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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
TITLE I—LINE-ITEM VETO
SEC. 101. ENHANCEMENT OF SPENDING CONTROL BY THE
PRESIDENT.
The Impoundment Control Act of 1974 is amended
by adding at the end thereof the following new title:
‘‘TITLE XI—LEGISLATIVE LINE ITEM VETO
RESCISSION AUTHORITY
‘‘PART A—LEGISLATIVE LINE ITEM VETO RESCISSION
AUTHORITY
‘‘GRANT OF AUTHORITY AND CONDITIONS
‘‘SEC. 1101. (a) IN GENERAL.—(1) Notwithstanding
part B of title X and subject to part B of this title, the
President may rescind all or part of any budget authority,
if the President—
‘‘(A) determines that—
‘‘(i) such rescission would help balance the
Federal budget, reduce the Federal budget defi-
cit, or reduce the public debt;
‘‘(ii) such rescission will not impair any es-
sential Government functions; and
‘‘(iii) such rescission will not harm the na-
tional interest; and
‘‘(B)(i) notifies the Congress of such rescission
by a special message not later than 20 calendar days
(not including Saturdays, Sundays, or holidays)
after the date of enactment of a regular or supple-
mental appropriations Act or a joint resolution mak-
ing continuing appropriations providing such budget
authority; or
‘‘(ii) notifies the Congress of such rescission by
special message accompanying the submission of the
President’s budget to Congress and such rescissions
have not been proposed previously for that fiscal
year.
‘‘(2) The President shall submit a separate rescission
message for each appropriations bill under paragraph
(1)(B)(ii).
‘‘(b) 
RESCISSION
EFFECTIVE
UNLESS
DIS-
APPROVED.—(1)(A) Any amount of budget authority re-
scinded under this title as set forth in a special message
by the President shall be deemed canceled unless, during
the period described in subparagraph (B), a rescission dis-
approval bill making available all of the amount rescinded
is enacted into law.
‘‘(B) The period referred to in subparagraph (A) is—
‘‘(i) a Congressional review period of 20 cal-
endar days of session under part B, during which
Congress must complete action on the rescission dis-
approval bill and present such bill to the President
for approval or disapproval;
‘‘(ii) after the period provided in clause (i), an
additional 10 days (not including Sundays) during
which the President may exercise his authority to
sign or veto the rescission disapproval bill; and
‘‘(iii) if the President vetoes the rescission dis-
approval bill during the period described in clause
(ii), an additional 5 calendar days of session after
the date of the veto.
‘‘(2) If a special message is transmitted by the Presi-
dent under this section during any Congress and the last
session of such Congress adjourns sine die before the expi-
ration of the period described in paragraph (1)(B)—
‘‘(A) the rescission shall not take effect;
‘‘(B) the message shall be deemed to have been
retransmitted on the first day of the succeeding
Congress; and
‘‘(C) the review period described in paragraph
(1)(B) (with respect to such message) shall run be-
ginning after such first day.
‘‘DEFINITIONS
‘‘SEC. 1102. For the purposes of this title, the term
‘rescission disapproval bill’ means a bill or joint resolution
which only disapproves a rescission of budget authority,
in whole, rescinded in a special message transmitted by
the President under section 1101.
‘‘PART B—CONGRESSIONAL CONSIDERATION OF
LEGISLATIVE LINE ITEM VETO RESCISSIONS
‘‘PRESIDENTIAL SPECIAL MESSAGE
‘‘SEC. 1111. When the President rescinds any budget
authority as provided in section 1101, the President shall
transmit to the House of Representatives and to the Sen-
ate a special message specifying—
‘‘(1) the amount of budget authority rescinded;
‘‘(2) any account, department, or establishment
of the Government to which such budget authority
is available for obligation, and the specific project or
governmental functions involved;
‘‘(3) the reasons and justifications for the de-
termination to rescind budget authority pursuant to
section 1101(a)(1);
‘‘(4) to the maximum extent practicable, the es-
timated fiscal, economic, and budgetary effect of the
rescission; and
‘‘(5) all facts, circumstances, and considerations
relating to or bearing upon the rescission and the
decision to effect the rescission, and to the maxi-
mum extent practicable, the estimated effect of the
rescission upon the objects, purposes, and programs
for which the budget authority is provided.
‘‘TRANSMISSION OF MESSAGES; PUBLICATION
‘‘SEC. 1112. (a) DELIVERY TO HOUSE AND SEN-
ATE.—(1) Each special message transmitted under sec-
tions 1101 and 1111 shall be transmitted to the House
of Representatives and the Senate on the same day, and
shall be delivered to the Clerk of the House of Representa-
tives if the House of Representatives is not in session and
other than the rescission of budget authority transmitted
by the President under section 1101.
‘‘(2) It shall not be in order in the Senate or the
House of Representatives to consider any amendment to
a rescission disapproval bill.
‘‘(3) Paragraphs (1) and (2) may be waived or sus-
pended in the House only by a vote of three-fifths of the
members duly chosen and sworn.’’.
TITLE II—CAPITAL GAINS
SEC. 201. DEDUCTION FOR CAPITAL GAINS ON CERTAIN
SMALL BUSINESS STOCK.
(a) IN GENERAL.—Subchapter P of chapter 1 of the
Internal Revenue Code of 1986 (relating to capital gains
and losses) is amended by adding at the end thereof the
following new part:
‘‘PART VII—ENTERPRISE CAPITAL INVESTMENT
INCENTIVES
‘‘Sec. 1301. Deduction for gain on certain small business stock.
‘‘Sec. 1302. Definitions and special rules.
‘‘SEC. 1301. DEDUCTION FOR GAIN ON CERTAIN SMALL
BUSINESS STOCK.
‘‘(a) GENERAL RULE.—If a taxpayer has a qualified
small business net capital gain for any taxable year, there
shall be allowed as a deduction from gross income an
amount equal to the sum of—
‘‘(1) 50 percent of the excess (if any) of—
‘‘(A) qualified small business net capital
gain, over
‘‘(B) the amount of seed capital gain, plus
‘‘(2) the seed capital gain deduction.
‘‘(b) QUALIFIED SMALL BUSINESS NET CAPITAL
GAIN.—For purposes of this section, the term ‘qualified
small business net capital gain’ means the lesser of—
‘‘(1) the net capital gain for the taxable year,
or
‘‘(2) the net capital gain for the taxable year
determined by taking into account only gain or loss
from sales or exchanges of qualified small business
stock with a holding period of more than 5 years at
the time of sale or exchange.
‘‘(c) SEED CAPITAL GAIN DEDUCTION.—For pur-
poses of this section—
‘‘(1) IN GENERAL.—The term ‘seed capital gain
deduction’ means an amount equal to the sum of the
amounts determined by applying the applicable per-
centages to the appropriate categories of seed capital
gain under the table contained in paragraph (2).
‘‘(2) COMPUTATION
OF
AMOUNT.—The seed
capital gain deduction shall be computed as follows:
The applicable
‘‘In the case of:
percentage is:
5-year gain ...................................................................
6-year gain ...................................................................
7-year gain ...................................................................
The applicable
‘‘In the case of:
percentage is:
8-year gain ...................................................................
9-year gain ...................................................................
10-year gain .................................................................
100.
‘‘(3) SEED
CAPITAL
GAIN.—For purposes of
this subsection, the term ‘seed capital gain’ means
the lesser of—
‘‘(A) the excess (if any) of—
‘‘(i) the net capital gain for the tax-
able year, over
‘‘(ii) the qualified small business net
capital gain for the taxable year deter-
mined without regard to gain or loss de-
scribed in subparagraph (B), or
‘‘(B) the net capital gain for the taxable
year determined by taking into account only
gain or loss from sales or exchanges of stock—
‘‘(i) which is qualified small business
stock in a corporation which is a qualified
small business (determined by substituting
‘$5,000,000’ for ‘$100,000,000’ in section
1302(b)(1)), and
‘‘(ii) with a holding period of more
than 5 years at the time of the sale or ex-
change.
‘‘(4) CATEGORIES OF GAIN.—For purposes of
this subsection—
‘‘(A) 10-YEAR
GAIN.—The term ‘10-year
gain’ means the lesser of—
‘‘(i) the seed capital gain, or
‘‘(ii) the seed capital gain determined
by taking into account under paragraph
(3)(B) only gain or loss from qualified
small business stock with a holding period
of more than 10 years at the time of the
sale or exchange.
‘‘(B) OTHER
GAIN.—The terms ‘5-, 6-,
7-, 8-, and 9-year gain’ mean, with respect to
any category, the lesser of—
‘‘(i) the excess (if any) of—
‘‘(I) seed capital gain, over
‘‘(II) the amount determined
under this paragraph for categories
with a longer holding period, or
‘‘(ii) seed capital gain determined by
taking into account under paragraph
(3)(B) only gain or loss from qualified
small business stock with a holding period
of more than 5, 6, 7, 8, or 9 years but not
more than 6, 7, 8, 9, or 10 years, respec-
tively.
‘‘(d) ESTATES AND TRUSTS.—In the case of an es-
tate or trust, the deduction under subsection (a) shall be
computed by excluding the portion (if any) of the gains
for the taxable year from sales or exchanges of qualified
small business stock which, under section 652 and 662
(relating to inclusions of amounts in gross income of bene-
ficiaries of trusts), is includible by the income beneficiaries
as gains derived from the sale or exchange of capital as-
sets.
‘‘SEC. 1302. DEFINITIONS AND SPECIAL RULES.
‘‘(a) QUALIFIED SMALL BUSINESS STOCK.—For pur-
poses of this part—
‘‘(1) IN GENERAL.—The term ‘qualified small
business stock’ means any stock in a corporation
which is originally issued after December 31, 1991,
if—
‘‘(A) as of the date of issuance, such cor-
poration is a qualified small business, and
‘‘(B) except as provided in subsections (d)
and (e), such stock is acquired by the taxpayer
at its original issue (directly or through an un-
derwriter)—
‘‘(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).
‘‘(2) 
5-YEAR
ACTIVE
BUSINESS
REQUIRE-
MENT.—Stock in a corporation shall not be treated
as qualified small business stock unless, during the
testing period, such corporation meets the active
business requirements of subsection (c).
‘‘(3) CERTAIN
REDEMPTIONS, 
EXCHANGES,
ETC. DISQUALIFIED.—For purposes of paragraph
(1)(B), and except as provided in subsections (d)
and (e), stock shall not be treated as acquired by the
taxpayer at its original issue if—
‘‘(i) it is issued directly or indirectly in re-
demption of, or otherwise in exchange for, stock
which is not qualified small business stock, or
‘‘(ii) it is issued in an exchange described
in section 351 in exchange for property other
than qualified small business stock, if imme-
diately after the exchange, both the issuer and
transferee of the stock are members of the
same controlled group of corporations (as de-
fined in section 1563).
‘‘(b) QUALIFIED SMALL BUSINESS.—For purposes of
this part—
‘‘(1) IN GENERAL.—The term ‘qualified small
business’ means any domestic corporation with re-
spect to which the sum of—
‘‘(A) the aggregate amount of money,
other property, and services received by the cor-
poration for stock, as a contribution to capital,
and as paid-in surplus, plus
‘‘(B) the accumulated earnings and profits
of the corporation,
does not exceed $100,000,000. The determination
under the preceding sentence shall be made as of the
time of such issuance but shall include amounts re-
ceived in such issuance and all prior issuances.
‘‘(2) AMOUNT TAKEN INTO ACCOUNT WITH RE-
SPECT TO PROPERTY AND SERVICES.—For purposes
of paragraph (1)—
‘‘(A) PROPERTY.—The amount taken into
account with respect to any property other than
money shall be an amount equal to the adjusted
basis of such property for determining gain, re-
duced (but not below zero) by any liability to
which the property was subject or which was
assumed by the corporation. The determination
under the preceding sentence shall be made as
of the time the property was received by the
corporation.
‘‘(B) COMPENSATION FOR SERVICES.—The
amount taken into account with respect to stock
issued for services shall be the value of such
services.
‘‘(c) ACTIVE BUSINESS REQUIREMENT.—For pur-
poses of this part—
‘‘(1) IN GENERAL.—For purposes of subsection
(a)(2), the requirements of this subsection are met
if, during the testing period—
‘‘(A) the corporation is engaged in the ac-
tive conduct of a trade or business, and
‘‘(B) substantially all of the assets of such
corporation are used in the active conduct 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, a corporation
is engaged in—
‘‘(A) start-up 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 corporation shall be treated with respect to
such activities as engaged in (and assets used in
such activities 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 a corporation has any gross income from
such activities at the time of the determination.
‘‘(3) STOCK IN OTHER CORPORATIONS.—
‘‘(A) LOOK-THRU
IN
CASE
OF
SUBSIDI-
ARIES.—For purposes of this subsection, stock
and debt in any subsidiary corporation shall be
disregarded and the parent corporation shall be
deemed to own its ratable share of the subsidi-
ary’s assets, and to conduct its ratable share of
the subsidiary’s activities.
‘‘(B) PORTFOLIO
STOCK.—A corporation
shall be treated as failing to meet the require-
ments of paragraph (1) if, at any time during
the testing period, more than 10 percent of the
value of its assets (in excess of liabilities) con-
sist of stock in other corporations which are not
subsidiaries of such corporation.
‘‘(C) SUBSIDIARY.—For purposes of this
paragraph, a corporation shall be considered a
subsidiary if the parent owns at least 50 per-
cent of the combined voting power of all classes
of stock entitled to vote, or at least 50 percent
in value of all outstanding stock of such cor-
poration.
‘‘(4) WORKING
CAPITAL.—For purposes of
paragraph (1)(B), any assets which—
‘‘(A) are held for investment, and
‘‘(B) are to be used to finance future re-
search and experimentation or working capital
needs of the corporation,
shall be treated as used in the active conduct of a
trade or business.
‘‘(5) MAXIMUM
REAL
ESTATE
HOLDINGS.—A
corporation shall not be treated as meeting the re-
quirements of paragraph (1) if, at any time during
the testing period, more than 10 percent of the total
value of its assets is real property which is not used
in the active conduct of a trade or business. For
purposes of the preceding sentence, the ownership
of, dealing in, or renting of real property shall not
be treated as the active conduct of a trade or busi-
ness.
‘‘(6) SMALL
BUSINESS
INVESTMENT
COMPA-
NIES.—Paragraph (1) shall not apply to any small
business investment company operating under the
Small Business Investment Act of 1958.
‘‘(7) COMPUTER
SOFTWARE
ROYALTIES.—For
purposes of paragraph (1), rights to computer soft-
ware which produces income described in section
543(d) shall be treated as an asset used in the active
conduct of a trade or business.
‘‘(8) TESTING PERIOD.—For purposes of this
section, the term ‘testing period’ means, with respect
to any stock held by a taxpayer, the 5-year period
beginning with the first day of the taxpayer’s hold-
ing period for such stock.
‘‘(d) SPECIAL RULES FOR OPTIONS, WARRANTS, AND
CERTAIN CONVERTIBLE INVESTMENTS.— For purposes
of this part—
‘‘(1) IN GENERAL.—In the case of stock which
is acquired by the taxpayer through the exercise of
an applicable option or warrant, through the conver-
sion of convertible debt, or in exchange for securities
of the corporation in a transaction described in sec-
tion 368—
‘‘(A) such stock shall be treated as ac-
quired by the taxpayer at original issue, and
‘‘(B) such stock shall be treated as having
been held during the period such option, war-
rant, or debt was held, or such security was
outstanding.
