I
103D CONGRESS
1ST SESSION
H. R. 1680
To amend the Internal Revenue Code of 1986 to provide incentives for
investments in small business enterprises owned by disadvantaged individuals.
IN THE HOUSE OF REPRESENTATIVES
APRIL 2, 1993
Mr. MFUME (for himself, Mr. SHAYS, and Mr. DIXON) 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
incentives for investments in small business enterprises
owned by disadvantaged individuals.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Minority Equity Cap-
ital Formation Act of 1993’’.
SEC. 2. FINDINGS AND PURPOSES.
(a) FINDINGS.—The Congress finds that—
(1) there is a severe shortage of capital avail-
able and targeted for investment in the United
States minority business marketplace and that such
shortage constitutes a ‘‘capital gap’’;
(2) the capital gap is a significant barrier to in-
creased minority entrepreneurship, employment, and
economic development;
(3) the development of targeted venture capital
resources is an important and needed stimulus for
economic development, employment growth, and
wealth creation;
(4) existing Federal incentives are inadequate
to address the capital gap;
(5) the existing system of federally regulated
specialized small business investment companies
(and similar public and private entities who support
and invest in the minority small business market-
place) should be fully utilized to aggregate and effi-
ciently deploy new capital investments; and
(6) it is essential, and should be a high priority
of the United States Government, to pursue a broad
array of Federal tax and other domestic policies that
will serve as a catalyst for the creation of capital
pools for investment in the minority enterprise mar-
ketplace.
(b) PURPOSES.—The purposes of this Act are to—
(1) authorize a Federal tax credit for invest-
ment in qualified minority fund interests;
(2) increase the availability of venture capital
for minority small business;
(3) strengthen existing public and private mi-
nority venture capital financial institutions (as well
as to encourage the formation of such new institu-
tions); and
(4) through these actions, support minority en-
terprise and economic development, increase minor-
ity entrepreneurship and employment, and to en-
hance the opportunities for minority persons to par-
ticipate fully in the free enterprise system.
SEC. 3. INCENTIVES FOR INVESTMENTS IN MINORITY VEN-
TURE CAPITAL FUNDS.
(a) GENERAL RULE.—Part IV of subchapter A of
chapter 1 of the Internal Revenue Code of 1986 (relating
to credits against tax) is amended by adding at the end
thereof the following new subpart:
‘‘Subpart H—Incentives for Investments in Minority
Venture Capital Funds
‘‘Sec. 54. Credit for investment in minority venture capital funds.
‘‘Sec. 54A. Recapture provisions.
‘‘Sec. 54B. Definitions and special rules.
‘‘SEC. 54. CREDIT FOR INVESTMENT IN MINORITY VENTURE
CAPITAL FUNDS.
‘‘(a) GENERAL RULE.—For purposes of section 38,
the minority venture capital fund credit determined under
this section is an amount equal to 20 percent of the aggre-
gate bases of qualified minority fund interests which are
acquired by the taxpayer during the taxable year at their
original issuance (directly or through an underwriter) and
which are held by the taxpayer at the end of the taxable
year.
‘‘(b) LIMITATIONS.—The credit determined under
paragraph (1) for any taxable year shall not exceed the
lesser of—
‘‘(1) $250,000 ($125,000 in the case of a sepa-
rate return by a married individual), or
‘‘(2) $7,000,000, ($3,500,000 in the case of a
separate return by a married individual), reduced by
the amount of the credit allowed under paragraph
(1) for all preceding taxable years.
‘‘SEC. 54A. RECAPTURE PROVISIONS.
‘‘(a) BASIS REDUCTION.—
‘‘(1) IN GENERAL.—If a credit is determined
under section 54(a) with respect to any qualified mi-
nority fund interest, the basis of such qualified mi-
nority fund interest shall be reduced by the credit so
determined.
‘‘(2) CERTAIN
DISPOSITIONS.—If during any
taxable year there is a recapture under subsection
(c) with respect to any qualified minority fund inter-
est, the basis of such interest (immediately before
the event resulting in such recapture) shall be in-
creased by an amount equal to the recapture
amount. For purposes of the preceding sentence, the
term ‘recapture amount’ means any increase in tax
under subsection (c) (or adjustment in carrybacks or
carryovers under subsection (c)) to the extent attrib-
utable to the amount referred to in subsection
(c)(1)(A).
