ment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986.
SEC. 2. EXCLUSION FOR GAIN FROM CERTAIN SMALL BUSI-
NESS STOCK.
(a) GENERAL RULE.—Part I of subchapter P of
chapter 1 (relating to capital gains and losses) is amended
by adding at the end thereof the following new section:
‘‘SEC. 1202. EXCLUSION FOR GAIN FROM CERTAIN SMALL
BUSINESS STOCK.
‘‘(a) EXCLUSION.—
‘‘(1) IN GENERAL.—Gross income shall not in-
clude the sum of—
‘‘(A) 50 percent of any gain from the sale
or exchange of qualified small business stock
(other than seed capital stock) held for more
than 5 years, plus
‘‘(B) the amounts determined by applying
the applicable percentages to the appropriate
categories of gain from the sale or exchange of
qualified small business stock which is seed cap-
ital stock held for more than 5 years.
‘‘(2) APPLICABLE PERCENTAGE.—For purposes
of paragraph (1), the applicable percentage shall be
computed as follows:
The applicable
‘‘In the case of:
percentage is:
5-year gain ...................................................................
6-year gain ...................................................................
7-year gain ...................................................................
8-year gain ...................................................................
9-year gain ...................................................................
10-year gain .................................................................
100.
‘‘(3) CATEGORIES OF GAIN.—
‘‘(A) 10-YEAR
GAIN.—The term ‘10-year
gain’ means gain determined by taking into ac-
count only gain 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 the gain deter-
mined by taking into account only gain from
qualified small business stock with a holding pe-
riod of more than 5, 6, 7, 8, or 9 years but not
more than 6, 7, 8, 9, or 10 years, respectively.
‘‘(b) QUALIFIED SMALL BUSINESS STOCK; SEED
CAPITAL STOCK.—For purposes of this section—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this section, the term ‘qualified small busi-
ness stock’ means any stock in a corporation which
is originally issued on or after January 1, 1993, if—
‘‘(A) as of the date of issuance, such cor-
poration is a qualified small business, and
‘‘(B) except as provided in subsections (e),
(f), and (g), such stock is acquired by the tax-
payer at its original issue (directly or through
an underwriter)—
‘‘(i) in exchange for money or other
property (not including stock), or
‘‘(ii) as compensation for services
(other than services performed as an un-
derwriter of such stock).
‘‘(2) ACTIVE BUSINESS REQUIREMENT.—Stock
in a corporation shall not be treated as qualified
small business stock unless, during substantially all
of the taxpayer’s holding period for such stock, such
corporation meets the active business requirements
of subsection (d).
‘‘(3) CERTAIN PURCHASES BY CORPORATION OF
ITS OWN STOCK.—
‘‘(A) IN GENERAL.—Stock issued by a cor-
poration shall not be treated as qualified small
business stock if such corporation has pur-
chased or purchases any of its stock within the
2-year period beginning 1 year before the date
of the issuance of such stock.
‘‘(B) EXCEPTION WHERE BUSINESS PUR-
POSE.—Subparagraph (A) shall not apply
where the issuing corporation establishes that
there was a business purpose for the purchase
of the stock and such purchase is not inconsist-
ent with the purposes of this section. Except as
provided in regulations, the preceding sentence
shall not apply to any purchase which—
‘‘(i) is part of a transaction or series
of transactions in which the corporation
purchases not more than 5 percent (by
vote or value) of the outstanding shares of
the corporation, or
‘‘(ii) is a purchase by the corporation
of convertible preferred stock of the cor-
poration but only if such purchase is re-
quired by the terms of the stock being pur-
chased.
‘‘(C) MEMBERS OF AFFILIATED GROUP.—
For purposes of this paragraph, the purchase of
any stock of the issuing corporation by any cor-
poration which, as of the time of the purchase,
is a member of the same affiliated group (with-
in the meaning of section 1504) as the issuing
corporation shall be treated as a purchase by
the issuing corporation of its stock.
‘‘(4) SEED CAPITAL STOCK.—The term ‘seed
capital stock’ means stock which is qualified small
business stock in a qualified small business, as de-
termined under subsection (c) by substituting
‘$5,000,000’ for ‘$100,000,000’ each place it ap-
pears in subsection (c)(1).