‘‘(2) ISSUE PRICE FOR CONVERTIBLE DEBT OR
SECURITY.—For purposes of section 1302(b)(1) and
notwithstanding section 1302(b)(2), in the case of a
debt instrument converted to stock, or stock issued
in exchange for securities in a transaction described
in section 368, such stock shall be treated as issued
for an amount equal to the sum of—
‘‘(A) the principal amount of the debt or
security as of the time of the conversion or ex-
change, and
‘‘(B) accrued but unpaid interest on such
loan or security.
‘‘(3) APPLICABLE OPTION OR WARRANT.—For
purposes of this subsection, the term ‘applicable op-
tion or warrant’ means an option or warrant
which—
‘‘(A) was issued in exchange for the per-
formance of services for the corporation issuing
it, and
‘‘(B) is nontransferrable.
‘‘(e) CERTAIN
TAX-FREE
AND
OTHER
TRANS-
FERS.—For purposes of this part—
‘‘(1) IN GENERAL.—In the case of a transfer of
stock to which this subsection applies, the transferee
shall be treated as—
‘‘(A) having acquired such stock in the
same manner as the transferor, and
‘‘(B) having held such stock during any
continuous period immediately preceding the
transfer during which it was held (or treated as
held under this subsection) by the transferor.
‘‘(2) TRANSFERS TO WHICH SUBSECTION AP-
PLIES.—This subsection shall apply to any trans-
fer—
‘‘(A) by gift,
‘‘(B) at death,
‘‘(C) to the extent that the basis of the
property in the hands of the transferee is deter-
mined by reference to the basis of the property
in the hands of the transferor by reason of sec-
tion 334(b), 723, or 732, or
‘‘(D) of qualified small business stock for
other qualified small business stock in a trans-
action described in section 351 or a reorganiza-
tion described in section 368.
‘‘(3) INCORPORATIONS AND REORGANIZATIONS
INVOLVING NONQUALIFIED STOCK.—
‘‘(A) IN GENERAL.—In the case of a trans-
action described in section 351 or a reorganiza-
tion described in section 368, if a qualified
small business stock is transferred for other
stock which is not qualified small business
stock, such transfer shall be treated as a trans-
fer to which this subsection applies solely with
respect to the person receiving such other stock.
‘‘(B) LIMITATION.—This part shall apply
to the sale or exchange of stock treated as
qualified small business stock by reason of sub-
paragraph (A) only to the extent of the gain (if
any) which would have been recognized at the
time of the transfer described in subparagraph
(A) if section 351 or 368 had not applied at
such time.
‘‘(C) SUCCESSIVE APPLICATION.—For pur-
poses of this paragraph, stock treated as quali-
fied small business stock under subparagraph
(A) shall be so treated for subsequent trans-
actions or reorganizations, except that the limi-
tation of subparagraph (B) shall be applied as
of the time of the first transfer to which sub-
paragraph (A) applied.
‘‘(D) CONTROL TEST.—Except in the case
of a transaction described in section 368, this
paragraph shall apply only if, immediately after
the transaction, the corporation issuing the
stock owns directly or indirectly stock rep-
resenting control (within the meaning of section
368(c)) of the corporation whose stock was
transferred.
‘‘(f) STOCK EXCHANGED FOR PROPERTY.—For pur-
poses of this part, in the case where the taxpayer transfers
property (other than money or stock) to a corporation in
exchange for stock in such corporation—
‘‘(1) such stock shall be treated as having been
acquired by the taxpayer on the date of such ex-
change, and
‘‘(2) the basis of such stock in the hands of the
taxpayer shall be treated as equal to the fair market
value of the property exchanged.
‘‘(g) PASS-THRU ENTITIES.—For purposes of this
part, any gain or loss of a pass-thru entity which is treated
for purposes of this subtitle as a gain or loss of any person
holding an interest in such entity shall retain its character
as qualified small business or seed capital gain or loss in
the hands of such person.
‘‘(h) INDEXING.—In the case of any stock issued in
a calendar year after 1992, the $5,000,000 and
$100,000,000 amounts in section 1301(c)(3)(B)(i) and
subsection (b)(1) of this section shall be increased by an
amount equal to—
‘‘(1) such dollar amount, multiplied by
‘‘(2) the cost-of-living adjustment determined
under section 1(f)(3) for such calendar year by sub-
stituting ‘1991’ for ‘1987’ in subparagraph (B)
thereof.’’.
(b) MAXIMUM 14 PERCENT TAX RATE.—
(1) INDIVIDUALS.—Section 1(h) of such Code
(relating to maximum capital gains rate) is amended
to read as follows:
‘‘(h) MAXIMUM CAPITAL GAINS RATE.—
‘‘(1) IN GENERAL.—If a taxpayer has a net
capital gain for any taxable year, then the tax im-
posed by this section shall not exceed the sum of—
‘‘(A) a tax computed at the rate and in the
same manner as if this subsection had not been
enacted on the greater of—
‘‘(i) taxable income reduced by the
amount of the net capital gain, or
‘‘(ii) the amount of taxable income
taxed at a rate below 28 percent, plus
‘‘(B) a tax of 28 percent of the amount of
taxable income in excess of the amount deter-
mined under subparagraph (A).
‘‘(2) SPECIAL
RULE
WHERE
TAXPAYER
HAS
QUALIFIED SMALL BUSINESS NET CAPITAL OR SEED
CAPITAL GAIN.—
‘‘(A) IN
GENERAL.—If a taxpayer has
qualified small business net capital gain or seed
capital gain for any taxable year, then the tax
imposed by this section shall not exceed the
lesser of—
‘‘(i) the amount determined under
paragraph (1), or
‘‘(ii) the sum of—
‘‘(I) 
the 
amount 
determined
under paragraph (1) without taking
into account qualified small business
net capital gain and seed capital gain
for purposes of subparagraphs (A)
and (B) thereof, plus
‘‘(II) 14 percent of the qualified
small business net capital gain and
seed capital gain.
‘‘(B) DEFINITIONS.—For purposes of this
paragraph, the terms ‘qualified small business
net capital gain’ and ‘seed capital gain’ have
the meanings given such terms by section 1301
(b) and (c), respectively.’’.
(2) CORPORATIONS.—Section 1201(a) of such
Code (relating to alternative tax for corporations) is
amended—
(A) by inserting ‘‘or the corporation has a
qualified small business net capital gain or seed
capital gain’’ before ‘‘, then’’, and
(B) by striking paragraph (2) and insert-
ing:
‘‘(2) a tax equal to the sum of—
‘‘(A) 34 percent of the sum of the net cap-
ital gain, reduced by qualified small business
net capital gain and seed capital gain, plus
‘‘(B) 17 percent of the qualified small
business net capital gain and seed capital
gain.’’.
(c) TREATMENT AS PREFERENCE ITEM FOR MINI-
MUM TAX.—Section 57(a) of such Code (relating to items
of tax preference under the alternative minimum tax) is
amended by adding at the end thereof the following new
paragraph:
‘‘(8) CAPITAL
GAINS
ON
SALE
OF
CERTAIN
SMALL BUSINESS STOCK.—An amount equal to the
deduction for the taxable year determined under sec-
tion 1301(a)(1).’’.
(d) LOSSES ON SMALL BUSINESS STOCK.—Section
1244(c)(3)(A) of such Code (defining small business cor-
poration) is amended by striking ‘‘$1,000,000’’ and insert-
ing ‘‘$5,000,000 (adjusted at the same time and manner
as under section 1302(g))’’.
(e) CONFORMING AMENDMENTS.—
(1) Section 62(a) of such Code is amended by
adding after paragraph (13) the following new para-
graph:
‘‘(14) LONG-TERM
CAPITAL
GAINS.—The de-
duction allowed by section 1301.’’.
(2) Subparagraph (B) of section 170(e)(1) of
such Code is amended by inserting ‘‘(or, in the case
of qualified small business stock under section 1301,
50 percent of the amount)’’ after ‘‘the amount’’.
(3) Section 172(d)(2) of such Code is amended
to read as follows:
‘‘(2) CAPITAL
GAINS
AND
LOSSES
OF
TAX-
PAYERS OTHER THAN CORPORATIONS.—In the case
of a taxpayer other than a corporation—
‘‘(A) the amount deductible on account of
losses from sales or exchanges of capital assets
shall not exceed the amount includible on ac-
count of gains from sales or exchanges of cap-
ital assets; and
‘‘(B) the deduction for long-term capital
gains provided by section 1301 shall not be al-
lowed.’’.
(4) Subparagraph (B) of section 172(d)(4) of
such Code is amended by inserting ‘‘, (2)(B),’’ after
‘‘paragraph (1)’’.
(5)(A) Section 220 of such Code is amended to
read as follows:
‘‘SEC. 220. CROSS REFERENCES.
‘‘(1) For deduction for long-term capital gains
in the case of sale of qualified small business stock,
see section 1301.
‘‘(2) For deductions in respect of a decedent,
see section 691.’’.
(B) The table of sections for part VII of sub-
chapter B of chapter 1 of such Code is amended by
striking out ‘‘reference’’ in the item relating to sec-
tion 220 and inserting ‘‘references’’.
(6) Paragraph (4) of section 642(c) of such
Code is amended to read as follows:
‘‘(4) ADJUSTMENTS.—To the extent that the
amount otherwise allowable as a deduction under
this subsection consists of gain from the sale or ex-
change of qualified small business stock held for
more than 5 years, proper adjustment shall be made
for any deduction allowable to the estate or trust
under section 1301 (relating to deduction for excess
of capital gains over capital losses). In the case of
a trust, the deduction allowed by this subsection
shall be subject to section 681 (relating to unrelated
business income).’’.
(7) Paragraph (3) of section 643(a) of such
Code is amended by adding at the end thereof the
following new sentence: ‘‘The deduction under sec-
tion 1301 (relating to deduction for gain on quali-
fied small business stock) shall not be taken into ac-
count.’’.
(8) Paragraph (4) of section 691(c) of such
Code is amended by striking out ‘‘1(h), 1201, and
1211’’ and inserting in lieu thereof ‘‘1(h), 1201,
1211, and 1301, and for purposes of section
57(a)(8)’’.
(9) Clause (iii) of section 852(b)(3)(D) of such
Code is amended by striking out ‘‘66 percent’’ and
inserting ‘‘the rate differential portion (within the
meaning of section 904(b)(3)(E))’’.
(10) The second sentence of paragraph (2) of
section 871(a) of such Code is amended by inserting
‘‘such gains and losses shall be determined without
regard to section 1301 (relating to deduction for
qualified small business net capital gains) and’’ after
‘‘except that’’.
(11) Section 1402(i)(1) of such Code is amend-
ed to read as follows:
‘‘(1) IN
GENERAL.—In determining the net
earnings from self-employment of any options dealer
or commodities dealer—
‘‘(A) notwithstanding subsection (a)(3)(A),
there shall not be excluded any gain or loss (in
the normal course of the taxpayer’s activity of
dealing in or trading section 1256 contracts)
from section 1256 contracts or property related
to such contracts, and
‘‘(B) the deduction provided by section
1301 shall not apply.’’.
(12) Section 1445(e)(1) of such Code is amend-
ed by striking out ‘‘34 percent (or, to the extent pro-
vided in regulations, 28 percent)’’ and inserting ‘‘34
percent (or, to the extent provided in regulations,
the alternative tax rate determined under section
904(b)(3)(E)(iii))’’.
(f) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to stock issued after Decem-
ber 31, 1993.
(2) APPLICATION OF TAX INCENTIVE TO CUR-
RENT STOCK HOLDINGS OF INVESTORS.—
(A) IN GENERAL.—If—
(i) a taxpayer holds any stock on any
date on or after the date determined under
paragraph (1) which, at the time it was is-
sued, would be treated as qualified small
business stock (as defined in section
1302(a) of the Internal Revenue Code of
1986) without regard to the time it was is-
sued, and
(ii) the value of such stock on such
date exceeds its adjusted basis,
the taxpayer may elect to treat such stock as
having been sold on such date for an amount
equal to its value on such date (and as having
been reacquired on such date for an amount
equal to such value). The gain from such sale
shall be treated as received or accrued (and the
holding period of the reacquired stock shall be
treated as beginning) on such date. For pur-
poses of applying section 1301 of such Code,
such stock shall be treated after such reacquisi-
tion as acquired in the same manner and at the
same time as the original acquisition and the
requirement of section 1302(a)(1) that the
stock must have been issued after December
31, 1993, shall not apply.
(B) ELECTION.—An election under sub-
paragraph (A) with respect to any stock shall
be made in such manner as the Secretary may
prescribe. Such an election, once made with re-
spect to any stock, shall be irrevocable.
TITLE III—SOCIAL SECURITY
EARNINGS TEST
SEC. 301. RETIREMENT TEST EXEMPT AMOUNT INCREASED.
(a) IN GENERAL.—Section 203(f)(8)(D) of the Social
Security Act (42 U.S.C. 403(f)(8)(D)) is amended to read
as follows:
‘‘(D) Notwithstanding any other provision of this
subsection, the exempt amount which is applicable to an
individual who has attained retirement age (as defined in
section 216(l)) before the close of the taxable year involved
shall be—
‘‘(i) $925 for each month of any taxable year
ending after 1992 and before 1994,
‘‘(ii) $1,020 for each month of any taxable year
ending after 1993 and before 1995,
‘‘(iii) $1,130 for each month of any taxable
year ending after 1994 and before 1996,
‘‘(iv) $1,450 for each month of any taxable year
ending after 1995 and before 1997,
‘‘(v) $1,750 for each month of any taxable year
ending after 1996 and before 1998,
‘‘(vi) $2,250 for each month of any taxable year
ending after 1997 and before 1999,
‘‘(vii) $2,670 for each month of any taxable
year ending after 1998 and before 2000,
‘‘(viii) $3,500 for each month of any taxable
year ending after 1999 and before 2001, and
‘‘(ix) $4,250 for each month of any taxable year
ending after 2000 and before 2002.’’.
(b) 
CONFORMING
AMENDMENT.—Section
203(f)(8)(B)(ii)(II) 
of 
such 
Act 
(42 
U.S.C.
403(f)(8)(B)(ii)(II)) is amended by striking ‘‘for the cal-
endar year before the most recent calendar year in which
an increase in the exempt amount was enacted or a deter-
mination resulting in such an increase was made under
subparagraph (A)’’ and inserting ‘‘for the second calendar
year before the calendar year in which the determination
under subparagraph (A) is made’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years ending after De-
cember 31, 1992.
SEC. 302. REDUCTION FACTOR WITH RESPECT TO CERTAIN
EARNINGS LOWERED TO 25 PERCENT.
(a) IN GENERAL.—Section 203(f)(3) of the Social
Security Act (42 U.S.C. 403(f)(3)) is amended by striking
‘‘331⁄3 percent’’ and all that follows through ‘‘paragraph
(8)’’ and inserting ‘‘equal to the sum of (A) 25 percent
of so much of his earnings for such year in excess of the
product of the applicable exempt amount as determined
under paragraph (8) as does not exceed $5,000, and (B)
331⁄3 percent of so much of such earnings in excess of
such product as exceeds $5,000,’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1997.
