10 means any interest in a partnership if—

11 ‘‘(A) such interest is acquired by the tax12 payer from the partnership solely in exchange

13 for cash,

14 ‘‘(B) as of the time such interest was ac15 quired, such partnership was an enterprise zone

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

17 such partnership was being organized for pur18 poses of being an enterprise zone business), and

19 ‘‘(C) during substantially all of the tax20 payer’s holding period for such interest, such

21 partnership qualified as an enterprise zone

22 business.

23 A rule similar to the rule of paragraph (2)(B) shall

24 apply for purposes of this paragraph.
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1 ‘‘(5) TREATMENT OF SUBSEQUENT PUR2 CHASERS.—The term ‘qualified zone asset’ includes

3 any property which would be a qualified zone asset

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

5 the hands of the taxpayer if such property was a

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

7 ‘‘(6) 10-YEAR SAFE HARBOR.—If any property

8 ceases to be a qualified zone asset by reason of para9 graph (2)(A)(iii), (3)(A)(iii), or (3)(C) after the 10-

10 year period beginning on the date the taxpayer ac11 quired such property, such property shall continue to

12 be treated as meeting the requirements of such

13 paragraph; except that the amount of gain to which

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

15 such property shall not exceed the amount which

16 would be qualified capital gain had such property

17 been sold on the date of such cessation.

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

19 The termination of any designation of an area as a

20 tax enterprise zone shall be disregarded for purposes

21 of determining whether any property is a qualified

22 zone asset.

23 ‘‘(c) OTHER DEFINITIONS AND SPECIAL RULES.—

24 For purposes of this section—
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1 ‘‘(1) QUALIFIED CAPITAL GAIN.—Except as

2 otherwise provided in this subsection, the term

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

4 gain.

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

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

7 not include any gain which would be treated as ordi8 nary income under section 1250 if section 1250 ap9 plied to all depreciation rather than the additional

10 depreciation.

11 ‘‘(3) GAIN ATTRIBUTABLE TO PERIODS AFTER

12 TERMINATION OF ZONE DESIGNATION NOT QUALI13 FIED.—The term ‘qualified capital gain’ shall not in14 clude any gain attributable to periods after the ter15 mination of any designation of an area as a tax en16 terprise zone.

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

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

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

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

21 entity which was an enterprise zone business during

22 substantially all of the period the taxpayer held such

23 interest) for more than 5 years shall be treated as

24 gain described in subsection (a) to the extent such

25 gain is attributable to amounts which would be
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1 qualified capital gain on qualified zone assets (deter2 mined as if such assets had been sold on the date

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

4 than 5 years and throughout the period the taxpayer

5 held such interest. A rule similar to the rule of para6 graph (2)(C) shall apply for purposes of the preced7 ing sentence.

8 ‘‘(2) INCOME INCLUSIONS.—

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

10 in income by reason of holding an interest in a

11 pass-thru entity (other than an entity which

12 was an enterprise zone business during substan13 tially all of the period the taxpayer held the in14 terest to which such inclusion relates) shall be

15 treated as gain described in subsection (a) if

16 such amount meets the requirements of sub17 paragraph (B).

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

19 the requirements of this subparagraph if—

20 ‘‘(i) such amount is attributable to

21 qualified capital gain recognized on the

22 sale or exchange by the pass-thru entity of

23 property which is a qualified zone asset in

24 the hands of such entity and which was
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1 held by such entity for the period required

2 under subsection (a), and

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

4 gross income of the taxpayer by reason of

5 the holding of an interest in such entity

6 which was held by the taxpayer on the date

7 on which such pass-thru entity acquired

8 such asset and at all times thereafter be9 fore the disposition of such asset by such

10 pass-thru entity.

11 ‘‘(C) LIMITATION BASED ON INTEREST

12 ORIGINALLY HELD BY TAXPAYER.—Subpara13 graph (A) shall not apply to any amount to the

14 extent such amount exceeds the amount to

15 which subparagraph (A) would have applied if

16 such amount were determined by reference to

17 the interest the taxpayer held in the pass-thru

18 entity on the date the qualified zone asset was

19 acquired.

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

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

22 ‘‘(A) any partnership,

23 ‘‘(B) any S corporation,

24 ‘‘(C) any regulated investment company,

25 and
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1 ‘‘(D) any common trust fund.

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

3 PARTNERSHIPS AND S CORPORATIONS WHICH ARE

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

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

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

7 during substantially all of the period the taxpayer held

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

9 shall be determined without regard to—

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

11 an integral part of any qualified business (as defined

12 in section 1392(b)), and

13 ‘‘(2) gain attributable to periods before the des14 ignation of an area as a tax enterprise zone.

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

16 For purposes of this section—

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

18 a qualified zone asset to which this subsection ap19 plies, the transferee shall be treated as—

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

21 same manner as the transferor, and

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

23 continuous period immediately preceding the

24 transfer during which it was held (or treated as

25 held under this subsection) by the transferor.
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1 ‘‘(2) TRANSFERS TO WHICH SUBSECTION AP2 PLIES.—This subsection shall apply to any trans3 fer—

4 ‘‘(A) by gift,

5 ‘‘(B) at death, or

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

7 thereof of a qualified zone asset with respect to

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

9 met at the time of the transfer (without regard

10 to the 5-year holding requirement).

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

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

13 apply for purposes of this section.