‘‘(c) QUALIFIED SMALL BUSINESS.—For purposes of
this section—
‘‘(1) IN GENERAL.—The term ‘qualified small
business’ means any domestic corporation if—
‘‘(A) the aggregate capitalization of such
corporation (or any predecessor thereof) at all
times on or after January 1, 1993, and before
the issuance did not exceed $100,000,000, and
‘‘(B) the aggregate capitalization of such
corporation immediately after the issuance (de-
termined by taking into account amounts to be
received in the issuance) does not exceed
$100,000,000.
‘‘(2) AGGREGATE
CAPITALIZATION.—For pur-
poses of paragraph (1), the term ‘aggregate capital-
ization’ means the excess of—
‘‘(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) ELIGIBLE
CORPORATION.—For purposes
of this subsection—
‘‘(A) IN GENERAL.—The term ‘eligible cor-
poration’ means any domestic corporation; ex-
cept that such term shall not include—
‘‘(i) any corporation predominantly
engaged in a disqualified business,
‘‘(ii) any personal service corporation
(within the meaning of section 269A(b)),
‘‘(iii) a DISC,
‘‘(iv) a corporation with respect to
which an election under section 936 is in
effect,
‘‘(v) any regulated investment com-
pany, real estate investment trust, or
REMIC,
‘‘(vi) any cooperative, and
‘‘(vii) in the case of a corporate share-
holder, any corporation which at any time
was a subsidiary (as defined in paragraph
(4)(C)) of such corporate shareholder.
‘‘(B) DISQUALIFIED BUSINESS.—The term
‘disqualified business’ means—
‘‘(i) any banking, insurance, financ-
ing, or similar business,
‘‘(ii) any farming business (other than
the business of raising or harvesting trees),
‘‘(iii) any business involving the pro-
duction or extraction of products of a char-
acter with respect to which a deduction is
allowable under section 613 or 613A, and
‘‘(iv) any business of franchising or
operating a hotel, motel, or restaurant or
similar business.
‘‘(4) 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. For purposes of the
preceding sentence, a corporation’s ratable
share shall be based on its share of the total
combined voting power of the stock of the sub-
sidiary.
‘‘(B) PORTFOLIO STOCK OR SECURITIES.—
A corporation shall be treated as failing to meet
the requirements of paragraph (1) for any pe-
riod during which more than 10 percent of the
value of its assets consists of stock or securities
in other corporations which are not subsidiaries
of such corporation (other than assets described
in paragraph (5)).
‘‘(C) SUBSIDIARY.—For purposes of this
paragraph, a corporation shall be considered a
subsidiary if the parent corporation owns more
than 50 percent of the combined voting power
of all classes of stock entitled to vote, or more
than 50 percent in value of all outstanding
stock, of such corporation.
‘‘(5) 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.
‘‘(6) MAXIMUM
REAL
ESTATE
HOLDINGS.—A
corporation shall be treated as failing to meet the re-
quirements of paragraph (1) for any period during
which more than 10 percent of the total value of its
assets consists of real property which is not used (or
to be used) in the active conduct of a trade or busi-
ness. For purposes of the preceding sentence—
‘‘(A) the ownership of, dealing in, or rent-
ing of real property shall not be treated as the
active conduct of a trade or business; and
‘‘(B) the total value of the assets and of
any real property shall be reduced by all liabil-
ities to which the property is subject.
‘‘(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) EXCEPTION FOR SMALL BUSINESS INVEST-
MENT COMPANIES.—This subsection shall not apply
to any small business investment company described
in section 301(d) of the Small Business Investment
Act of 1958 (15 U.S.C. 682(d)).
‘‘(e) STOCK ACQUIRED ON CONVERSION OF OTHER
STOCK.—If any stock is acquired through the conversion
of other stock which is qualified small business stock in
the hands of the taxpayer—
‘‘(1) the stock so acquired shall be treated as
qualified small business stock in the hands of the
taxpayer, and
‘‘(2) the stock so acquired shall be treated as
having been held during the period during which the
converted stock was held.