TITLE IV—URBAN TAX ENTER-
PRISE ZONES AND RURAL DE-
VELOPMENT 
INVESTMENT
ZONES
SEC. 401. STATEMENT OF PURPOSE.
It is the purpose of this title to establish a demonstra-
tion program of providing incentives for the creation of
tax enterprise zones in order—
(1) to revitalize economically and physically dis-
tressed areas, primarily by encouraging the forma-
tion of new businesses and the retention and expan-
sion of existing businesses,
(2) to promote meaningful employment for tax
enterprise zone residents, and
(3) to encourage individuals to reside in the tax
enterprise zones in which they are employed.
Subtitle A—Designation and Tax
Incentives
SEC. 411. DESIGNATION AND TREATMENT OF URBAN TAX
ENTERPRISE ZONES AND RURAL DEVELOP-
MENT INVESTMENT ZONES.
(a) IN GENERAL.—Chapter 1 of the Internal Reve-
nue Code of 1986 (relating to normal taxes and surtaxes)
is amended by inserting after subchapter T the following
new subchapter:
‘‘Subchapter U—Designation and Treatment
of Tax Enterprise Zones
‘‘Part I. Designation of tax enterprise zones.
‘‘Part II. Incentives for tax enterprise zones.
‘‘PART I—DESIGNATION OF TAX ENTERPRISE
ZONES
‘‘Sec. 1391. Designation procedure.
‘‘Sec. 1392. Eligibility and selection criteria.
‘‘Sec. 1393. Definitions and special rules.
‘‘SEC. 1391. DESIGNATION PROCEDURE.
‘‘(a) IN GENERAL.—For purposes of this title, the
term ‘tax enterprise zone’ means any area which is, under
this part—
‘‘(1) nominated by 1 or more local governments
and the State in which it is located for designation
as a tax enterprise zone, and
‘‘(2) designated by—
‘‘(A) the Secretary of Housing and Urban
Development in the case of an urban tax enter-
prise zone, or
‘‘(B) the Secretary of Agriculture, in con-
sultation with the Secretary of Commerce, in
the case of a rural development investment
zone.
‘‘(b) NUMBER OF DESIGNATIONS.—
‘‘(1) AGGREGATE LIMIT.—The appropriate Sec-
retaries may designate in the aggregate 50 nomi-
nated areas as tax enterprise zones under this sec-
tion, subject to the availability of eligible nominated
areas. Not more than 25 urban tax enterprise zones
may be designated and not more than 25 rural de-
velopment investment zones may be designated.
Such designations may be made only during cal-
endar years after 1992 and before 1998.
‘‘(2) ANNUAL LIMITS.—
‘‘(A) URBAN TAX ENTERPRISE ZONES.—
The number of urban tax enterprise zones des-
ignated under paragraph (1)—
‘‘(i) before 1995 shall not exceed 8,
‘‘(ii) before 1996 shall not exceed 15,
and
‘‘(iii) before 1997 shall not exceed 21.
‘‘(B) RURAL DEVELOPMENT INVESTMENT
ZONES.—The number of rural development in-
vestment zones designated under paragraph
(1)—
‘‘(i) before 1995 shall not exceed 8,
‘‘(ii) before 1996 shall not exceed 15,
and
‘‘(iii) before 1997 shall not exceed 21.
‘‘(3) ADVANCE
DESIGNATIONS
PERMITTED.—
For purposes of this subchapter, a designation dur-
ing any calendar year shall be treated as made on
January 1 of the following calendar year if the ap-
propriate Secretary, in making such designation,
specifies that such designation is effective as of such
January 1.
‘‘(c) LIMITATIONS ON DESIGNATIONS.—The appro-
priate Secretary may not make any designation under sub-
section (a) unless—
‘‘(1) the local governments and the State in
which the nominated area is located have the au-
thority—
‘‘(A) to nominate the area for designation
as a tax enterprise zone, and
‘‘(B) to provide assurances satisfactory to
the appropriate Secretary that the commit-
ments under section 1392(c) will be fulfilled,
‘‘(2) a nomination of the area is submitted
within a reasonable time before the calendar year for
which designation as a tax enterprise zone is sought
(or, if later, a reasonable time after the date of the
enactment of this subchapter),
‘‘(3) the appropriate Secretary determines that
any information furnished is reasonably accurate,
and
‘‘(4) the State and local governments certify
that no portion of the area nominated is already in-
cluded in a tax enterprise zone or in an area other-
wise nominated to be a tax enterprise zone.
‘‘(d) PERIOD FOR WHICH DESIGNATION IS IN EF-
FECT.—
‘‘(1) IN GENERAL.—Any designation of an area
as a tax enterprise zone shall remain in effect during
the period beginning on the date of the designation
and ending on the earliest of—
‘‘(A) December 31 of the 15th calendar
year following the calendar year in which such
date occurs,
‘‘(B) the termination date designated by
the State and local governments as provided for
in their nomination, or
‘‘(C) the date the appropriate Secretary re-
vokes the designation under paragraph (2).
‘‘(2) REVOCATION OF DESIGNATION.—
‘‘(A) IN GENERAL.—The appropriate Sec-
retary shall revoke the designation of an area
as a tax enterprise zone if such Secretary deter-
mines that the local government or the State in
which it is located—
‘‘(i) has modified the boundaries of
the area, or
‘‘(ii) is not complying substantially
with the State and local commitments pur-
suant to section 1392(c).
‘‘(B) APPLICABLE PROCEDURES.—A des-
ignation may be revoked by the appropriate
Secretary under subparagraph (A) only after a
hearing on the record involving officials of the
State or local government involved.
‘‘SEC. 1392. ELIGIBILITY AND SELECTION CRITERIA.
‘‘(a) IN GENERAL.—The appropriate Secretary may
make a designation of any nominated area under section
1391 only on the basis of the eligibility and selection cri-
teria set forth in this section.
‘‘(b) ELIGIBILITY CRITERIA.—
‘‘(1) URBAN TAX ENTERPRISE ZONES.—A nom-
inated area which is not a rural area shall be eligible
for designation under section 1391 only if it meets
the following criteria:
‘‘(A) POPULATION.—The nominated area
has a population (as determined by the most re-
cent census data available) of not less than
4,000.
‘‘(B) DISTRESS.—The nominated area is
one of pervasive poverty, unemployment, and
general distress.
‘‘(C) SIZE.—The nominated area—
‘‘(i) does not exceed 20 square miles,
‘‘(ii) has a boundary which is continu-
ous, or consists of not more than 3 non-
contiguous parcels within the same metro-
politan area,
‘‘(iii) is located entirely within 1
State, and
‘‘(iv) does not include any portion of
a central business district (as such term is
used for purposes of the most recent Cen-
sus of Retail Trade).
‘‘(D) UNEMPLOYMENT RATE.—The unem-
ployment rate (as determined by the appro-
priate available data) is not less than 1.5 times
the national unemployment rate.
‘‘(E) POVERTY
RATE.—The poverty rate
(as determined by the most recent census data
available) for not less than 90 percent of the
population census tracts (or where not tracted,
the equivalent county divisions as defined by
the Bureau of the Census for the purposes of
defining poverty areas) within the nominated
area is not less than 20 percent.
‘‘(F) COURSE OF ACTION.—There has been
adopted for the nominated area a course of ac-
tion which meets the requirements of subsection
(c).
‘‘(2) 
RURAL
DEVELOPMENT
INVESTMENT
ZONES.—A nominated area which is a rural area
shall be eligible for designation under section 1391
only if it meets the following criteria:
‘‘(A) POPULATION.—The nominated area
has a population (as determined by the most re-
cent census data available) of not less than
1,000.
‘‘(B) DISTRESS.—The nominated area is
one of general distress.
‘‘(C) SIZE.—The nominated area—
‘‘(i) does not exceed 10,000 square
miles,
‘‘(ii) consists of areas within not more
than 4 contiguous counties,
‘‘(iii) has a boundary which is contin-
uous, or consists of not more than 3 non-
contiguous parcels, and
‘‘(iv) is located entirely within 1
State.
‘‘(D) ADDITIONAL
CRITERIA.—Not less
than 2 of the following criteria:
‘‘(i) UNEMPLOYMENT RATE.—The cri-
terion set forth in paragraph (1)(D).
‘‘(ii) POVERTY
RATE.—The criterion
set forth in paragraph (1)(E).
‘‘(iii) JOB
LOSS.—The amount of
wages attributable to employment in the
area, and subject to tax under section
3301 during the preceding calendar year,
is not more than 95 percent of such wages
during the 5th preceding calendar year.
‘‘(iv) 
OUT-MIGRATION.—The 
popu-
lation of the area decreased (as determined
by the most recent census data available)
by 10 percent or more between 1980 and
1990.
‘‘(E) COURSE OF ACTION.—There has been
adopted for the nominated area a course of ac-
tion which meets the requirements of subsection
(c).
‘‘(3) AREAS WITHIN INDIAN RESERVATIONS IN-
ELIGIBLE.—A nominated area shall not be eligible
for designation under section 1391 if any portion of
such area is within an Indian reservation.
‘‘(c) REQUIRED STATE AND LOCAL COURSE OF AC-
TION.—
‘‘(1) IN GENERAL.—No nominated area may be
designated as a tax enterprise zone unless the local
government and the State in which it is located
agree in writing that, during any period during
which the area is a tax enterprise zone, the govern-
ments will follow a specified course of action de-
signed to reduce the various burdens borne by em-
ployers or employees in the area.
‘‘(2) COURSE OF ACTION.—The course of action
under paragraph (1) may be implemented by both
governments and private nongovernmental entities,
may not be funded from proceeds of any Federal
program (other than discretionary proceeds), and
may include—
‘‘(A) a certification by the State insurance
commissioner (or similar State official) that
basic commercial property insurance of a type
comparable to that insurance generally in force
in urban or rural areas, whichever is applicable,
throughout the State is available to businesses
within the tax enterprise zone,
‘‘(B) a reduction of tax rates or fees apply-
ing within the tax enterprise zone,
‘‘(C) an increase in the level, or efficiency
of delivery, of local public services within the
tax enterprise zone,
‘‘(D) actions to reduce, remove, simplify,
or streamline government paperwork require-
ments applicable within the tax enterprise zone,
‘‘(E) the involvement in the program by
public authorities or private entities, organiza-
tions, neighborhood associations, and commu-
nity groups, particularly those within the nomi-
nated area, including a written commitment to
provide jobs and job training for, and technical,
financial, or other assistance to, employers, em-
ployees, and residents of the nominated area,
‘‘(F) the giving of special preference to
contractors owned and operated by members of
any socially and economically disadvantaged
group (within the meaning of section 8(a) of
the Small Business Act (15 U.S.C. 637(a)),
‘‘(G) the gift (or sale at below fair market
value) of surplus land in the tax enterprise zone
to neighborhood organizations agreeing to oper-
ate a business on the land,
‘‘(H) the establishment of a program
under which employers within the tax enterprise
zone may purchase health insurance for their
employees on a pooled basis,
‘‘(I) the establishment of a program to en-
courage local financial institutions to satisfy
their obligations under the Community Rein-
vestment Act of 1977 (12 U.S.C. 2901 et seq.)
by making loans to enterprise zone businesses,
with emphasis on startup and other small-busi-
ness concerns (as defined in section 3(a) of the
Small Business Act (15 U.S.C. 632(a)),
‘‘(J) the giving of special preference to
qualified low-income housing projects located in
tax enterprise zones, in the allocation of the
State housing credit ceiling applicable under
section 42, and
‘‘(K) the giving of special preference to fa-
cilities located in tax enterprise zones, in the al-
location of the State ceiling on private activity
bonds applicable under section 146.
‘‘(3) RECOGNITION
OF
PAST
EFFORTS.—In
evaluating courses of action agreed to by any State
or local government, the appropriate Secretary shall
take into account the past efforts of the State or
local government in reducing the various burdens
borne by employers and employees in the area in-
volved.
‘‘(4) PROHIBITION OF ASSISTANCE FOR BUSI-
NESS RELOCATIONS.—
‘‘(A) IN GENERAL.—The course of action
implemented under paragraph (1) may not in-
clude any action to assist any establishment in
relocating from one area to another area.
‘‘(B) EXCEPTION.—The limitation estab-
lished in subparagraph (A) shall not be con-
strued to prohibit assistance for the expansion
of an existing business entity through the estab-
lishment of a new branch, affiliate, or subsidi-
ary if—
‘‘(i) the establishment of the new
branch, affiliate, or subsidiary will not re-
sult in an increase in unemployment in the
area of original location or in any other
area where the existing business entity
conducts business operations, and
‘‘(ii) there is no reason to believe that
the new branch, affiliate, or subsidiary is
being established with the intention of clos-
ing down the operations of the existing
business entity in the area of its original
location or in any other area where the ex-
isting business entity conducts business op-
erations.
‘‘(d) SELECTION CRITERIA.—From among the nomi-
nated areas eligible for designation under subsection (b)
by the appropriate Secretary, such appropriate Secretary
shall make designations of tax enterprise zones on the
basis of the following factors (each of which is to be given
equal weight):
‘‘(1) STATE AND LOCAL COMMITMENTS.—The
strength and quality of the commitments which have
been promised as part of the course of action rel-
ative to the fiscal ability of the nominating State
and local governments.
‘‘(2) IMPLEMENTATION
OF
COURSE
OF
AC-
TION.—The effectiveness and enforceability of the
guarantees that the course of action will actually be
carried out, including the specificity with which the
commitments under paragraph (1) are described in
order that the applicable Secretary will be better
able 
to 
determine 
annually 
under 
section
1391(d)(2)(A)(ii) whether the commitments are
being carried out.
‘‘(3) PRIVATE
COMMITMENTS.—The level of
commitments by private entities of additional re-
sources and contributions to the economy of the
nominated area, including the creation of new or ex-
panded business activities.
‘‘(4) AVERAGE RANKINGS.—The average rank-
ing with respect to—
‘‘(A) the criteria set forth in subpara-
graphs (D) and (E) of subsection (b)(1), in the
case of an area which is not a rural area, or
‘‘(B) the 2 criteria set forth in subsection
(b)(2)(D) that give the area a higher average
ranking, in the case of a rural area.
‘‘(5) REVITALIZATION POTENTIAL.—The poten-
tial for the revitalization of the nominated area as
a result of zone designation, taking into account
particularly the number of jobs to be created and re-
tained.
‘‘SEC. 1393. DEFINITIONS AND SPECIAL RULES.
For purposes of this subchapter—
‘‘(1) URBAN
TAX
ENTERPRISE
ZONE.—The
term ‘urban tax enterprise zone’ means a tax enter-
prise zone which meets the requirements of section
1392(b)(1).
‘‘(2) 
RURAL
DEVELOPMENT
INVESTMENT
ZONE.—The term ‘rural development investment
zone’ means a tax enterprise zone which meets the
requirements of section 1392(b)(2).
‘‘(3) GOVERNMENTS.—If more than 1 local gov-
ernment seeks to nominate an area as a tax enter-
prise zone, any reference to, or requirement of, this
subchapter shall apply to all such governments.
