partnership interest in a domestic partnership,
which is originally issued after December 31, 1994,
if—
‘‘(A) as of the date of issuance, such cor-
poration or partnership is a qualified small
business entity, and
‘‘(B) such stock or partnership interest is
acquired by the taxpayer at its original issue
(directly or through an underwriter)—
‘‘(i) in exchange for money or other
property (not including stock), or
‘‘(ii) as compensation for services
(other than services performed as an un-
derwriter of such stock or partnership in-
terest).
A rule similar to the rule of section 1202(c)(3) shall
apply for purposes of this section.
‘‘(3) ACTIVE BUSINESS REQUIREMENT.—Stock
in a corporation, and a partnership interest in a
partnership, shall not be treated as eligible small
business investment unless, during substantially all
of the taxpayer’s holding period for such stock or
partnership interest, such corporation or partnership
meets the active business requirements of subsection
(c). A rule similar to the rule of section
1202(c)(2)(B) shall apply for purposes of this sec-
tion.
‘‘(4) QUALIFIED SMALL BUSINESS ENTITY.—
‘‘(A) IN
GENERAL.—The term ‘qualified
small business entity’ means any domestic cor-
poration or partnership if—
‘‘(i) for the taxable year of such entity
in which the stock or partnership interest
was issued and each prior taxable year,
such entity (and any predecessor thereof)
had 
gross 
receipts 
of 
less 
than
$20,000,000,
‘‘(ii) at all times before such issuance,
such entity (and any predecessor thereof)
had aggregate gross assets (as defined in
section 
1202(d)(2)) 
of 
less 
than
$25,000,000, and
‘‘(iii) at all times before such issu-
ance, the excess of the fair market value of
the assets of such entity (and any prede-
cessor thereof) over the liabilities of such
entity was less than $10,000,000.
‘‘(B) AGGREGATION
RULES.—All persons
treated as a single employer under subsection
(a) or (b) of section 52 shall be treated as one
person for purposes of subparagraph (A).
‘‘(C) SPECIAL RULES FOR DETERMINING
GROSS RECEIPTS.—The rules of subparagraphs
(B) and (C) of section 448(c)(3) shall apply for
purposes of subparagraph (A)(i).
‘‘(c) ACTIVE BUSINESS REQUIREMENT.—
‘‘(1) IN GENERAL.—For purposes of subsection
(b)(3), the requirements of this subsection are met
by a qualified small business entity for any period
if—
‘‘(A) the entity is engaged in the active
conduct of a trade or business, and
‘‘(B) at least 80 percent (by value) of the
assets of such entity are used in the active con-
duct of a trade or business.
‘‘(2) SPECIAL
RULE
FOR
CERTAIN
ACTIVI-
TIES.—For purposes of paragraph (1), if, in connec-
tion with any future trade or business, an entity is
engaged in—
‘‘(A) startup activities described in section
195(c)(1)(A),
‘‘(B) activities resulting in the payment or
incurring of expenditures which may be treated
as research and experimental expenditures
under section 174, or
‘‘(C) activities with respect to in-house re-
search expenses described in section 41(b)(4),
such entity shall be treated with respect to such ac-
tivities as engaged in (and assets used in such activi-
ties shall be treated as used in) the active conduct
of a trade or business. Any determination under this
paragraph shall be made without regard to whether
the entity has any gross income from such activities
at the time of the determination.
‘‘(3) CERTAIN RULES TO APPLY.—Rules similar
to the rules of paragraphs (5), (6), (7), and (8) of
section 1202(e) shall apply for purposes of this sub-
section.
‘‘(d) CERTAIN OTHER RULES TO APPLY.—Rules
similar to the rules of subsections (f), (g), (h), and (j)
of section 1202 (without regard to any 5-year holding pe-
riod requirement) shall apply for purposes of this section.
‘‘(e) BASIS ADJUSTMENTS.—If gain from any sale is
not recognized by reason of subsection (a), such gain shall
be applied to reduce (in the order acquired) the basis for
determining gain or loss of any eligible small business in-
vestment which is purchased by the taxpayer during the
6-month period described in subsection (a).
‘‘(f) STATUTE OF LIMITATIONS.—If any gain is real-
ized by the taxpayer on the sale or exchange of any eligible
small business investment and there is in effect an election
under subsection (a) with respect to such gain, then—
‘‘(1) the statutory period for the assessment of
any deficiency with respect to such gain shall not ex-
pire before the expiration of 3 years from the date
the Secretary is notified by the taxpayer (in such
manner as the Secretary may by regulations pre-
scribe) of—
‘‘(A) the taxpayer’s cost of purchasing
other eligible small business investment which
the taxpayer claims results in nonrecognition of
any part of such gain,
‘‘(B) the taxpayer’s intention not to pur-
chase other eligible small business investment
within the 6-month period described in sub-
section (a), or
‘‘(C) a failure to make such purchase with-
in such 6-month period, and
‘‘(2) such deficiency may be assessed before the
expiration of such 3-year period notwithstanding the
provisions of any other law or rule of law which
would otherwise prevent such assessment.