‘‘(b) TAX CREDIT RECAPTURED AS ORDINARY IN-
COME.—
‘‘(1) IN
GENERAL.—For purposes of section
1245—
‘‘(A) any property the basis of which is re-
duced under subsection (a) (and any other
property the basis of which is determined in
whole or in part by reference to the adjusted
basis of such property) shall be treated as sec-
tion 1245 property, and
‘‘(B) any reduction under subsection (a)
shall be treated as a deduction allowed for
depreciation.
If an exchange of any stock or partnership interest
the basis of which is reduced under subsection (a)
qualifies under section 351(a), 354(a), 355(a), or
356(a), the amount of gain recognized under section
1245 by reason of this paragraph shall not exceed
the amount of gain recognized in the exchange (de-
termined without regard to this paragraph).
‘‘(2) CERTAIN EVENTS TREATED AS DISPOSI-
TIONS.—For purposes of this subsection and sub-
section (c), if a credit was determined under section
54 with respect to any stock in a corporation or in-
terest in a partnership and such stock or partner-
ship interest, as the case may be, ceases to be a
qualified minority fund interest, the taxpayer shall
be treated as having disposed of such property (as
of the time of such cessation) for an amount equal
to its fair market value.
‘‘(c) INCREASE IN TAX IF DISPOSITION WITHIN 5
YEARS.—
‘‘(1) IN GENERAL.—If a taxpayer disposes of
any qualified minority fund interest before the close
of the fifth taxable year after the taxable year in
which such interest was acquired by the taxpayer,
the tax imposed by this chapter for the taxable year
in which such disposition occurs shall be increased
by the sum of—
‘‘(A) the recapture percentage of the ag-
gregate decrease in the credits allowed under
section 38 for all prior taxable years which
would have resulted solely from reducing to zero
any credit determined under this subpart with
respect to such interest, and
‘‘(B) the interest amount determined
under paragraph (3).
‘‘(2) RECAPTURE PERCENTAGE.—For purposes
of paragraph (1), the recapture percentage is—
‘‘(A) 100 percent if the disposition occurs
during the first, second, or third taxable year
after the taxable year in which the qualified mi-
nority fund interest was acquired, and
‘‘(B) 50 percent if the disposition occurs in
the fourth or fifth taxable year after the taxable
year in which such interest was acquired.
‘‘(3) INTEREST
AMOUNT.—For purposes of
paragraph (1), the interest amount determined
under this paragraph is interest determined at the
overpayment 
rate 
established 
under 
section
662(a)(2) (without regard to section 6621(c))—
‘‘(A) on the recapture percentage of each
decrease in credit referred to in paragraph
(1)(A) for any prior taxable year,
‘‘(B) for the period beginning on the due
date for such prior taxable year and ending on
the due date for the taxable year in which the
disposition occurs.
For purposes of the preceding sentence, the term
‘due date’ means the due date (determined without
regard to extensions) for filing the return of the tax
imposed by this chapter.
‘‘(4) 
CARRYBACKS
AND
CARRYOVERS
AD-
JUSTED.—In the case of any disposition described in
paragraph (1), the carrybacks and carryovers under
section 39 shall be adjusted by reason of such
disposition.
‘‘(5) COORDINATION
WITH
OTHER
CREDITS,
ETC.—Any increase in tax under paragraph (1) shall
not be treated as a tax imposed by this chapter for
purposes of determining the amount of—
‘‘(A) any credit allowable under subpart A,
B, D, or G, and
‘‘(B) the minimum tax imposed by section
55.
‘‘(6) SPECIAL
RULES.—For purposes of this
subsection—
‘‘(A) MERE
CHANGE
IN
FORM.—A tax-
payer shall not be treated as disposing of any
qualified minority fund interest by reason of a
mere change in the form of the taxpayer, the
entity which issued such interest or any quali-
fied minority business.
‘‘(B) EXCEPTION
FOR
CERTAIN
TRANS-
FERS.—Paragraph (1) shall not apply to any
transfer by reason of death or in a transaction
to which section 381(a) applies.
‘‘SEC. 54B. DEFINITIONS AND SPECIAL RULES.
‘‘(a) QUALIFIED MINORITY BUSINESS DEFINED.—
For purposes of this subpart—
‘‘(1) GENERAL RULE.—The term ‘qualified mi-
nority business’ means any domestic business if—
‘‘(A) 50 percent or more of the total value
of the ownership interests in such business are
held (directly or indirectly) by individuals who
are members of a minority,
‘‘(B) throughout the 5-year period ending
on the date as of which the determination is
being made (or, if shorter, throughout the pe-
riod such business was in existence), such busi-
ness has been engaged in the active conduct of
a trade or business or in startup activities relat-
ing to a trade or business, and
‘‘(C) substantially all of the assets of such
business are being used in the active conduct of
a trade or business or in startup activities relat-
ed to a trade or business.