‘‘(4) LOCAL
GOVERNMENT.—The term ‘local
government’ means—
‘‘(A) any county, city, town, township, par-
ish, village, or other general purpose political
subdivision of a State, and
‘‘(B) any combination of political subdivi-
sions described in subparagraph (A) recognized
by the appropriate Secretary.
‘‘(5) NOMINATED AREA.—The term ‘nominated
area’ means an area which is nominated by 1 or
more local governments and the State in which it is
located for designation as a tax enterprise zone
under this subchapter.
‘‘(6) RURAL
AREA.—The term ‘rural area’
means any area which is—
‘‘(A) outside of a metropolitan statistical
area 
(within 
the 
meaning 
of 
section
143(k)(2)(B)), or
‘‘(B) determined by the Secretary of Agri-
culture, after consultation with the Secretary of
Commerce, to be a rural area.
‘‘(7) APPROPRIATE SECRETARY.—The term ‘ap-
propriate Secretary’ means—
‘‘(A) the Secretary of Housing and Urban
Development in the case of urban tax enterprise
zones, and
‘‘(B) the Secretary of Agriculture in the
case of rural development investment zones.
‘‘(8) STATE-CHARTERED
DEVELOPMENT
COR-
PORATIONS.—An area shall be treated as nominated
by a State and a local government if it is nominated
by an economic development corporation chartered
by the State.
‘‘PART II—INCENTIVES FOR TAX ENTERPRISE
ZONES
‘‘SUBPART A. Enterprise zone employment credit.
‘‘SUBPART B. Investment incentives.
‘‘SUBPART C. Regulations.
‘‘Subpart A—Enterprise Zone Employment Credit
‘‘Sec. 1394. Enterprise zone employment credit.
‘‘Sec. 1395. Other definitions and special rules.
‘‘SEC. 1394. ENTERPRISE ZONE EMPLOYMENT CREDIT.
‘‘(a) AMOUNT OF CREDIT.—For purposes of section
38, the amount of the enterprise zone employment credit
determined under this section with respect to any em-
ployer for any taxable year is 15 percent of the qualified
zone wages paid or incurred during such taxable year.
‘‘(b) QUALIFIED ZONE WAGES.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘qualified zone wages’ means any
wages paid or incurred by an employer for services
performed by an employee while such employee is a
qualified zone employee.
‘‘(2) ONLY FIRST $20,000 OF WAGES PER YEAR
TAKEN INTO ACCOUNT.—With respect to each quali-
fied zone employee, the amount of qualified zone
wages which may be taken into account for the tax-
able year shall not exceed $20,000.
‘‘(3) COORDINATION
WITH
TARGETED
JOBS
CREDIT.—The term ‘qualified zone wages’ shall not
include wages attributable to service rendered during
the 1-year period beginning with the day the individ-
ual begins work for the employer if any portion of
such wages is taken into account in determining the
credit under section 51.
‘‘(c) QUALIFIED ZONE EMPLOYEE.—For purposes of
this section—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, the term ‘qualified zone em-
ployee’ means, with respect to any period, any em-
ployee of an employer if—
‘‘(A) substantially all of the services per-
formed during such period by such employee for
such employer are performed within a tax en-
terprise zone in a trade or business of the em-
ployer, and
‘‘(B) the principal place of abode of such
employee while performing such services is
within such tax enterprise zone.
‘‘(2) CERTAIN INDIVIDUALS NOT ELIGIBLE.—
The term ‘qualified zone employee’ shall not in-
clude—
‘‘(A) any individual described in subpara-
graph (A), (B), or (C) of section 51(i)(1),
‘‘(B) any 5-percent owner (as defined in
section 416(i)(1)(B)),
‘‘(C) any individual employed by the em-
ployer at any facility described in section
144(c)(6)(B), and
‘‘(D) any individual employed by the em-
ployer in a trade or business the principal activ-
ity of which is farming (within the meaning of
subparagraphs 
(A) 
or 
(B) 
of 
section
2032A(e)(5)), but only if, as of the close of the
taxable year, the sum of—
‘‘(i) the aggregate unadjusted bases
(or, if greater, the fair market value) of
the assets owned by the employer which
are used in such a trade or business, and
‘‘(ii) the aggregate value of assets
leased by the employer which are used in
such a trade or business (as determined
under regulations prescribed by the Sec-
retary),
exceeds $500,000.
‘‘(d) EARLY TERMINATION OF EMPLOYMENT BY EM-
PLOYER.—
‘‘(1) IN GENERAL.—If the employment of any
employee is terminated by the taxpayer before the
day 1 year after the day on which such employee
began work for the employer—
‘‘(A) no wages with respect to such em-
ployee shall be taken into account under sub-
section (a) for the taxable year in which such
employment is terminated, and
‘‘(B) the tax under this chapter for the
taxable year in which such employment is ter-
minated shall be increased by the aggregate
credits (if any) allowed under section 38(a) for
prior taxable years by reason of wages taken
into account with respect to such employee.
‘‘(2) 
CARRYBACKS
AND
CARRYOVERS
AD-
JUSTED.—In the case of any termination of employ-
ment to which paragraph (1) applies, the carrybacks
and carryovers under section 39 shall be properly
adjusted.
‘‘(3) SUBSECTION NOT TO APPLY IN CERTAIN
CASES.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
not apply to—
‘‘(i) a termination of employment of
an employee who voluntarily leaves the em-
ployment of the taxpayer,
‘‘(ii) a termination of employment of
an individual who before the close of the
period referred to in paragraph (1) be-
comes disabled to perform the services of
such employment unless such disability is
removed before the close of such period
and the taxpayer fails to offer reemploy-
ment to such individual, or
‘‘(iii) a termination of employment of
an individual if it is determined under the
applicable State unemployment compensa-
tion law that the termination was due to
the misconduct of such individual.
‘‘(B) CHANGES IN FORM OF BUSINESS.—
For purposes of paragraph (1), the employment
relationship between the taxpayer and an em-
ployee shall not be treated as terminated—
‘‘(i) by a transaction to which section
381(a) applies if the employee continues to
be employed by the acquiring corporation,
or
‘‘(ii) by reason of a mere change in
the form of conducting the trade or busi-
ness of the taxpayer if the employee con-
tinues to be employed in such trade or
business and the taxpayer retains a sub-
stantial interest in such trade or business.
‘‘(4) SPECIAL
RULE.—Any increase in tax
under paragraph (1) shall not be treated as a tax
imposed by this chapter for purposes of—
‘‘(A) determining the amount of any credit
allowable under this chapter, and
‘‘(B) determining the amount of the tax
imposed by section 55.
‘‘SEC. 1395. OTHER DEFINITIONS AND SPECIAL RULES.
‘‘(a) WAGES.—For purposes of this subpart, the term
‘wages’ has the same meaning as when used in section
51.
‘‘(b) CONTROLLED GROUPS.—For purposes of this
subpart—
‘‘(1) all employers treated as a single employer
under subsection (a) or (b) of section 52 shall be
treated as a single employer for purposes of this
subpart, and
‘‘(2) the credit (if any) determined under sec-
tion 1394 with respect to each such employer shall
be its proportionate share of the wages giving rise
to such credit.
‘‘(c) CERTAIN OTHER RULES MADE APPLICABLE.—
For purposes of this subpart, rules similar to the rules
of section 51(k) and subsections (c), (d), and (e) of section
52 shall apply.
‘‘(d) NOTICE OF AVAILABILITY OF ADVANCE PAY-
MENT
OF EARNED INCOME CREDIT.—Each employer
shall take reasonable steps to notify all qualified zone em-
ployees of the availability to eligible individuals of receiv-
ing advanced payments of the credit under section 32 (re-
lating to the earned income credit).
‘‘Subpart B—Investment Incentives
‘‘Sec. 1396. Deduction for purchase of enterprise zone stock.
‘‘Sec. 1397. 50 percent exclusion for gain from new zone invest-
ments.
‘‘Sec. 1397A. Nonrecognition of gain from new zone investments.
‘‘Sec. 1397B. Other incentives.
‘‘Sec. 1397C. Enterprise zone business defined.
‘‘SEC. 1396. DEDUCTION FOR PURCHASE OF ENTERPRISE
ZONE STOCK.
‘‘(a) GENERAL RULE.—In the case of an individual,
there shall be allowed as a deduction an amount equal to
50 percent of the aggregate amount paid in cash by the
taxpayer during the taxable year for the purchase of enter-
prise zone stock.
‘‘(b) LIMITATION.—
‘‘(1) IN GENERAL.—The maximum amount al-
lowed as a deduction under subsection (a) to a tax-
payer for the taxable year shall not exceed the lesser
of—
‘‘(A) $25,000, or
‘‘(B) the excess of $250,000 over the
amount allowed as a deduction under this sec-
tion to the taxpayer for all prior taxable years.
‘‘(2) EXCESS AMOUNTS.—If the amount other-
wise deductible by any person under subsection (a)
exceeds the limitation under paragraph (1)(A)—
‘‘(A) the amount of such excess shall be
treated as an amount paid to which subsection
(a) applies during the next taxable year, and
‘‘(B) the deduction allowed for any taxable
year shall be allocated proportionately among
the enterprise zone stock purchased by such
person on the basis of the respective purchase
prices per share.
‘‘(3) AGGREGATION WITH FAMILY MEMBERS.—
The taxpayer and members of the taxpayer’s family
shall be treated as one person for purposes of para-
graph (1), and the limitations contained in such
paragraph shall be allocated among the taxpayer and
such members in accordance with their respective
purchases of enterprise zone stock. For purposes of
this paragraph, an individual’s family includes only
such individual’s spouse and minor children.
‘‘(c) ENTERPRISE ZONE STOCK.—For purposes of
this section—
‘‘(1) IN GENERAL.—The term ‘enterprise zone
stock’ means stock of a corporation if—
‘‘(A) such stock is acquired on original
issue from the corporation, and
‘‘(B) such corporation is, at the time of
issue, a qualified enterprise zone issuer.
‘‘(2) PROCEEDS MUST BE INVESTED IN QUALI-
FIED ENTERPRISE ZONE PROPERTY.—
‘‘(A) IN GENERAL.—Such term shall in-
clude such stock only to the extent that the pro-
ceeds of such issuance are used by such issuer
during the 12-month period beginning on the
date of issuance to purchase (as defined in sec-
tion 179(d)(2)) qualified enterprise zone prop-
erty.
‘‘(B) QUALIFIED ENTERPRISE ZONE PROP-
ERTY.—For purposes of this section, the term
‘qualified enterprise zone property’ means prop-
erty to which section 168 applies—
‘‘(i) the original use of which in a tax
enterprise zone commences with the issuer,
and
‘‘(ii) substantially all of the use of
which is in a tax enterprise zone.
‘‘(3) REDEMPTIONS.—The term ‘enterprise
zone stock’ shall not include any stock acquired from
a corporation which made a substantial stock re-
demption or distribution (without a bona fide busi-
ness purpose therefor) in an attempt to avoid the
purposes of this section.
‘‘(d) QUALIFIED ENTERPRISE ZONE ISSUER.—For
purposes of this section, the term ‘qualified enterprise
zone issuer’ means any domestic C corporation if—
‘‘(1) such corporation is an enterprise zone
business or, in the case of a new corporation, such
corporation is being organized for purposes of being
an enterprise zone business,
‘‘(2) such corporation does not have more than
one class of stock,
‘‘(3) the sum of—
‘‘(A) the money,
‘‘(B) the aggregate unadjusted bases of
property owned by such corporation, and
‘‘(C) the value of property leased to the
corporation (as determined under regulations
prescribed by the Secretary),
does not exceed $5,000,000, and
‘‘(4) more than 20 percent of the total voting
power, and 20 percent of the total value, of the
stock of such corporation is owned directly by indi-
viduals or estates or indirectly by individuals
through partnerships or trusts.
The determination under paragraph (3) shall be made as
of the time of issuance of the stock in question but shall
include amounts received for such stock.
‘‘(e) DISPOSITIONS OF STOCK.—
‘‘(1) BASIS REDUCTION.—For purposes of this
title, the basis of any enterprise zone stock shall be
reduced by the amount of the deduction allowed
under this section with respect to such stock.
‘‘(2) DEDUCTION
RECAPTURED
AS
ORDINARY
INCOME.—For purposes of section 1245—
‘‘(A) any stock the basis of which is re-
duced under paragraph (1) (and any other
property the basis of which is determined in
whole or in part by reference to the adjusted
basis of such stock) shall be treated as section
1245 property, and
‘‘(B) any reduction under paragraph (1)
shall be treated as a deduction allowed for de-
preciation.
If an exchange of any stock described in paragraph
(1) qualifies under section 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).
‘‘(3) CERTAIN EVENTS TREATED AS DISPOSI-
TIONS.—For purposes of determining the amount
treated as ordinary income under section 1245 by
reason of paragraph (2), paragraph (3) of section
1245(b) (relating to certain tax-free transactions)
shall not apply.
‘‘(4) INTEREST
CHARGED
IF
DISPOSITION
WITHIN 5 YEARS OF PURCHASE.—
‘‘(A) IN GENERAL.—If—
‘‘(i) a taxpayer disposes of any enter-
prise zone stock with respect to which a
deduction was allowed under subsection (a)
(or any other property the basis of which
is determined in whole or in part by ref-
erence to the adjusted basis of such stock)
before the end of the 5-year period begin-
ning on the date such stock was purchased
by the taxpayer, and
‘‘(ii) section 1245(a) applies to such
disposition by reason of paragraph (2),
then the tax imposed by this chapter for the
taxable year in which such disposition occurs
shall be increased by the amount determined
under subparagraph (B).
‘‘(B) ADDITIONAL AMOUNT.—For purposes
of subparagraph (A), the additional amount
shall be equal to the amount of interest (deter-
be treated for purposes of subsection (e) as dispos-
ing of such stock (and any other property the basis
of which is determined in whole or in part by ref-
erence to the adjusted basis of such stock) during
the taxable year during which such cessation occurs
at its fair market value as of the 1st day of such
taxable year.
‘‘(2) CESSATION OF ENTERPRISE ZONE STATUS
NOT
TO
CAUSE
RECAPTURE.—A corporation shall
not fail to be treated as a qualified enterprise zone
issuer for purposes of paragraph (1) solely by reason
of the termination or revocation of a tax enterprise
zone designation.
‘‘(g) OTHER SPECIAL RULES.—
‘‘(1) APPLICATION
OF
LIMITS
TO
PARTNER-
SHIPS AND S CORPORATIONS.—In the case of a part-
nership or an S corporation, the limitations under
subsection (b) shall apply at the partner and share-
holder level and shall not apply at the partnership
or corporation level.
‘‘(2) DEDUCTION NOT ALLOWED TO ESTATES
AND TRUSTS.—Estates and trusts shall not be treat-
ed as individuals for purposes of this section.
‘‘SEC. 1397. 50 PERCENT EXCLUSION FOR GAIN FROM NEW
ZONE INVESTMENTS.
‘‘(a) GENERAL RULE.—In the case of an individual,
gross income shall not include 50 percent of any qualified
capital gain recognized on the sale or exchange of a quali-
fied zone asset held for more than 5 years.
‘‘(b) QUALIFIED ZONE ASSET.—For purposes of this
section—
‘‘(1) IN GENERAL.—The term ‘qualified zone
asset’ means—
‘‘(A) any qualified zone stock,
‘‘(B) any qualified zone business property,
and
‘‘(C) any qualified zone partnership inter-
est.
