I
105TH CONGRESS
1ST SESSION
H. R. 2707
To amend the Internal Revenue Code of 1986 to permit tax-free reorganiza-
tions of specialized small business investment companies into partnerships
and regulated investment companies, to expand the exclusion for gain
from small business stock for such stock held by such companies, and
for other purposes.
IN THE HOUSE OF REPRESENTATIVES
OCTOBER 23, 1997
Mr. JEFFERSON (for himself, Mr. RANGEL, Mr. WYNN, Mr. CLYBURN, Ms.
EDDIE BERNICE JOHNSON of Texas, Mr. FATTAH, Mr. TOWNS, Mr.
ENGLISH of Pennsylvania, Ms. CHRISTIAN-GREEN, Mr. WATT of North
Carolina, Mr. FORD, Ms. WATERS, Mr. FROST, Mrs. CLAYTON, Mr.
LEWIS of Georgia, Mr. DAVIS of Illinois, Ms. NORTON, Ms. JACKSON-
LEE of Texas, Mr. HILLIARD, Mr. MCCRERY, Mr. FLAKE, Mr. THOMP-
SON, Mr. DELLUMS, Mr. SCOTT, Mr. CUMMINGS, Mr. PAYNE, Mrs. MEEK
of Florida, Ms. KILPATRICK, Ms. CARSON, Mr. DIXON, Mr. STOKES, Mr.
RUSH, Mr. CLAY, Mr. BISHOP, Ms. MILLENDER-MCDONALD, Mr.
OWENS, Mr. JACKSON of Illinois, Ms. MCKINNEY, Mr. CONYERS, Mr.
HASTINGS of Florida, and Ms. BROWN of Florida) introduced the follow-
ing bill; which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to permit
tax-free reorganizations of specialized small business in-
vestment companies into partnerships and regulated in-
vestment companies, to expand the exclusion for gain
from small business stock for such stock held by such
companies, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Entrepreneurial Eq-
uity Capital Formation Act’’.
TITLE 
I—TAX-FREE 
CONVER-
SIONS 
OF 
SPECIALIZED
SMALL 
BUSINESS 
INVEST-
MENT 
COMPANIES 
INTO
PASS-THRU ENTITIES
SEC. 101. MODIFICATIONS TO PROVISIONS RELATING TO
REGULATED INVESTMENT COMPANIES.
(a) IN GENERAL.—Section 851 of the Internal Reve-
nue Code of 1986 (relating to definition of regulated in-
vestment company) is amended by adding at the end the
following new subsection:
‘‘(i) SPECIAL RULES FOR SPECIALIZED SMALL BUSI-
NESS INVESTMENT COMPANIES.—
‘‘(1) IN GENERAL.—For purposes of determin-
ing whether a specialized small business investment
company is a regulated investment company for pur-
poses of this subchapter—
‘‘(A) income derived in connection with ac-
tivities as a specialized small business invest-
ment company (including compensation for
services rendered in connection with invest-
ments made as part of such activities) shall be
treated as qualifying income under subsection
(b)(2),
‘‘(B) subsection (b)(3) shall not apply, and
‘‘(C) the requirements of subsection (b)(4)
shall be treated as met if, at the close of each
quarter of the taxable year, at least 50 percent
of the value of its total assets is represented
by—
‘‘(i) assets described in subsection
(b)(4)(A)(i), and
‘‘(ii) 
other 
investments 
permitted
under the Small Business Investment Act
of 1958.
‘‘(2) WAIVER OF DISTRIBUTION REQUIREMENT;
CERTAIN EARNINGS AND PROFITS DISREGARDED.—
In the case of a specialized small business invest-
ment company—
‘‘(A) section 852(a)(1) and section 4982(a)
shall not apply, and
‘‘(B) earning and profits accumulated
while the company is a specialized small busi-
ness investment company shall be disregarded
for purposes of section 852(a)(2).
‘‘(3) SPECIALIZED
SMALL
BUSINESS
INVEST-
MENT COMPANY.—For purposes of this subsection,
the term ‘specialized small business investment com-
pany’ means any corporation which—
‘‘(A) as of September 30, 1996, held a li-
cense to operate under section 301(d) of the
Small Business Investment Act of 1958, or
‘‘(B) holds a license from the Small Busi-
ness Administration, issued after such date, to
operate as a specialized small business invest-
ment company.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1996.
SEC. 102. TAX-FREE REORGANIZATION OF SPECIALIZED
SMALL BUSINESS INVESTMENT COMPANY AS
A PARTNERSHIP.
