I
103D CONGRESS
2D SESSION
H. R. 4175
To amend the Small Business Act to provide financial assistance to small
businesses operating in urban empowerment zones and enterprise commu-
nities and to amend the Internal Revenue Code of 1986 to allow individ-
uals an exclusion for capital gain from new investments in those small
businesses.
IN THE HOUSE OF REPRESENTATIVES
APRIL 12, 1994
Mr. MACHTLEY introduced the following bill; which was referred jointly to the
Committees on Small Business and Ways and Means
A BILL
To amend the Small Business Act to provide financial assist-
ance 
to 
small 
businesses 
operating 
in 
urban
empowerment zones and enterprise communities and to
amend the Internal Revenue Code of 1986 to allow indi-
viduals an exclusion for capital gain from new invest-
ments in those small businesses.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. FINANCIAL ASSISTANCE FOR SMALL BUSI-
NESSES 
OPERATING 
IN 
URBAN
EMPOWERMENT 
ZONES 
AND 
ENTERPRISE
COMMUNITIES.
Section 7(a) of the Small Business Act (15 U.S.C.
636(a)) is amended by adding at the end the following:
‘‘(23)(A) Out of the amounts appropriated to
carry 
out 
this 
subsection, 
not 
less 
than
$1,000,000,000 shall be expended in each fiscal year
for small business concerns operating in urban areas
designated as empowerment zones or enterprise com-
munities pursuant to section 1391 of the Internal
Revenue Code of 1986.
‘‘(B) Subparagraph (A) shall apply to any fiscal
year beginning after September 30, 1994, in which
designations described in subparagraph (A) are in
effect.’’.
SEC. 2. EXCLUSION FOR CAPITAL GAIN FROM NEW INVEST-
MENTS IN SMALL BUSINESSES OPERATING IN
URBAN EMPOWERMENT ZONES AND ENTER-
PRISE COMMUNITIES.
(a) IN GENERAL.—Subchapter U of chapter 1 of the
Internal Revenue Code of 1986 (relating to designation
and treatment of empowerment zones, enterprise commu-
nities, and rural development investment areas) is amend-
ed by redesignating part IV as part V and by inserting
after part III the following new part:
‘‘PART IV—EXCLUSION FOR CAPITAL GAIN FROM
NEW INVESTMENTS IN SMALL BUSINESSES
OPERATING 
IN 
URBAN 
EMPOWERMENT
ZONES AND ENTERPRISE COMMUNITIES
‘‘Sec. 1397D. Exclusion for gain from new investments in small
businesses operating in urban empowerment zones
and enterprise communities.
‘‘SEC. 1397D. EXCLUSION FOR GAIN FROM NEW INVEST-
MENTS IN SMALL BUSINESSES OPERATING IN
URBAN EMPOWERMENT ZONES AND ENTER-
PRISE COMMUNITIES.
‘‘(a) GENERAL RULE.—In the case of an individual,
gross income shall not include any qualified capital gain
recognized on the sale or exchange of a qualified 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 a small urban
enterprise zone business (or, in the case of
a new corporation, such corporation was
being organized for purposes of being a
small urban enterprise zone business), and
‘‘(iii) during substantially all of the
taxpayer’s holding period for such stock,
such corporation qualified as a small urban
enterprise zone business.
‘‘(B) 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.—
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 urban tax enterprise
zone took effect,
‘‘(ii) the original use of such property
in such an urban tax enterprise zone 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 an urban tax enterprise
zone and in a small urban enterprise zone
business of the taxpayer.
‘‘(A) 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 urban tax enterprise zone took ef-
fect, additions to basis with respect to such
property in the hands of the taxpayer exceed
the greater of (i) an amount equal to the ad-
justed basis at the beginning of such 24-month
period in the hands of the taxpayer, or (ii)
$5,000.
‘‘(B) 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
1397B(d)).
‘‘(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 a small urban en-
terprise zone business (or, in the case of a new
partnership, such partnership was being orga-
nized for purposes of being a small urban enter-
prise zone business), and
‘‘(C) during substantially all of the tax-
payer’s holding period for such interest, such
partnership qualified as a small urban enter-
prise 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
urban tax enterprise zone shall be disregarded for
purposes of determining whether any property is a
qualified zone asset.
‘‘(c) SMALL URBAN ENTERPRISE ZONE BUSINESS;
URBAN TAX ENTERPRISE ZONE.—For purposes of this
section:
‘‘(1) SMALL URBAN ENTERPRISE ZONE BUSI-
NESS.—The term ‘small urban enterprise zone busi-
ness’ means an enterprise zone business (as defined
in section 1397B) which normally employs 500 or
fewer employees on any day during the taxable year;
except that, in applying section 1397B for such pur-
poses—
‘‘(A) references to empowerment zones
shall be treated as references only to urban tax
enterprise zones, and
‘‘(B) 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.
‘‘(B) URBAN
TAX
ENTERPRISE
ZONE.—The
term ‘urban tax enterprise zone’ means any
empowerment zone, and any enterprise community,
which is located in an urban area.
‘‘(d) 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 an urban
tax enterprise zone.
‘‘(e) 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 a small urban enterprise zone busi-
ness during substantially all of the period the tax-
payer 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 as-
sets (determined 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 paragraph (2)(C) shall apply for purposes of
the preceding 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 a small urban enterprise zone business dur-
ing substantially all of the period the taxpayer
held the interest to which such inclusion re-
lates) shall be treated as gain described in sub-
section (a) if such amount meets the require-
ments of subparagraph (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.
‘‘(f) 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 a small urban enterprise
zone business during substantially all of the period the
taxpayer held such interest or stock, the amount of quali-
fied 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 1397B(d)), and
‘‘(2) gain attributable to periods before the des-
ignation of an area as an urban tax enterprise zone.
‘‘(g) CERTAIN
TAX-FREE
AND
OTHER
TRANS-
FERS.—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.’’
(b) TECHNICAL AMENDMENTS.—
(1) Section 172(d)(2)(B) of such Code (relating
to modifications with respect to net operating loss
deduction) is amended to read as follows:
‘‘(B) the exclusions provided by sections
1202 and 1397D shall not be allowed.’’
(2) Paragraph (4) of section 642(c) of such
Code is amended—
(A) by inserting ‘‘or 1397D(a)’’ after ‘‘sec-
tion 1202(a)’’, and
(B) by striking ‘‘section 1202’’ and insert-
ing ‘‘such section’’.
(3) The last sentence of paragraph (3) of sec-
tion 643(a) of such Code is amended to read as fol-
lows: ‘‘The exclusions under sections 1202 and
1397D shall not be taken into account.’’
(4) Paragraph (4) of section 691(c) of such
Code is amended by inserting ‘‘1397D,’’ after
‘‘1201,’’.
(5) The second sentence of paragraph (2) of
section 871(a) of such Code is amended by striking
‘‘section 1202’’ and inserting ‘‘sections 1202 and
1397D’’.
(6) The section 1397D of such Code contained
in part V of subchapter U of chapter 1 of such Code
(as redesignated by subsection (a)) is redesignated
as section 1397E.
(7) The table of parts for subchapter U of
chapter 1 of such Code is amended by striking the
last item and inserting the following:
‘‘Part IV. Exclusion for capital gain from new investments in
small businesses operating in urban empowerment
zones and enterprise communities.
‘‘Part V. Regulations.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect on the date of the enactment
of this Act.
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