‘‘(2) QUALIFIED ZONE STOCK.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), the term ‘qualified zone
stock’ means any stock in a domestic corpora-
tion if—
‘‘(i) such stock is acquired by the tax-
payer on original issue from the corpora-
tion solely in exchange for cash,
‘‘(ii) as of the time such stock was is-
sued, such corporation was an enterprise
zone business (or, in the case of a new cor-
poration, such corporation was being orga-
nized for purposes of being an enterprise
zone business), and
‘‘(iii) during substantially all of the
taxpayer’s holding period for such stock,
such corporation qualified as an enterprise
zone business.
‘‘(B) EXCLUSION OF STOCK FOR WHICH
DEDUCTION UNDER SECTION 1396 ALLOWED.—
The term ‘qualified zone stock’ shall not include
any stock the basis of which is reduced under
section 1396(e)(1).
‘‘(C) REDEMPTIONS.—The term ‘qualified
zone stock’ shall not include any stock acquired
from a corporation which made a substantial
stock redemption or distribution (without a
bona fide business purpose therefor) in an at-
tempt to avoid the purposes of this section.
‘‘(3) QUALIFIED ZONE BUSINESS PROPERTY.—
‘‘(A) IN
GENERAL.—The term ‘qualified
zone business property’ means tangible property
if—
‘‘(i) such property was acquired by
the taxpayer by purchase (as defined in
section 179(d)(2)) after the date on which
the designation of the tax enterprise zone
took effect,
‘‘(ii) the original use of such property
in a tax enterprise zone commences with
the taxpayer, and
‘‘(iii) during substantially all of the
taxpayer’s holding period for such prop-
erty, substantially all of the use of such
property was in a tax enterprise zone and
in an enterprise zone business of the tax-
payer.
‘‘(B) SPECIAL RULE FOR SUBSTANTIAL IM-
PROVEMENTS.—The requirements of clauses (i)
and (ii) of subparagraph (A) shall be treated as
satisfied with respect to—
‘‘(i) property which is substantially
improved by the taxpayer, and
‘‘(ii) any land on which such property
is located.
For purposes of the preceding sentence, prop-
erty shall be treated as substantially improved
by the taxpayer if, during any 24-month period
beginning after the date on which the designa-
tion of the tax enterprise zone took effect, addi-
tions to basis with respect to such property in
the hands of the taxpayer exceed the greater of
(i) an amount equal to the adjusted basis at the
beginning of such 24-month period in the hands
of the taxpayer, or (ii) $5,000.
‘‘(C) LIMITATION
ON
LAND.—The term
‘qualified zone business property’ shall not in-
clude land which is not an integral part of a
qualified business (as defined in section
1397C(c)).
‘‘(4) QUALIFIED
ZONE
PARTNERSHIP
INTER-
EST.—The term ‘qualified zone partnership interest’
means any interest in a partnership if—
‘‘(A) such interest is acquired by the tax-
payer from the partnership solely in exchange
for cash,
‘‘(B) as of the time such interest was ac-
quired, such partnership was an enterprise zone
business (or, in the case of a new partnership,
such partnership was being organized for pur-
poses of being an enterprise zone business), and
‘‘(C) during substantially all of the tax-
payer’s holding period for such interest, such
partnership qualified as an enterprise zone
business.
A rule similar to the rule of paragraph (2)(C) shall
apply for purposes of this paragraph.
‘‘(5) 
TREATMENT
OF
SUBSEQUENT
PUR-
CHASERS.—The term ‘qualified zone asset’ includes
any property which would be a qualified zone asset
but for paragraph (2)(A)(i), (3)(A)(ii), or (4)(A) in
the hands of the taxpayer if such property was a
qualified zone asset in the hands of any prior holder.
‘‘(6) 10-YEAR SAFE HARBOR.—If any property
ceases to be a qualified zone asset by reason of para-
graph (2)(A)(iii), (3)(A)(iii), or (4)(C) after the 10-
year period beginning on the date the taxpayer ac-
quired such property, such property shall continue to
be treated as meeting the requirements of such
paragraph; except that the amount of gain to which
subsection (a) applies on any sale or exchange of
such property shall not exceed the amount which
would be qualified capital gain had such property
been sold on the date of such cessation.
‘‘(7) TREATMENT OF ZONE TERMINATIONS.—
The termination of any designation of an area as a
tax enterprise zone shall be disregarded for purposes
of determining whether any property is a qualified
zone asset.
‘‘(c) OTHER DEFINITIONS AND SPECIAL RULES.—
For purposes of this section—
‘‘(1) QUALIFIED
CAPITAL
GAIN.—Except as
otherwise provided in this subsection, the term
‘qualified capital gain’ means any long-term capital
gain.
‘‘(2) CERTAIN GAIN ON REAL PROPERTY NOT
QUALIFIED.—The term ‘qualified capital gain’ shall
not include any gain which would be treated as ordi-
nary income under section 1250 if section 1250 ap-
plied to all depreciation rather than the additional
depreciation.
‘‘(3) GAIN ATTRIBUTABLE TO PERIODS AFTER
TERMINATION OF ZONE DESIGNATION NOT QUALI-
FIED.—The term ‘qualified capital gain’ shall not in-
clude any gain attributable to periods after the ter-
mination of any designation of an area as a tax en-
terprise zone.
‘‘(d) TREATMENT OF PASS-THRU ENTITIES.—
‘‘(1) SALES
AND
EXCHANGES.—Gain on the
sale or exchange of an interest in a pass-thru entity
held by the taxpayer (other than an interest in an
entity which was an enterprise zone business during
substantially all of the period the taxpayer held such
interest) for more than 5 years shall be treated as
gain described in subsection (a) to the extent such
gain is attributable to amounts which would be
qualified capital gain on qualified zone assets (deter-
mined as if such assets had been sold on the date
of the sale or exchange) held by such entity for more
than 5 years and throughout the period the taxpayer
held such interest. A rule similar to the rule of para-
graph (2)(C) shall apply for purposes of the preced-
ing sentence.
‘‘(2) INCOME INCLUSIONS.—
‘‘(A) IN GENERAL.—Any amount included
in income by reason of holding an interest in a
pass-thru entity (other than an entity which
was an enterprise zone business during substan-
tially all of the period the taxpayer held the in-
terest to which such inclusion relates) shall be
treated as gain described in subsection (a) if
such amount meets the requirements of sub-
paragraph (B).
‘‘(B) REQUIREMENTS.—An amount meets
the requirements of this subparagraph if—
‘‘(i) such amount is attributable to
qualified capital gain recognized on the
sale or exchange by the pass-thru entity of
property which is a qualified zone asset in
the hands of such entity and which was
held by such entity for the period required
under subsection (a), and
‘‘(ii) such amount is includible in the
gross income of the taxpayer by reason of
the holding of an interest in such entity
which was held by the taxpayer on the date
on which such pass-thru entity acquired
such asset and at all times thereafter be-
fore the disposition of such asset by such
pass-thru entity.
‘‘(C) LIMITATION
BASED
ON
INTEREST
ORIGINALLY
HELD
BY
TAXPAYER.—Subpara-
graph (A) shall not apply to any amount to the
extent such amount exceeds the amount to
which subparagraph (A) would have applied if
such amount were determined by reference to
the interest the taxpayer held in the pass-thru
entity on the date the qualified zone asset was
acquired.
‘‘(3) PASS-THRU ENTITY.—For purposes of this
subsection, the term ‘pass-thru entity’ means—
‘‘(A) any partnership,
‘‘(B) any S corporation,
‘‘(C) any regulated investment company,
and
‘‘(D) any common trust fund.
‘‘(e) SALES
AND EXCHANGES
OF INTERESTS
IN
PARTNERSHIPS
AND
S CORPORATIONS
WHICH
ARE
QUALIFIED ZONE BUSINESSES.—In the case of the sale
or exchange of an interest in a partnership, or of stock
in an S corporation, which was an enterprise zone business
during substantially all of the period the taxpayer held
such interest or stock, the amount of qualified capital gain
shall be determined without regard to—
‘‘(1) any intangible, and any land, which is not
an integral part of any qualified business (as defined
in section 1397C(b)), and
‘‘(2) gain attributable to periods before the des-
ignation of an area as a tax enterprise zone.
‘‘(f) CERTAIN TAX-FREE AND OTHER TRANSFERS.—
For purposes of this section—
‘‘(1) IN GENERAL.—In the case of a transfer of
a qualified zone asset to which this subsection ap-
plies, the transferee shall be treated as—
‘‘(A) having acquired such asset in the
same manner as the transferor, and
‘‘(B) having held such asset during any
continuous period immediately preceding the
transfer during which it was held (or treated as
held under this subsection) by the transferor.
‘‘(2) TRANSFERS TO WHICH SUBSECTION AP-
PLIES.—This subsection shall apply to any trans-
fer—
‘‘(A) by gift,
‘‘(B) at death, or
‘‘(C) from a partnership to a partner
thereof of a qualified zone asset with respect to
which the requirements of subsection (d)(2) are
met at the time of the transfer (without regard
to the 5-year holding requirement).
‘‘(3) CERTAIN
RULES
MADE
APPLICABLE.—
Rules similar to the rules of section 1244(d)(2) shall
apply for purposes of this section.
‘‘(g) CERTAIN
BUSINESSES
TREATED
AS
NOT
QUALIFIED BUSINESSES.—For purposes of this section
and section 1397A, the term ‘enterprise zone business’ has
the meaning given such term by section 1397C except
that, in applying section 1397C for such purposes, the
term ‘qualified business’ shall not include any trade or
business of producing property of a character subject to
the allowance for depletion under section 611.
‘‘SEC. 1397A. NONRECOGNITION OF GAIN FROM NEW ZONE
INVESTMENTS.
‘‘(a) GENERAL RULE.—At the election of an individ-
ual, qualified capital gain (within the meaning of section
1397) from the sale or exchange of a qualified zone asset
shall be recognized only to the extent that—
‘‘(1) the amount realized from such sale or ex-
change, exceeds
‘‘(2) the cost (not heretofore taken into account
under this subsection) of any qualified zone asset
purchased directly by the taxpayer during the rein-
vestment period.
‘‘(b) QUALIFIED ZONE ASSET.—For purposes of this
section—
‘‘(1) IN GENERAL.—The term ‘qualified zone
asset’ has the meaning given such term by section
1397.
‘‘(2) TIME FOR TESTING.—
‘‘(A) SALES.—In the case of a sale or ex-
change of property, the determination of wheth-
er such property is a qualified zone asset shall
be made as of the time of the sale or exchange.
‘‘(B) PURCHASES.—In the case of a pur-
chase of property, the determination of whether
such property is a qualified zone asset shall be
made as of the time of such purchase.
‘‘(c) OTHER DEFINITIONS.—For purposes of this
section—
‘‘(1) REINVESTMENT PERIOD.—The term ‘rein-
vestment period’ means, with respect to any sale or
exchange, the 6-month period beginning on the date
of such sale or exchange.
‘‘(2) PURCHASE.—The term ‘purchase’ has the
meaning given to such term by section 179(d)(2).
‘‘(d) BUSINESS OR PROPERTY CEASES TO QUAL-
IFY.—
‘‘(1) IN GENERAL.—If, during the 10-year pe-
riod beginning on the date any qualified zone re-
placement asset was purchased by the taxpayer,
such asset ceases to be a qualified zone asset, not-
withstanding any provision of this subtitle other
than paragraph (3), the taxpayer shall be treated as
disposing of such asset during the taxable year dur-
ing which such cessation occurs at its fair market
value as of the 1st day of such taxable year.
‘‘(2) LIMITATION ON GAIN RECOGNIZED.—The
amount of gain recognized pursuant to paragraph
(1) with respect to any asset shall not exceed the
lesser of—
‘‘(A) the amount of gain which was not
recognized under subsection (a) by the reason
of the purchase of such asset, or
‘‘(B) the excess of the fair market value
referred to in paragraph (1) over the adjusted
basis of such asset.
‘‘(3) CESSATION OF ENTERPRISE ZONE STATUS
NOT TO CAUSE RECAPTURE.—An asset shall not fail
to be treated as a qualified zone asset for purposes
of paragraph (1) solely by reason of the termination
of a tax enterprise zone designation.
‘‘(4) QUALIFIED ZONE REPLACEMENT ASSET.—
For purposes of paragraph (1), the term ‘qualified
zone replacement asset’ means any qualified zone
asset the purchase of which resulted in the non-
recognition of gain under subsection (a) with respect
to any other property.
‘‘(e) BASIS
OF QUALIFIED ZONE REPLACEMENT
ASSET.—If gain from the sale or exchange of any property
is not recognized by reason of subsection (a), such gain
shall be applied to reduce (in the order acquired) the basis
of any qualified zone replacement asset (as defined in sub-
section (d)(4)) purchased during the reinvestment period.
‘‘(f) COORDINATION WITH INSTALLMENT METHOD
REPORTING.—This section shall not apply to any gain
from any installment sale (as defined in section 453(b))
if section 453(a) applies to such sale.
‘‘(g) STATUTE OF LIMITATIONS.—If any gain is real-
ized by the taxpayer on any sale or exchange to which
an election under this section applies, 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 any
qualified zone replacement asset,
‘‘(B) the taxpayer’s intention not to pur-
chase a qualified zone replacement asset within
the reinvestment period, or
‘‘(C) a failure to make such purchase with-
in the reinvestment period, and
‘‘(2) such deficiency may be assessed before the
expiration of such 3-year period notwithstanding the
provisions of any law or rule of law which would oth-
erwise prevent such assessment.
‘‘SEC. 1397B. ADDITIONAL INCENTIVES.
‘‘(a) INCREASE
IN EXPENSING UNDER SECTION
179.—In the case of an enterprise zone business, section
179(b)(1) shall be applied by substituting ‘$20,000’ for
‘$10,000’.
‘‘(b) ORDINARY LOSS TREATMENT
FOR CERTAIN
PROPERTY.—
‘‘(1) IN GENERAL.—Loss on any qualified zone
asset (as defined in section 1397(b)) held for more
than 2 years (5 years in the case of real property)
shall be treated as an ordinary loss.
‘‘(2) REAL PROPERTY.—For purposes of para-
graph (1), the term ‘real property’ means any prop-
erty which is section 1250 property (as defined in
section 1250(c)).
‘‘(3) SPECIAL RULES.—
‘‘(A) CERTAIN
RULES
MADE
APPLICA-
BLE.—For purposes of this subsection, rules
similar to the following rules shall apply:
‘‘(i) Paragraphs (1), (2), and (3) of
section 1244(d).
‘‘(ii) Subsections (b)(6), (c)(3), (d),
(e), and (f) of section 1397.
‘‘(B) 
COORDINATION
WITH
SECTION
1231.—Losses treated as ordinary losses by rea-
son of this subsection shall not be taken into
account in applying section 1231.
‘‘SEC. 1397C. ENTERPRISE ZONE BUSINESS DEFINED.
‘‘(a) IN GENERAL.—For purposes of this subpart, the
term ‘enterprise zone business’ means—
‘‘(1) any qualified business entity, and
‘‘(2) any qualified proprietorship.