(a) IN GENERAL.—If, during the 180-day period be-
ginning on the date of the enactment of this Act, a cor-
poration which is a specialized small business investment
company transfers substantially all of its assets to a part-
nership (including its license to operate as a specialized
small business investment company) solely in exchange for
partnership interests in such partnership, no gain or loss
shall be recognized to the corporation on such a transfer
if—
(1) immediately after such exchange, such cor-
poration holds partnership interests in such partner-
ship having a value equal to at least 80 percent of
the total value of all partnership interests in such
partnership, and
(2) before the close of such period, such cor-
poration transfers all partnership interests held by
the corporation in such partnership, and all remain-
ing assets of the corporation, to its shareholders in
the complete liquidation of such corporation.
If, prior to the date of enactment of this Act or at any
time before the close of the 120-day period beginning on
such date, a corporation files an application with the Small
Business Administration for approval of a transfer de-
scribed in the preceding sentence, the 180-day period re-
ferred to in the preceding sentence shall not expire before
the date which is 180 days after the date such Administra-
tion grants preliminary approval of such transfer.
(b) NONRECOGNITION OF GAIN OR LOSS TO COR-
PORATION ON DISTRIBUTION OF PARTNERSHIP INTER-
ESTS.—In the case of any distribution of a partnership
interest acquired by the liquidating corporation in an ex-
change to which subsection (a) applies—
(1) no gain or loss shall be recognized to the
liquidating corporation by reason of such distribu-
tion, and
(2) such distribution shall not be treated as a
sale 
or 
exchange 
for 
purposes 
of 
section
708(b)(1)(B) of the Internal Revenue Code of 1986.
(c) GAIN RECOGNIZED BY SHAREHOLDERS ON RE-
CEIPT OF PROPERTY OTHER THAN PARTNERSHIP INTER-
ESTS.—
(1) IN GENERAL.—No gain or loss shall be rec-
ognized to a shareholder of a corporation on the
transfer of such shareholder’s stock in such corpora-
tion to such corporation solely in exchange for a
partnership interest in the partnership referred to in
subsection (a)(1).
(2) RECEIPT OF PROPERTY.—If paragraph (1)
would apply to an exchange but for the fact that
there is received, in addition to the partnership in-
terests permitted to be received under paragraph
(1), other property or money, then—
(A) gain (if any) to such recipient shall be
recognized, but not in excess of—
(i) the amount of money received, plus
(ii) the fair market value of such
other property received, and
(B) no loss to such recipient shall be rec-
ognized.
(d) BASIS.—The basis of property received in any ex-
change to which this section applies shall be determined
in accordance with rules similar to the rules of section 358
of the Internal Revenue Code of 1986.
(e) IMPOSITION OF TAX IN CERTAIN CASES.—If, at
any time during the 3-year period beginning on the date
of the transfer referred to in subsection (a) to a partner-
ship, such partnership ceases its investment activities or
ceases to have at least 75 percent of the value of its assets
(at cost) represented by investments permitted for special-
ized small business investment companies under the Small
Business Investment Act of 1958, there is hereby imposed
a tax on the income of such partnership equal to the ag-
gregate amount of tax which would have been imposed
under chapter 1 of the Internal Revenue Code of 1986
but for subsections (a) and (b). Any tax imposed by this
subsection shall be treated for purposes of such Code as
a tax imposed by chapter 1.
(f) SPECIALIZED SMALL BUSINESS INVESTMENT
COMPANY.—For purposes of this section, the term ‘‘spe-
cialized small business investment company’’ has the
meaning given such term by section 1202(k) of the Inter-
nal Revenue Code of 1986 (as added by this Act).
TITLE 
II—ADDITIONAL 
INCEN-
TIVES RELATED TO INVEST-
ING IN SPECIALIZED SMALL
BUSINESS INVESTMENT COM-
PANIES
SEC. 201. EXPANSION OF NONRECOGNITION TREATMENT
FOR SECURITIES GAIN ROLLED OVER INTO
SPECIALIZED SMALL BUSINESS INVESTMENT
COMPANIES.
(a) EXTENSION OF ROLLOVER PERIOD.—Paragraph
(1) of section 1044(a) of the Internal Revenue Code of
1986 (relating to nonrecognition of gain) is amended by
striking ‘‘60-day period’’ and inserting ‘‘180-day period’’.
(b) INCREASE OF MAXIMUM EXCLUSION.—
(1) IN GENERAL.—Paragraphs (1) and (2) of
section 1044(b) of such Code (relating to limita-
tions) are amended to read as follows:
‘‘(1) LIMITATION
ON
INDIVIDUALS.—In the
case of an individual, the amount of gain which may
be excluded under subsection (a) for any taxable
year shall not exceed—
‘‘(A) $750,000, reduced by
‘‘(B) the amount of gain excluded under
subsection (a) for all preceding taxable years.