‘‘(2) DOMESTIC
BUSINESS.—For purposes of
paragraph 
(1), 
the 
term 
‘domestic 
business’
means—
‘‘(A) any domestic corporation or domestic
partnership, and
‘‘(B) any trade or business conducted in
the United States as a sole proprietorship.
‘‘(b) QUALIFIED MINORITY FUND INTEREST DE-
FINED.—For purposes of this subpart, the term ‘qualified
minority fund interest’ means any stock in a domestic cor-
poration or partnership interest in a domestic partnership
if—
‘‘(1) such stock or partnership interest (as the
case may be) is issued after the date of the enact-
ment of this subpart solely in exchange for money,
‘‘(2) such corporation or partnership (as the
case may be) was formed exclusively for purposes
of—
‘‘(A) acquiring at original issuance (di-
rectly or through an underwriter) owner inter-
ests in qualified minority businesses, or
‘‘(B) making loans to such businesses, and
‘‘(3) at least 80 percent of the total bases of its
assets is represented by—
‘‘(A) investments referred to in paragraph
(2), and
‘‘(B) cash and cash equivalents.
‘‘(c) MINORITY INDIVIDUALS.—For purposes of this
subpart, individuals are members of a minority if the par-
ticipation of such individuals in the free enterprise system
is hampered because of social disadvantage within the
meaning of section 301(d) of the Small Business Invest-
ment Act of 1958.
‘‘(d) CONTROLLED GROUP RULES.—
‘‘(1) IN GENERAL.—All corporations which are
members of the same controlled groups shall be
treated as 1 corporation for purposes of this sub-
part.
‘‘(2) CONTROLLED
GROUP.—For purposes of
paragraph (1), the term ‘controlled group’ has the
meaning given such term by section 179(d)(7).’’
(b) CREDIT MADE PART OF GENERAL BUSINESS
CREDIT.—Subsection (b) of section 38 of such Code is
amended by striking ‘‘plus’’ at the end of paragraph (7),
by striking the period at the end of paragraph (8) and
inserting ‘‘, plus’’, and by adding at the end thereof the
following new paragraph:
‘‘(9) the minority venture capital fund credit
determined under section 54.’’
(c) CREDIT MAY OFFSET 25 PERCENT OF MINIMUM
TAX.—Subsection (c) of section 38 of such Code is amend-
ed by redesignating paragraph (2) as paragraph (3) and
by inserting after paragraph (1) the following new para-
graph:
‘‘(2) CREDIT FOR INVESTMENTS IN MINORITY
VENTURE CAPITAL FUNDS MAY OFFSET 25 PERCENT
OF MINIMUM TAX.—
‘‘(A) IN GENERAL.—In the case of a C
corporation, the amount determined under
paragraph (1)(A) shall be reduced by the lesser
of—
‘‘(i) the portion of the credit under
section 54 not used against the normal
limitation, or
‘‘(ii) 25 percent of the taxpayer’s ten-
tative minimum tax for the taxable year.
‘‘(B) PORTION
OF
THE
CREDIT
UNDER
SECTION
NOT
USED
AGAINST
NORMAL
LIMIT.—For purposes of subparagraph (A), the
portion of the credit under section 54 for any
taxable year not used against the normal limita-
tion is the excess (if any) of—
‘‘(i) the portion of the credit under
subsection (a) which is attributable to the
credit under section 54, over
‘‘(ii) the limitation of paragraph (1)
(without regard to this paragraph) reduced
by the portion of the credit under sub-
section (a) which is not so attributable.
‘‘(C) LIMITATION.—In no event shall this
paragraph permit the allowance of a credit
which would result in a net chapter 1 tax less
than an amount equal to 10 percent of the
amount determined under section 55(b)(1)(A)
without regard to the alternative tax net operat-
ing loss deduction. For purposes of the preced-
ing sentence, the term ‘net chapter 1 tax’
means the sum of the regular tax liability for
the taxable year and the tax imposed by section
55 for the taxable year, reduced by the sum of
the credits allowable under this part for the
taxable year (other than under section 34).’’
(d) CLERICAL AMENDMENT.—The table of subparts
for part IV subchapter A of chapter 1 of such Code is
amended by adding at the end thereof the following item:
‘‘Subpart H. Incentives for investments in enterprises owned by
disadvantaged individuals.’’
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years ending after the
date of the enactment of this Act.
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