‘‘(b) QUALIFIED BUSINESS ENTITY.—For purposes
of this section, the term ‘qualified business entity’ means,
with respect to any taxable year, any corporation or part-
nership if for such year—
‘‘(1)(A) every trade or business of such entity
is the active conduct of a qualified business within
a tax enterprise zone, and
‘‘(B) at least 80 percent of the total gross in-
come of such entity is derived from the active con-
duct of such business,
‘‘(2) substantially all of the use of the tangible
property of such entity (whether owned or leased) is
within a tax enterprise zone,
‘‘(3) substantially all of the intangible property
of such entity is used in, and exclusively related to,
the active conduct of any such business,
‘‘(4) substantially all of the services performed
for such entity by its employees are performed in a
tax enterprise zone,
‘‘(5) at least 1⁄3 of its employees are residents
of a tax enterprise zone,
‘‘(6) less than 5 percent of the average of the
aggregate unadjusted bases of the property of such
entity is attributable to collectibles (as defined in
section 408(m)(2)) other than collectibles that are
held primarily for sale to customers in the ordinary
course of such business, and
‘‘(7) less than 5 percent of the average of the
aggregate unadjusted bases of the property of such
entity is attributable to nonqualified financial prop-
erty.
‘‘(c) QUALIFIED PROPRIETORSHIP.—For purposes of
this section, the term ‘qualified proprietorship’ means,
with respect to any taxable year, any qualified business
carried on by an individual as a proprietorship if for such
year—
‘‘(1) at least 80 percent of the total gross in-
come of such individual from such business is de-
rived from the active conduct of such business in a
tax enterprise zone,
‘‘(2) substantially all of the use of the tangible
property of such individual in such business (wheth-
er owned or leased) is within a tax enterprise zone,
‘‘(3) substantially all of the intangible property
of such business is used in, and exclusively related
to, the active conduct of such business,
‘‘(4) substantially all of the services performed
for such individual in such business by employees of
such business are performed in a tax enterprise
zone,
‘‘(5) at least 1⁄3 of such employees are residents
of a tax enterprise zone,
‘‘(6) less than 5 percent of the average of the
aggregate unadjusted bases of the property of such
individual which is used in such business is attrib-
utable 
to 
collectibles 
(as 
defined 
in 
section
408(m)(2)) other than collectibles that are held pri-
marily for sale to customers in the ordinary course
of such business, and
‘‘(7) less than 5 percent of the average of the
aggregate unadjusted bases of the property of such
individual which is used in such business is attrib-
utable to nonqualified financial property.
For purposes of this subsection, the term ‘employee’ in-
cludes the proprietor.
‘‘(d) QUALIFIED BUSINESS.—For purposes of this
section—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, the term ‘qualified business’
means any trade or business.
‘‘(2) RENTAL OF REAL PROPERTY.—The rental
to others of real property located in a tax enterprise
zone shall be treated as a qualified business if and
only if—
‘‘(A) in the case of real property which is
not residential rental property (as defined in
section 168(e)(2)), the lessee is an enterprise
zone business, or
‘‘(B) in the case of residential rental prop-
erty (as so defined)—
‘‘(i) such property was originally
placed in service after the date the tax en-
terprise zone was designated, or
‘‘(ii) such property is rehabilitated
after such date in a rehabilitation which
meets requirements based on the principles
of section 42(e)(3).
‘‘(3) RENTAL OF TANGIBLE PERSONAL PROP-
ERTY.—The rental to others of tangible personal
property shall be treated as a qualified business if
and only if substantially all of the rental of such
property is by enterprise zone businesses or by resi-
dents of a tax enterprise zone.
‘‘(4) TREATMENT OF BUSINESS HOLDING IN-
TANGIBLES.—The term ‘qualified business’ shall not
include any trade or business consisting predomi-
nantly of the development or holding of intangibles
for sale or license.
‘‘(5) CERTAIN
BUSINESSES
EXCLUDED.—The
term ‘qualified business’ shall not include—
‘‘(A) any trade or business consisting of
the operation of any facility described in section
144(c)(6)(B), and
‘‘(B) any trade or business the principal
activity of which is farming (within the meaning
of subparagraphs (A) or (B) of section
2032A(e)(5)), but only if, as of the close of the
preceding taxable year, the sum of—
‘‘(i) the aggregate unadjusted bases
(or, if greater, the fair market value) of
the assets owned by the taxpayer which are
used in such a trade or business, and
‘‘(ii) the aggregate value of assets
leased by the taxpayer which are used in
such a trade or business,
exceeds $500,000.
For purposes of subparagraph (B), rules similar to
the rules of section 1395(b) shall apply.
‘‘(e) NONQUALIFIED FINANCIAL PROPERTY.—For
purposes of this section, the term ‘nonqualified financial
property’ means debt, stock, partnership interests, op-
tions, futures contracts, forward contracts, warrants, no-
tional principal contracts, annuities, and other similar
property specified in regulations; except that such term
shall not include—
‘‘(1) reasonable amounts of working capital
held in cash, cash equivalents, or debt instruments
with a term of 18 months or less, or
‘‘(2) debt instruments described in section
1221(4).
‘‘Subpart C—Regulations
‘‘Sec. 1397C. Regulations.
‘‘SEC. 1397C. REGULATIONS.
‘‘The Secretary shall prescribe such regulations as
may be necessary or appropriate to carry out the purposes
of this part, including—
‘‘(1) regulations limiting the benefit of this part
in circumstances where such benefits, in combination
with benefits provided under other Federal pro-
grams, would result in an activity being 100 percent
or more subsidized by the Federal Government,
‘‘(2) regulations preventing abuse of the provi-
sions of this part, and
‘‘(3) regulations dealing with inadvertent fail-
ures of entities to be qualified zone businesses.’’.
(b) CLERICAL AMENDMENT.—The table of sub-
chapters for chapter 1 of such Code is amended by insert-
ing after the item relating to subchapter T the following
new item:
‘‘Subchapter U. Designation and treatment of tax enterprise
zones.’’.
SEC. 412. TECHNICAL AND CONFORMING AMENDMENTS.
(a) ENTERPRISE ZONE EMPLOYMENT CREDIT PART
OF GENERAL BUSINESS CREDIT.—
(1) Subsection (b) of section 38 of the Internal
Revenue Code of 1986 (relating to current year
business credit) is amended by striking ‘‘plus’’ at the
end of paragraph (6), by striking the period at the
end of paragraph (7) and inserting ‘‘, plus’’, and by
adding at the end the following new paragraph:
‘‘(8) the enterprise zone employment credit de-
termined under section 1394(a).’’.
(2) Subsection (d) of section 39 of such Code
is amended by adding at the end thereof the follow-
ing new paragraph:
‘‘(3) NO CARRYBACK OF SECTION 1394 CREDIT
BEFORE
ENACTMENT.—No portion of the unused
business credit for any taxable year which is attrib-
utable to the enterprise zone employment credit de-
termined under section 1394 may be carried to a
taxable year ending before the date of the enactment
of section 1394.’’.
(b) NONITEMIZERS ALLOWED DEDUCTION FOR EN-
TERPRISE ZONE STOCK.—Subsection (a) of section 62 of
such Code is amended by adding at the end thereof the
following new paragraph:
‘‘(14) ENTERPRISE ZONE STOCK.—The deduc-
tion allowed by section 1396.’’.
(c) DENIAL OF DEDUCTION FOR PORTION OF WAGES
EQUAL TO ENTERPRISE ZONE EMPLOYMENT CREDIT.—
(1) Subsection (a) of section 280C of such Code
(relating to rule for targeted jobs credit) is amend-
ed—
(A) by striking ‘‘the amount of the credit
determined for the taxable year under section
51(a)’’ and inserting ‘‘the sum of the credits
determined for the taxable year under sections
51(a) and 1394(a)’’, and
(B) by striking ‘‘TARGETED JOBS CRED-
IT’’ in the subsection heading and inserting
‘‘EMPLOYMENT CREDITS’’.
(2) Subsection (c) of section 196 of such Code
(relating to deduction for certain unused business
credits) is amended by striking ‘‘and’’ at the end of
paragraph (4), by striking the period at the end of
paragraph (5) and inserting ‘‘, and’’, and by adding
at the end the following new paragraph:
‘‘(6) the enterprise zone employment credit de-
termined under section 1394(a).’’.
(d) OTHER AMENDMENTS.—
(1)(A) Section 172(d)(2) of such Code (relating
to modifications with respect to net operating loss
deduction) is amended to read as follows:
‘‘(2) CAPITAL
GAINS
AND
LOSSES
OF
TAX-
PAYERS OTHER THAN CORPORATIONS.—In the case
of a taxpayer other than a corporation—
‘‘(A) the amount deductible on account of
losses from sales or exchanges of capital assets
shall not exceed the amount includable on ac-
count of gains from sales or exchanges of cap-
ital assets; and
‘‘(B) the exclusion provided by section
1397 shall not be allowed.’’.
(B) Subparagraph (B) of section 172(d)(4) of
such Code is amended by inserting ‘‘, (2)(B),’’ after
‘‘paragraph (1)’’.
(2) Subsection (c) of section 381 of such Code
(relating to carryovers in certain corporate acquisi-
tions) is amended by adding at the end the following
new paragraph:
‘‘(26) ENTERPRISE
ZONE
PROVISIONS.—The
acquiring corporation shall take into account (to the
extent proper to carry out the purposes of this sec-
tion and subchapter U, and under such regulations
as may be prescribed by the Secretary) the items re-
quired to be taken into account for purposes of sub-
chapter U in respect of the distributor or transferor
corporation.’’.
(3) Paragraph (4) of section 642(c) of such
Code is amended to read as follows:
‘‘(4) ADJUSTMENTS.—To the extent that the
amount otherwise allowable as a deduction under
this subsection consists of gain described in section
1397(a), proper adjustment shall be made for any
exclusion allowable to the estate or trust under sec-
tion 1397. In the case of a trust, the deduction al-
lowed by this subsection shall be subject to section
681 (relating to unrelated business income).’’.
(4) Paragraph (3) of section 643(a) of such
Code is amended by adding at the end thereof the
following new sentence: ‘‘The exclusion under section
1397 shall not be taken into account.’’.
(5) Paragraph (4) of section 691(c) of such
Code is amended by striking ‘‘1201, and 1211’’ and
inserting ‘‘1201, 1397, and 1211’’.
(6) The second sentence of paragraph (2) of
section 871(a) of such Code is amended by inserting
‘‘such gains and losses shall be determined without
regard to section 1397 and’’ after ‘‘except that’’.
(7) Paragraph (1) of section 1371(d) of such
Code (relating to coordination with investment credit
recapture) is amended by inserting before the period
at the end the following ‘‘and for purposes of section
1394(d)(3)’’.
(8) Subsection (a) of section 1016 of such Code
(relating to adjustments to basis) is amended by
striking ‘‘and’’ at the end of paragraph (23), by
striking the period at the end of paragraph (24) and
inserting a semicolon, and by adding at the end
thereof the following new paragraphs:
‘‘(25) in the case of stock with respect to which
a deduction was allowed under section 1396(a), to
the extent provided in section 1396(e); and
‘‘(26) in the case of property the acquisition of
which resulted under section 1397A in the non-
recognition of any part of the gain realized on the
sale or exchange of other property, to the extent pro-
vided in section 1397A(e).’’.
(9) Section 1223 of such Code (relating to hold-
ing period of property) is amended by redesignating
paragraph (15) as paragraph (16) and by inserting
after paragraph (14) the following new paragraph:
‘‘(15) In determining the period for which the
taxpayer has held property the acquisition of which
resulted under section 1397A in the nonrecognition
of any part of the gain realized on the sale or ex-
change of any qualified zone asset (as defined in sec-
tion 1397A(b)), there shall be included the period
for which such asset had been held as of the date
of such sale or exchange.’’.
SEC. 413. EFFECTIVE DATE.
(a) GENERAL RULE.—The amendments made by this
subtitle shall take effect on the date of the enactment of
this Act.
(b) REQUIREMENT FOR RULES.—Not later than the
date 4 months after the date of the enactment of this Act,
the appropriate Secretaries shall issue rules—
(1) establishing the procedures for nominating
areas for designation as tax enterprise zones,
(2) establishing a method for comparing the
factors listed in section 1392(d) of the Internal Rev-
enue Code of 1986 (as added by this part),
(3) establishing recordkeeping requirements
necessary or appropriate to assist the studies re-
quired by subtitle E, and
(4) providing that State and local governments
shall have at least 30 days after such rules are pub-
lished to file applications for nominated areas before
such applications are evaluated and compared and
any area designated as a tax enterprise zone.
Subtitle B—Redevelopment Bonds
for Tax Enterprise Zones
SEC. 421. SPECIAL RULES FOR REDEVELOPMENT BONDS
PROVIDING FINANCING FOR TAX ENTER-
PRISE ZONES.
(a) IN GENERAL.—Subsection (c) of section 144 of
the Internal Revenue Code of 1986 (relating to qualified
redevelopment bonds) is amended by adding at the end
thereof the following new paragraph:
‘‘(9) SPECIAL
RULES
FOR
TAX
ENTERPRISE
ZONES.—For purposes of this subsection, in the case
of bonds issued during the 60-month period begin-
ning on the date a tax enterprise zone is des-
ignated—
‘‘(A) 
TREATMENT
AS
DESIGNATED
BLIGHTED
AREA.—Such tax enterprise zone
shall be treated as a designated blighted area
during such 60-month period (or, if shorter, the
period such designation is in effect). Any area
designated by reason of the preceding sentence
shall not be taken into account in applying
paragraph (4)(C).
‘‘(B) SECURITY FOR BONDS.—The require-
ments of paragraph (2)(B) shall be treated as
met with respect to a financed area that is
within a tax enterprise zone if the general pur-
pose governmental unit guarantees the payment
of principal and interest on the issue either di-
rectly or through insurance, a letter of credit,
or a similar agreement but only if the cost
thereof is financed other than with proceeds of
any tax-exempt private activity bond or earn-
ings on such proceeds.
‘‘(C) EXPANSION
OF
REDEVELOPMENT
PURPOSES.—
‘‘(i) IN GENERAL.—The term ‘redevel-
opment purposes’ includes the making of
loans to any enterprise zone business (as
defined in section 1397B) for—
‘‘(I) the acquisition of land with-
in the tax enterprise zone for use in
such business, or
‘‘(II) the acquisition, construc-
tion, reconstruction, or improvement
by such business of land, or property
of a character subject to the allowance
for depreciation, for use in such busi-
ness.
‘‘(ii) $2,500,000 LIMITATION.—Clause
(i) shall apply to loans made to any enter-
prise zone business only if the aggregate
principal amount of such loans (whether or
not financed by the same issue) does not
exceed $2,500,000. For purposes of the
preceding sentence, all persons treated as a
single employer under subsection (a) or (b)
of section 52 shall be treated as 1 person.
‘‘(iii) LOANS MUST BE MADE WITHIN
18 MONTHS AFTER BONDS ISSUED; REPAY-
MENTS
MUST
BE
USED
FOR
REDEMP-
TIONS.—Clause (i) shall apply only to
loans—
‘‘(I) made during the 18-month
period beginning on the date of issu-
ance of the issue financing such loan,
‘‘(II) repayments of principal on
which are used not later than the
close of the 1st semiannual period be-
ginning after the date the repayment
is received to redeem bonds which are
part of such issue, and
‘‘(III) the effective rate of inter-
est on which does not exceed the yield
on the issue by more than 0.125 per-
centage points.