‘‘(2) LIMITATION ON C CORPORATIONS.—In the
case of a C corporation, the amount of gain which
may be excluded under subsection (a) for any tax-
able year shall not exceed—
‘‘(A) $2,000,000, reduced by
‘‘(B) the amount of gain excluded under
subsection (a) for all preceding taxable years.’’
(2) CONFORMING AMENDMENT.—Subparagraph
(A) of section 1044(b)(3) of such Code (relating to
special rules for married individuals) is amended to
read as follows:
‘‘(A) SEPARATE RETURNS.—In the case of
a separate return by a married individual, para-
graph (1) shall be applied by substituting
‘$375,000’ for ‘$750,000’.’’
(c) EXTENSION TO PREFERRED STOCK.—Paragraph
(1) of section 1044(a) of such Code is amended by striking
‘‘common’’.
(d) DEFINITION OF SPECIALIZED SMALL BUSINESS
INVESTMENT
COMPANY.—Paragraph (3) of section
1044(c) of such Code (relating to definitions and special
rules) is amended to read as follows:
‘‘(3) SPECIALIZED
SMALL
BUSINESS
INVEST-
MENT COMPANY.—The term ‘specialized small busi-
ness investment company’ means any partnership or
corporation which—
‘‘(A) as of September 30, 1996, is licensed
by the Small Business Administration under
section 301(d) of the Small Business Invest-
ment Act of 1958, or
‘‘(B) holds a license from the Small Busi-
ness Administration, issued after such date, to
operate as a specialized small business invest-
ment company.’’
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to sales occurring after the date
of the enactment of this Act.
SEC. 202. MODIFICATIONS TO EXCLUSION FOR GAIN FROM
QUALIFIED SMALL BUSINESS STOCK.
(a) IN GENERAL.—Section 1202 of the Internal Rev-
enue Code of 1986 (relating to 50-percent exclusion for
gain from certain small business stock) is amended by re-
designating subsection (k) as subsection (l) and by insert-
ing after subsection (j) the following new subsection:
‘‘(k) SPECIAL RULES
FOR SPECIALIZED SMALL
BUSINESS INVESTMENT COMPANIES.—
‘‘(1) INCREASE IN EXCLUSION; CORPORATE IN-
VESTORS ELIGIBLE.—In the case of—
‘‘(A) the sale or exchange of stock in a
specialized small business investment company,
and
‘‘(B) any amount treated under subsection
(g) or paragraph (2) of this subsection as gain
described in subsection (a) by reason of the
holding, sale, or exchange of an interest in a
specialized small business investment company,
subsection (a) shall be applied by substituting ‘60
percent’ for ‘50 percent’ and, in the case of interests
acquired after the date of the enactment of this sub-
section, without being limited to taxpayers other
than corporations.
‘‘(2) EXCLUSION
ALLOWABLE
FOR
CERTAIN
GAIN ON SALE OR EXCHANGE OF INTERESTS IN CER-
TAIN
SPECIALIZED
SMALL
BUSINESS
INVESTMENT
COMPANIES.—
‘‘(A) IN GENERAL.—If any interest in a
specialized small business investment company
which is a pass-thru entity (as defined in sub-
section (g)(4)) is sold or exchanged, gain on
such sale or exchange shall be treated as gain
described in subsection (a) to the extent attrib-
utable to unrealized small business stock gain.
‘‘(B) 
UNREALIZED
SMALL
BUSINESS
STOCK
GAIN.—For purposes of subparagraph
(A), the term ‘unrealized small business stock
gain’ means the amount which would be eligible
gain if the qualified small business stock held
by such company had been sold at the time of
the sale of the interest referred to in subpara-
graph (A).
‘‘(C) CERTAIN
RULES
TO
APPLY.—Rules
similar to the rules of paragraphs (2)(B) and
(3) of subsection (g) shall apply for purposes of
this subsection.
‘‘(3) APPLICATION
OF
ACTIVE
BUSINESS
RE-
QUIREMENT
TO
STOCK
HELD
BY
SPECIALIZED
SMALL
BUSINESS
INVESTMENT
COMPANIES.—For
purposes of determining whether stock held by a
specialized small business investment company is
qualified small business stock, subsection (e) shall be
applied by treating as a qualified trade or business
any trade or business in which such company is per-
mitted to invest under the Small Business Invest-
ment Act of 1958.
‘‘(4) SPECIALIZED
SMALL
BUSINESS
INVEST-
MENT COMPANY.—For purposes of this subsection,