14 ‘‘(g) CERTAIN BUSINESSES TREATED AS NOT

15 QUALIFIED BUSINESSES.—For purposes of this section,

16 the term ‘enterprise zone business’ has the meaning given

17 such term by section 1392 except that, in applying section

18 1392 for such purposes, the term ‘qualified business’ shall

19 not include any trade or business of producing property

20 of a character subject to the allowance for depletion under

21 section 611.

22 ‘‘SEC. 1392. ENTERPRISE ZONE BUSINESS DEFINED.

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

24 term ‘enterprise zone business’ means, with respect to any
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1 taxable year, any corporation or partnership if for such

2 year—

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

4 is the active conduct of a qualified business within

5 a tax enterprise zone, and

6 ‘‘(B) at least 80 percent of the total gross in7 come of such entity is derived from the active con8 duct of such businesses,

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

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

11 within a tax enterprise zone,

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

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

14 the active conduct of any such business,

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

16 for such entity by its employees are performed in a

17 tax enterprise zone,

‘‘(5) at least 1 18 ⁄3 of its employees are residents

19 of a tax enterprise zone,

20 ‘‘(6) such entity offers its employees an oppor21 tunity to purchase equity interests in such entity

22 and at least 5 percent (by value) of the equity inter23 ests in such entity are held (directly or through a

24 defined contribution plan which meets the require25 ments of section 401(a)) by employees who (as of
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1 the time of the acquisition of the interests) were dis2 advantaged residents of a tax enterprise zone,

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

4 aggregate unadjusted bases of the property of such

5 entity is attributable to collectibles (as defined in

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

7 held primarily for sale to customers in the ordinary

8 course of such business, and

9 ‘‘(8) less than 5 percent of the average of the

10 aggregate unadjusted bases of the property of such

11 entity is attributable to nonqualified financial prop12 erty.

13 ‘‘(b) DISADVANTAGED RESIDENTS.—For purposes of

14 subsection (a), an employee is a disadvantaged resident

15 of a tax enterprise zone if such employee is a resident of

16 such zone and if—

17 ‘‘(1) such employee is a member of an economi18 cally disadvantaged family (within the meaning of

19 section 51(d)(11)), or

20 ‘‘(2) the family income (within the meaning of

21 section 143(f)(2)) of such employee is less than 50

22 percent of the applicable median family income (as

23 defined in section 143(f)(4)).

24 ‘‘(c) QUALIFIED BUSINESS.—For purposes of this

25 section—
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1 ‘‘(1) IN GENERAL.—Except as otherwise pro2 vided in this subsection, the term ‘qualified business’

3 means any trade or business.

4 ‘‘(2) RENTAL OF REAL PROPERTY.—The rental

5 to others of real property located in a tax enterprise

6 zone shall be treated as a qualified business if and

7 only if—

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

9 not residential rental property (as defined in

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

11 zone business, or

12 ‘‘(B) in the case of residential rental prop13 erty (as so defined)—

14 ‘‘(i) such property was originally

15 placed in service after the date the tax en16 terprise zone was designated, or

17 ‘‘(ii) such property is rehabilitated

18 after such date in a rehabilitation which

19 meets requirements based on the principles

20 of section 42(e)(3).

21 ‘‘(3) RENTAL OF TANGIBLE PERSONAL PROP22 ERTY.—The rental to others of tangible personal

23 property shall be treated as a qualified business if

24 and only if substantially all of the rental of such
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1 property is by enterprise zone businesses or by resi2 dents of a tax enterprise zone.

3 ‘‘(4) TREATMENT OF BUSINESS HOLDING IN4 TANGIBLES.—The term ‘qualified business’ shall not

5 include any trade or business consisting predomi6 nantly of the development or holding of intangibles

7 for sale or license.

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

9 term ‘qualified business’ shall not include—

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

11 the operation of any facility described in section

12 144(c)(6)(B), and

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

14 activity of which is farming (within the meaning

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

16 2032A(e)(5)), but only if, as of the close of the

17 preceding taxable year, the sum of—

18 ‘‘(i) the aggregate unadjusted bases

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

20 the assets owned by the taxpayer which are

21 used in such a trade or business, and

22 ‘‘(ii) the aggregate value of assets

23 leased by the taxpayer which are used in

24 such a trade or business,

25 exceeds $500,000.
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1 For purposes of subparagraph (B), rules similar to

2 the rules of section 1395(b) shall apply.

3 ‘‘(d) NONQUALIFIED FINANCIAL PROPERTY.—For

4 purposes of this section, the term ‘nonqualified financial

5 property’ means debt, stock, partnership interests, op6 tions, futures contracts, forward contracts, warrants, no7 tional principal contracts, annuities, and other similar

8 property specified in regulations; except that such term

9 shall not include—

10 ‘‘(1) reasonable amounts of working capital

11 held in cash, cash equivalents, or debt instruments

12 with a term of 18 months or less, or

13 ‘‘(2) debt instruments described in section

14 1221(4).

15 ‘‘SEC. 1393. TAX ENTERPRISE ZONE.

16 ‘‘For purposes of this subchapter, the term ‘tax en17 terprise zone’ means any area hereafter designated as an

18 enterprise zone or tax enterprise zone pursuant to any law

19 enacted after the date of the enactment of this section.’’

20 (b) CLERICAL AMENDMENT.—The table of sub21 chapters for chapter 1 of such Code is amended by insert22 ing after the item relating to subchapter T the following

23 new subchapter:

‘‘SUBCHAPTER U—Capital gain exclusion for investments in enterprise zones.’’
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