In determining the effective rate of interest
for purposes of subclause (III), there shall
be taken into account all fees, charges, and
other amounts (other than amounts for
any credit report) borne by the borrower
which are attributable to the loan or the
bond issue.
‘‘(iv) HOUSING LOANS EXCLUDED.—
Clause (i) shall not apply to any loan to be
used directly or indirectly to provide resi-
dential real property.
‘‘(v) COORDINATION
WITH
RESTRIC-
TIONS ON USE OF PROCEEDS.—Paragraphs
(6) and (8) shall apply notwithstanding
clause (i); except that in applying para-
graph (6), subsection (a)(8) shall be treat-
ed as not including a reference to a facility
the primary purpose of which is retail food
services.
‘‘(D) ISSUER TO DESIGNATE AMOUNT OF
ISSUE TO BE USED FOR LOANS.—Subparagraph
(C) shall not apply with respect to any issue
unless the issuer designates before the date of
issuance the amount of the proceeds of such
issue which is to be used for loans to which
subparagraph (C)(i) applies. If such amount ex-
ceeds the principal amount of loans to which
subparagraph (C)(i) applies, an amount of pro-
ceeds equal to such excess shall be used not
later than the close of the 1st semiannual pe-
riod beginning after the close of the 18-month
period referred to in subparagraph (C)(iii) to
redeem bonds which are part of such issue.
‘‘(E) DE MINIMIS REDEMPTIONS NOT RE-
QUIRED.—Subparagraphs (C)(iii) and (D) shall
not be construed to require amounts of less
than $250,000 to be used to redeem bonds. The
Secretary may by regulation treat related issues
as 1 issue for purposes of the preceding sen-
tence.
‘‘(F) PENALTY.—
‘‘(i) IN
GENERAL.—In the case of
property with respect to which financing
was provided under this paragraph, if at
any time during the 10-period beginning
on the date such financing was provided—
‘‘(I) such property ceases to be in
use in an enterprise zone business (as
defined in section 1397B), or
‘‘(II) substantially all of the use
of such property ceases to be in a tax
enterprise zone,
there is hereby imposed on the trade or
business to which such financing was pro-
vided a penalty equal to 1.25 percent of so
much of the face amount of all financing
provided (whether or not from the same
issue and whether or not such issue is out-
standing) before such cessation to the
trade or business using such property.
‘‘(ii) NO
PENALTY
BY
REASON
OF
ZONE TERMINATION.—No penalty shall be
imposed under clause (i) solely by reason
of the termination or revocation of a tax
enterprise zone designation.
‘‘(iii) 
EXCEPTION
FOR
BANK-
RUPTCY.—Clause (i) shall not apply to any
cessation resulting from bankruptcy.’’.
(b) VOLUME CAP ONLY CHARGED WITH 50 PER-
CENT
OF TAX ENTERPRISE ZONE REDEVELOPMENT
BONDS.—Subsection (g) of section 146 of such Code is
amended by striking ‘‘and’’ at the end of paragraph (3),
by striking the period at the end of paragraph (4) and
inserting ‘‘, and’’, and by adding at the end thereof the
following new paragraph:
‘‘(5) 50 percent of any qualified redevelopment
bond issued—
‘‘(A) as part of an issue 95 percent or
more of the net proceeds of which are to be
used for 1 or more redevelopment purposes (as
defined in section 144(c)) in a tax enterprise
zone, and
‘‘(B) during the 60-month period begin-
ning on the date of the designation of such
zone.’’.
(c) PENALTIES FOR LOANS MADE TO BUSINESSES
THAT CEASE TO BE ENTERPRISE ZONE BUSINESSES,
ETC.—Subsection (b) of section 150 of such Code is
amended by adding at the end thereof the following new
paragraph:
‘‘(6) 
ENTERPRISE
ZONE
REDEVELOPMENT
BONDS.—In the case of any financing provided by
an issue the interest on which is exempt from tax by
reason of section 144(c)(9)—
‘‘(A) IN GENERAL.—No deduction shall be
allowed under this chapter for interest on such
financing which accrues during the period be-
ginning on the first day of the calendar year
which includes the date on which—
‘‘(i) the trade or business to which the
financing was provided ceases to be an en-
terprise zone business (as defined in sec-
tion 1397B), or
‘‘(ii) substantially all of the use of the
property (determined in accordance with
subchapter U) with respect to which the fi-
nancing was provided ceases to be in a tax
enterprise zone.
The preceding sentence shall not apply solely by
reason of the termination or revocation of a tax
enterprise zone designation.
‘‘(B) EXCEPTION FOR BANKRUPTCY.—This
paragraph shall not apply to any cessation re-
sulting from bankruptcy.’’.
100
Subtitle C—Credit for Contribu-
tions to Certain Community De-
velopment Corporations
SEC. 431. CREDIT FOR CONTRIBUTIONS TO CERTAIN COM-
MUNITY DEVELOPMENT CORPORATIONS.
(a) IN GENERAL.—For purposes of section 38 of the
Internal Revenue Code of 1986, the current year business
credit shall include the credit determined under this sec-
tion.
(b) DETERMINATION OF CREDIT.—The credit deter-
mined under this section for each taxable year in the credit
period with respect to any qualified CDC contribution
made by the taxpayer is an amount equal to 5 percent
of such contribution.
(c) CREDIT PERIOD.—For purposes of this section,
the credit period with respect to any qualified CDC con-
tribution is the period of 10 taxable years beginning with
the taxable year during which such contribution was made.
(d) QUALIFIED CDC CONTRIBUTION.—For purposes
of this section—
(1) IN GENERAL.—The term ‘‘qualified CDC
contribution’’ means any transfer of cash—
(A) which is made to a selected community
development corporation during the 5-year pe-
101
riod beginning on the date such corporation was
selected for purposes of this section,
(B) the amount of which is available for
use by such corporation for at least 10 years,
(C) which is to be used by such corpora-
tion for qualified low-income assistance within
its operational area, and
(D) which is designated by such corpora-
tion for purposes of this section.
(2) LIMITATIONS ON AMOUNT DESIGNATED.—
The aggregate amount of contributions to a selected
community development corporation which may be
designated by such corporation shall not exceed
$2,000,000.
(e) SELECTED COMMUNITY DEVELOPMENT COR-
PORATIONS.—
(1) IN GENERAL.—For purposes of this section,
the term ‘‘selected community development corpora-
tion’’ means any corporation—
(A) which is described in section 501(c)(3)
of such Code and exempt from tax under sec-
tion 501(a) of such Code,
(B) the principal purposes of which include
promoting employment of, and business oppor-
102
tunities for, low-income individuals who are
residents of the operational area, and
(C) which is selected by the Secretary of
Housing and Urban Development for purposes
of this section.
(2) ONLY
CORPORATIONS
MAY
BE
SE-
LECTED.—
(A) IN GENERAL.—The Secretary of Hous-
ing and Urban Development may select 10 cor-
porations for purposes of this section, subject to
the availability of eligible corporations. Such se-
lections may be made only before January 1,
1995. At least 4 of the operational areas of the
corporations selected must be rural areas (as
defined by section 1393(6) of such Code).
(B) PRIORITY OF DESIGNATIONS.—In se-
lecting corporations for purposes of this section,
such Secretary shall give priority to corpora-
tions with a demonstrated record of perform-
ance in administering community development
programs which target at least 75 percent of
the jobs emanating from their investment funds
to low income or unemployed individuals.
(3) OPERATIONAL AREAS MUST HAVE CERTAIN
CHARACTERISTICS.—A corporation may be selected
103
for purposes of this section only if its operational
area meets the following criteria:
(A) The area meets the size requirements
under paragraph (1)(C) or (2)(C) of section
1391(b) which would apply if such area were to
be designated as a tax enterprise zone.
(B) The unemployment rate (as deter-
mined by the appropriate available data) is not
less than the national unemployment rate.
(C) The median family income of residents
of such area does not exceed 80 percent of the
median gross income of residents of the juris-
diction of the local government which includes
such area.
(f) QUALIFIED LOW-INCOME ASSISTANCE.—For pur-
poses of this section, the term ‘‘qualified low-income as-
sistance’’ means assistance—
(1) which is designed to provide employment of,
and business opportunities for, low-income individ-
uals who are residents of the operational area of the
community development corporation, and
(2) which is approved by the Secretary of Hous-
ing and Urban Development.
104
Subtitle D—Indian Employment
and Investment
SEC. 441. INVESTMENT TAX CREDIT FOR PROPERTY ON IN-
DIAN RESERVATIONS.
(a) ALLOWANCE OF INDIAN RESERVATION CRED-
IT.—Section 46 of the Internal Revenue Code of 1986 (re-
lating to investment credits) is amended by striking ‘‘and’’
at the end of paragraph (2), by striking the period at the
end of paragraph (3) and inserting ‘‘, and’’, and by adding
after paragraph (3) the following new paragraph:
‘‘(4) the Indian reservation credit.’’.
(b) AMOUNT OF INDIAN RESERVATION CREDIT.—
(1) IN GENERAL.—Section 48 of such Code (re-
lating to the energy credit and the reforestation
credit) is amended by adding after subsection (b)
the following new subsection:
‘‘(c) INDIAN RESERVATION CREDIT.—
‘‘(1) IN GENERAL.—For purposes of section 46,
the Indian reservation credit for any taxable year is
the Indian reservation percentage of the qualified in-
vestment in qualified Indian reservation property
placed in service during such taxable year, deter-
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 ...............................
New reservation construction property .................
105
Reservation infrastructure investment ..................
15.
‘‘(2) QUALIFIED
INVESTMENT
IN
QUALIFIED
INDIAN
RESERVATION
PROPERTY
DEFINED.—For
purposes of this subpart—
‘‘(A) IN
GENERAL.—The term ‘qualified
Indian reservation property’ means property—
‘‘(i) which is—
‘‘(I) reservation personal prop-
erty,
‘‘(II) new reservation construc-
tion property, or
‘‘(III) reservation infrastructure
investment, and
‘‘(ii) not acquired (directly or indi-
rectly) by the taxpayer from a person who
is related to the taxpayer (within the
meaning of section 465(b)(3)(C)).
The term ‘qualified Indian reservation property’
does not include any property (or any portion
thereof) placed in service for purposes of con-
ducting or housing class I, II, or III gaming (as
defined in section 4 of the Indian Regulatory
Act (25 U.S.C. 2703)).
‘‘(B) QUALIFIED INVESTMENT.—The term
‘qualified investment’ means—
106
‘‘(i) in the case of reservation infra-
structure investment, the amount expended
by the taxpayer for the acquisition or con-
struction of the reservation infrastructure
investment; and
‘‘(ii) in the case of all other qualified
Indian reservation
property,
the
tax-
payer’s basis for such property.
‘‘(C) 
RESERVATION
PERSONAL
PROP-
ERTY.—The term ‘reservation personal prop-
erty’ means qualified personal property which is
used by the taxpayer predominantly in the ac-
tive conduct of a trade or business within an
Indian reservation. Property shall not be treat-
ed as ‘reservation personal property’ if it is
used or located outside the Indian reservation
on a regular basis.
‘‘(D) QUALIFIED PERSONAL PROPERTY.—
The term ‘qualified personal property’ means
property—
‘‘(i) for which depreciation is allow-
able under section 168,
‘‘(ii) which is not—
‘‘(I) nonresidential real property,
107
‘‘(II) residential rental property,
or
‘‘(III) real property which is not
described in (I) or (II) and which has
a class life of more than 12.5 years.
For purposes of this subparagraph, the terms
‘nonresidential real property’, ‘residential rental
property’, and ‘class life’ have the respective
meanings given such terms by section 168.
‘‘(E) NEW
RESERVATION
CONSTRUCTION
PROPERTY.—The term ‘new reservation con-
struction property’ means qualified real prop-
erty—
‘‘(i) which is located in an Indian res-
ervation,
‘‘(ii) which is used by the taxpayer
predominantly in the active conduct of a
trade or business within an Indian reserva-
tion, and
‘‘(iii) which is originally placed in
service by the taxpayer.
‘‘(F) QUALIFIED
REAL
PROPERTY.—The
term ‘qualified real property’ means property
for which depreciation is allowable under sec-
108
tion 168 and which is described in clause (I),
(II), or (III) of subparagraph (D)(ii).
‘‘(G) RESERVATION INFRASTRUCTURE IN-
VESTMENT.—
‘‘(i) IN GENERAL.—The term ‘reserva-
tion 
infrastructure 
investment’ 
means
qualified personal property or qualified real
property which—
‘‘(I) benefits the tribal infrastruc-
ture,
‘‘(II) is available to the general
public, and
‘‘(III) is placed in service in con-
nection with the taxpayer’s active con-
duct of a trade or business within an
Indian reservation.
‘‘(ii) PROPERTY
MAY
BE
LOCATED
OUTSIDE
THE
RESERVATION.—Qualified
personal property and qualified real prop-
erty used or located outside an Indian res-
ervation shall be reservation infrastructure
investment only if its purpose is to connect
to existing tribal infrastructure in the res-
ervation, and shall include, but not be lim-
ited to, roads, power lines, water systems,
109
railroad spurs, and communications facili-
ties.
‘‘(H) COORDINATION WITH OTHER CRED-
ITS.—The term ‘qualified Indian reservation
property’ shall not include any property with re-
spect to which the energy credit or the rehabili-
tation credit is allowed.
‘‘(3) REAL ESTATE RENTALS.—For purposes of
this section, the rental to others of real property lo-
cated within an Indian reservation shall be treated
as the active conduct of a trade or business in an
Indian reservation.
‘‘(4) INDIAN
RESERVATION
DEFINED.—For
purposes of this subpart, the term ‘Indian reserva-
tion’ means a reservation, as defined in—
‘‘(A) section 3(d) of the Indian Financing
Act of 1974 (25 U.S.C. 1452(d)), or
‘‘(B) section 4(10) of the Indian Child
Welfare Act of 1978 (25 U.S.C. 1903(10)).
‘‘(5) 
LIMITATION
BASED
ON
UNEMPLOY-
MENT.—
‘‘(A) GENERAL
RULE.—The Indian res-
ervation credit allowed under section 46 for any
taxable year shall equal—
110
‘‘(i) if the Indian unemployment rate
on the applicable Indian reservation for
which the credit is sought exceeds 300 per-
cent of the national average unemployment
rate at any time during the calendar year
in which the property is placed in service
or during the immediately preceding 2 cal-
endar years, 100 percent of such credit,
‘‘(ii) if such Indian unemployment
rate exceeds 150 percent but not 300 per-
cent, 50 percent of such credit, and
‘‘(iii) if such Indian unemployment
rate does not exceed 150 percent, 0 per-
cent of such credit.
‘‘(B) 
SPECIAL
RULE
FOR
LARGE
PROJECTS.—In the case of a qualified Indian
reservation property which has (or is a compo-
nent of a project which has) a projected con-
struction period of more than 2 years or a cost
of more than $1,000,000, subparagraph (A)
shall apply by substituting ‘during the earlier of
the calendar year in which the taxpayer enters
into a binding agreement to make a qualified
investment or the first calendar year in which
the taxpayer has expended at least 10 percent
111
of the taxpayer’s qualified investment, or the
preceding calendar year’ for ‘during the cal-
endar year in which the property is placed in
service or during the immediately preceding 2
calendar years’.
‘‘(C) DETERMINATION OF INDIAN UNEM-
PLOYMENT.—For purposes of this paragraph,
with respect to any Indian reservation, the In-
dian unemployment rate shall be based upon
Indians unemployed and able to work, and shall
be certified by the Secretary of the Interior.
‘‘(6) 
COORDINATION
WITH
NONREVENUE
LAWS.—Any reference in this subsection to a provi-
sion not contained in this title shall be treated for
purposes of this subsection as a reference to such
provision as in effect on the date of the enactment
of this paragraph.’’.
(2) LODGING TO QUALIFY.—Paragraph (2) of
section 50(b) of such Code (relating to property used
for lodging) is amended—
(A) by striking ‘‘and’’ at the end of sub-
paragraph (C),
(B) by striking the period at the end of
subparagraph (D) and inserting ‘‘; and’’ and
112
(C) by adding at the end thereof the fol-
lowing subparagraph:
‘‘(E) new reservation construction prop-
erty.’’.
(c) RECAPTURE.—Subsection (a) of section 50 of
such Code (relating to recapture in case of dispositions,
etc.), is amended by adding at the end thereof the follow-
ing new paragraph:
‘‘(6) SPECIAL RULES FOR INDIAN RESERVATION
PROPERTY.—
‘‘(A) IN GENERAL.—If, during any taxable
year, property with respect to which the tax-
payer claimed an Indian reservation credit—
‘‘(i) is disposed of, or
‘‘(ii) in the case of reservation per-
sonal property—
‘‘(I) otherwise ceases to be in-
vestment credit property with respect
to the taxpayer, or
‘‘(II) is removed from the Indian
reservation, converted or otherwise
ceases to be Indian reservation prop-
erty,
113
the tax under this chapter for such taxable year
shall be increased by the amount described in
subparagraph (B).
‘‘(B) AMOUNT
OF
INCREASE.—The in-
crease in tax under subparagraph (A) shall
equal the aggregate decrease in the credits al-
lowed under section 38 by reason of section
48(c) for all prior taxable years which would
have resulted had the qualified investment
taken into account with respect to the property
been limited to an amount which bears the
same ratio to the qualified investment with re-
spect to such property as the period such prop-
erty was held by the taxpayer bears to the ap-
plicable recovery period under section 168(g).
‘‘(C) COORDINATION WITH OTHER RECAP-
TURE PROVISIONS.—In the case of property to
which this paragraph applies, paragraph (1)
shall not apply and the rules of paragraphs (3),
(4), and (5) shall apply.’’.
(d) BASIS ADJUSTMENT TO REFLECT INVESTMENT
CREDIT.—Paragraph (3) of section 50(c) of such Code
(relating to basis adjustment to investment credit prop-
erty) is amended by striking ‘‘energy credit or reforest-
ation credit’’ and inserting ‘‘energy credit, reforestation
114
credit or Indian reservation credit other than with respect
to any expenditure for new reservation construction prop-
erty’’.
(e) CERTAIN GOVERNMENTAL USE PROPERTY TO
QUALIFY.—Paragraph (4) of section 50(b) of such Code
(relating to property used by governmental units or for-
eign persons or entities) is amended by redesignating sub-
paragraphs (D) and (E) as subparagraphs (E) and (F),
respectively, and inserting after subparagraph (C) the fol-
lowing new subparagraph:
‘‘(D) EXCEPTION
FOR
RESERVATION
IN-
FRASTRUCTURE INVESTMENT.—This paragraph
shall not apply for purposes of determining the
Indian reservation credit with respect to res-
ervation infrastructure investment.’’.
(f) APPLICATION
OF AT-RISK RULES.—Subpara-
graph (C) of section 49(a)(1) of such Code is amended
by striking ‘‘and’’ at the end of clause (ii), by striking
the period at the end of clause (iii) and inserting ‘‘, and’’,
and by adding at the end the following new clause:
‘‘(iv) the qualified investment in quali-
fied Indian reservation property.’’.
(g) CLERICAL AMENDMENTS.—
115
(1) The caption of section 48 of such Code is
amended by deleting the period at the end thereof
and adding ‘‘; indian reservation credit.’’
(2) The table of sections for subpart E of part
IV of subchapter A of chapter 1 of such Code is
amended by striking out the item relating to section
48 and inserting the following:
‘‘Sec. 48. Energy credit; reforestation credit; Indian reservation
credit.’’.
(h) EFFECTIVE DATE.—The amendments made by
this section shall apply to property placed in service after
December 31, 1993.
SEC. 442. INDIAN EMPLOYMENT CREDIT.
(a) ALLOWANCE OF INDIAN EMPLOYMENT CRED-
IT.—Section 38(b) of the Internal Revenue Code of 1986
(relating to general business credits), as amended by sec-
tion 412, is amended by striking ‘‘plus’’ at the end of
paragraph (7), by striking the period at the end of para-
graph (8) and inserting ‘‘, plus’’, and by adding after
paragraph (8) the following new paragraph:
‘‘(9) the Indian employment credit as deter-
mined under section 45(a).’’.
(b) AMOUNT OF INDIAN EMPLOYMENT CREDIT.—
Subpart D of Part IV of subchapter A of chapter 1 of
such Code (relating to business related credits) is amended
by adding at the end thereof the following new section:
116
‘‘SEC. 45. INDIAN EMPLOYMENT CREDIT.
‘‘(a) AMOUNT OF CREDIT.—
‘‘(1) IN GENERAL.—For purposes of section 38,
the amount of the Indian employment credit deter-
mined under this section with respect to any em-
ployer for any taxable year is 10 percent (30 percent
in the case of an employer with at least 85 percent
Indian employees throughout the taxable year) of
the sum of—
‘‘(A) the qualified wages paid or incurred
during such taxable year, plus
‘‘(B) qualified employee health insurance
costs paid or incurred during such taxable year.
In no event shall the amount of the Indian employ-
ment credit for any taxable year exceed the credit
limitation amount determined under subsection (e)
for such taxable year.
‘‘(2) INDIAN
EMPLOYEE.—For purposes of
paragraph (1), the term ‘Indian employee’ means an
employee who is an enrolled member of an Indian
tribe or the spouse of such a member.
‘‘(b) QUALIFIED WAGES; QUALIFIED EMPLOYEE
HEALTH INSURANCE COSTS.—For purposes of this sec-
tion—
‘‘(1) QUALIFIED WAGES.—
117
‘‘(A) IN
GENERAL.—The term ‘qualified
wages’ means any wages paid or incurred by an
employer for services performed by an employee
while such employee is a qualified employee.
‘‘(B) COORDINATION
WITH
TARGETED
JOBS CREDIT.—The term ‘qualified wages’ shall
not include wages attributable to service ren-
dered during the 1-year period beginning with
the day the individual begins work for the em-
ployer if any portion of such wages is taken
into account in determining the credit under
section 51.
‘‘(2) QUALIFIED
EMPLOYEE
HEALTH
INSUR-
ANCE COSTS.—
‘‘(A) IN
GENERAL.—The term ‘qualified
employee health insurance costs’ means any
amount paid or incurred by an employer for
health insurance to the extent such amount is
attributable to coverage provided to any em-
ployee while such employee is a qualified em-
ployee.
‘‘(B) EXCEPTION
FOR
AMOUNTS
PAID
UNDER SALARY REDUCTION ARRANGEMENTS.—
No amount paid or incurred for health insur-
ance pursuant to a salary reduction arrange-
118
ment shall be taken into account under sub-
paragraph (A).
‘‘(c) QUALIFIED EMPLOYEE.—For purposes of this
section—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, the term ‘qualified em-
ployee’ means, with respect to any period, any em-
ployee of an employer if—
‘‘(A) substantially all of the services per-
formed during such period by such employee for
such employer are performed within an Indian
reservation,
‘‘(B) the principal place of abode of such
employee while performing such services is on
or near the reservation in which the services are
performed, and
‘‘(C) the employee began work for such
employer on or after January 1, 1993.
‘‘(2) CREDIT
ALLOWED
ONLY
FOR
FIRST
YEARS.—An employee shall not be treated as a
qualified employee for any period after the date 7
years after the day on which such employee first
began work for the employer.
‘‘(3) INDIVIDUALS
RECEIVING
WAGES
IN
EX-
CESS OF $30,000 NOT ELIGIBLE.—An employee shall
119
not be treated as a qualified employee for any tax-
able year of the employer if the total amount of the
wages paid or incurred by such employer to such
employee during such taxable year (whether or not
for services within an Indian reservation) exceeds
the amount determined at an annual rate of
$30,000. The Secretary shall adjust the $30,000
amount contained in the preceding sentence for
years beginning after 1993 at the same time and in
the same manner as under section 415(d).
‘‘(4) EMPLOYMENT MUST BE TRADE OR BUSI-
NESS EMPLOYMENT.—An employee shall be treated
as a qualified employee for any taxable year of the
employer only if more than 50 percent of the wages
paid or incurred by the employer to such employee
during such taxable year are for services performed
in a trade or business of the employer. Any deter-
mination as to whether the preceding sentence ap-
plies with respect to any employee for any taxable
year shall be made without regard to subsection
(f)(2).
‘‘(5) CERTAIN
EMPLOYEES
NOT
ELIGIBLE.—
The term ‘qualified employee’ shall not include—
‘‘(A) any individual described in subpara-
graph (A), (B), or (C) of section 51(i)(1),
120
‘‘(B) any 5-percent owner (as defined in
section 416(i)(1)(B)),
‘‘(C) any individual who is neither an en-
rolled member of an Indian tribe nor the spouse
of an enrolled member of an Indian tribe, and
‘‘(D) any individual if the services per-
formed by such individual for the employer in-
volve the conduct of class I, II, or III gaming
as defined in section 4 of the Indian Gaming
Regulatory Act (25 U.S.C. 2703), or are per-
formed in a building housing such gaming ac-
tivity.
‘‘(6) INDIAN TRIBE DEFINED.—The term ‘In-
dian tribe’ means any Indian tribe, band, nation,
pueblo, or other organized group or community, in-
cluding any Alaska Native village, or regional or vil-
lage corporation, as defined in, or established pursu-
ant to, the Alaska Native Claims Settlement Act (43
U.S.C. 1601 et seq.) which is recognized as eligible
for the special programs and services provided by
the United States to Indians because of their status
as Indians.
‘‘(7) INDIAN
RESERVATION
DEFINED.—The
term ‘Indian reservation’ means a reservation, as de-
fined in—
121
‘‘(A) section 3(d) of the Indian Financing
Act of 1974 (25 U.S.C. 1452(d)), or
‘‘(B) section 4(10) of the Indian Child
Welfare Act of 1978 (25 U.S.C. 1903 (10)).
‘‘(d) EARLY TERMINATION OF EMPLOYMENT BY EM-
PLOYER.—
‘‘(1) IN GENERAL.—If the employment of any
employee is terminated by the taxpayer before the
day 1 year after the day on which such employee
began work for the employer—
‘‘(A) no wages (or qualified employee
health insurance costs) with respect to such em-
ployee shall be taken into account under sub-
section (a) for the taxable year in which such
employment is terminated, and
‘‘(B) the tax under this chapter for the
taxable year in which such employment is ter-
minated shall be increased by the aggregate
credits (if any) allowed under section 38(a) for
prior taxable years by reason of wages (or
qualified employee health insurance costs) taken
into account with respect to such employee.
‘‘(2) 
CARRYBACKS
AND
CARRYOVERS
AD-
JUSTED.—In the case of any termination of employ-
ment to which paragraph (1) applies, the carrybacks
122
and carryovers under section 39 shall be properly
adjusted.
‘‘(3) SUBSECTION NOT TO APPLY IN CERTAIN
CASES.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
not apply to—
‘‘(i) a termination of employment of
an employee who voluntarily leaves the em-
ployment of the taxpayer,
‘‘(ii) a termination of employment of
an individual who before the close of the
period referred to in paragraph (1) be-
comes disabled to perform the services of
such employment unless such disability is
removed before the close of such period
and the taxpayer fails to offer reemploy-
ment to such individual, or
‘‘(iii) a termination of employment of
an individual if it is determined under the
applicable State unemployment compensa-
tion law that the termination was due to
the misconduct of such individual.
‘‘(B) CHANGES IN FORM OF BUSINESS.—
For purposes of paragraph (1), the employment
123
relationship between the taxpayer and an em-
ployee shall not be treated as terminated—
‘‘(i) by a transaction to which section
381(a) applies if the employee continues to
be employed by the acquiring corporation,
or
‘‘(ii) by reason of a mere change in
the form of conducting the trade or busi-
ness of the taxpayer if the employee con-
tinues to be employed in such trade or
business and the taxpayer retains a sub-
stantial interest in such trade or business.
‘‘(4) SPECIAL
RULE.—Any increase in tax
under paragraph (1) shall not be treated as a tax
imposed by this chapter for purposes of—
‘‘(A) determining the amount of any credit
allowable under this chapter, and
‘‘(B) determining the amount of the tax
imposed by section 55.
‘‘(e) CREDIT LIMITATION AMOUNT.—For purposes of
this section—
‘‘(1) CREDIT LIMITATION AMOUNT.—The credit
limitation amount for a taxable year shall be an
amount equal to the credit rate (10 or 30 percent
124
as determined under subsection (a)) multiplied by
the increased credit base.
‘‘(2) INCREASED CREDIT BASE.—The increased
credit base for a taxable year shall be the excess
of—
‘‘(A) the sum of any qualified wages and
qualified employee health insurance costs paid
or incurred by the employer during the taxable
year with respect to employees whose wages
(paid or incurred by the employer) during the
taxable year do not exceed the amount deter-
mined under paragraph (3) of subsection (c),
over
‘‘(B) the sum of any qualified wages and
qualified employee health insurance costs paid
or incurred by the employer (or any prede-
cessor) during calendar year 1993 with respect
to employees whose wages (paid or incurred by
the employer or any predecessor) during 1993
did not exceed $30,000.
‘‘(3) SPECIAL
RULE
FOR
SHORT
TAXABLE
YEARS.—For any taxable year having less than 12
months—
125
‘‘(A) the amounts paid or incurred by the
employer shall be annualized for purposes of de-
termining the increased credit base, and
‘‘(B) the credit limitation amount shall be
multiplied by a fraction, the numerator of which
is the number of days in the taxable year and
the denominator of which is 365.
‘‘(f) OTHER DEFINITIONS AND SPECIAL RULES.—
For purposes of this section—
‘‘(1) WAGES.—The term ‘wages’ has the same
meaning given to such term in section 51.
‘‘(2) CONTROLLED GROUPS.—
‘‘(A) All employers treated as a single em-
ployer under section (a) or (b) of section 52
shall be treated as a single employer for pur-
poses of this section.
‘‘(B) The credit (if any) determined under
this section with respect to each such employer
shall be its proportionate share of the wages
and qualified employee health insurance costs
giving rise to such credit.
‘‘(3) CERTAIN OTHER RULES MADE APPLICA-
BLE.—Rules similar to the rules of section 51(k)
and subsections (c), (d), and (e) of section 52 shall
apply.