‘‘(f) SPECIAL RULES FOR WARRANTS AND CERTAIN
CONVERTIBLE INVESTMENTS.—For purposes of this sec-
tion—
‘‘(1) IN GENERAL.—In the case of stock which
is acquired by the taxpayer through the exercise of
an applicable warrant, through the conversion of
convertible debt, or in exchange for securities of the
corporation in a transaction described in section
368—
‘‘(A) such stock shall be treated as ac-
quired by the taxpayer at original issue,
‘‘(B) the holding period of such stock shall
be treated for purposes of subsection (a) as in-
cluding the period such warrant or debt was
held by the taxpayer, or such security was out-
standing, and
‘‘(C) such stock shall be treated as meeting
the requirements of subsection (c) if such re-
quirements were met at the time the warrant,
debt, or security was acquired by the taxpayer.
‘‘(2) ISSUE PRICE FOR CONVERTIBLE DEBT OR
SECURITY.—For purposes of subsection (c)(1), in
the case of a debt instrument converted to stock, or
stock issued in exchange for securities in a trans-
action 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
debt or security.
‘‘(3) APPLICABLE WARRANT.—For purposes of
this subsection, the term ‘applicable warrant’ means
a warrant which—
‘‘(A) was granted in connection with the
performance of services for the corporation
granting it (or its parent or subsidiary), and
‘‘(B) by its terms is not transferable other
than by will or the laws of descent or distribu-
tion.
‘‘(g) SPECIAL RULE FOR OPTIONS.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, in the case of stock which is acquired by the
taxpayer through the exercise of an applicable op-
tion—
‘‘(A) such stock shall be treated as ac-
quired by the taxpayer at original issue,
‘‘(B) such stock shall be treated as having
been held during the period such option was
held by the taxpayer, and
‘‘(C) such stock shall be treated as meeting
the requirements of subsection (c) if such re-
quirements were met at the time the option was
granted.
‘‘(2) APPLICABLE
OPTION.—For purposes of
this subsection, the term ‘applicable option’ means
an option which—
‘‘(A) was granted in connection with the
performance of services for the corporation
granting it (or its parent or subsidiary), and
‘‘(B) by its terms is not transferable other
than by will or the laws of descent or distribu-
tion.
‘‘(h) TREATMENT OF PASS-THRU ENTITIES.—
‘‘(1) IN GENERAL.—Any amount included in in-
come by reason of holding an interest in a pass-thru
entity shall be treated as gain described in sub-
section (a) if such amount meets the requirements
of paragraph (2).
‘‘(2) REQUIREMENTS.—An amount meets the
requirements of this paragraph if—
‘‘(A) such amount is attributable to gain
on the sale or exchange by the pass-thru entity
of stock which is qualified small business stock
in the hands of such entity and which was held
by such entity for more than 5 years, and
‘‘(B) 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 stock and at all times
thereafter before the disposition of such stock
by such pass-thru entity.
‘‘(3) LIMITATION BASED ON INTEREST ORIGI-
NALLY HELD BY TAXPAYER.—Paragraph (1) shall
not apply to any amount to the extent such amount
exceeds the amount to which paragraph (1) would
have applied if such amount were determined by ref-
erence to the interest the taxpayer held in the pass-
thru entity on the date the qualified small business
stock was acquired.
‘‘(4) 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.
‘‘(i) CERTAIN TAX-FREE AND OTHER TRANSFERS.—
For purposes of this section—
‘‘(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) subject to the limitation of subsection
(h)(3), from a partnership to a partner of stock
with respect to which the requirements of sub-
section (h) are met at the time of the transfer
(without regard to the 5-year holding require-
ment),
‘‘(D) 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), but only if requirements similar to
the requirements of subsection (h) are met with
respect to the stock,
‘‘(E) 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, or
‘‘(F) as a stock distribution of qualified
small business stock in a transaction not sub-
ject to tax under section 305.
‘‘(3) CERTAIN RULES MADE APPLICABLE.—In
the case of distributions or transactions described in
subparagraph (E) or (F) of section 368(a)(1), rules
similar to the rules of section 1244(d)(2) shall apply
for purposes of this section.
‘‘(4) 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 qualified small
business stock is transferred for other stock,
such transfer shall be treated as a transfer to
which this subsection applies solely with respect
to the person receiving such other stock.
‘‘(B) 
LIMITATION.—This 
section 
shall
apply to the sale or exchange of stock treated
as qualified small business stock by reason of
subparagraph (A) only to the extent of the gain
(if any) which would have been recognized at
the time of the transfer described in subpara-
graph (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.
‘‘(j) BASIS RULES.—
‘‘(1) STOCK EXCHANGED FOR PROPERTY.—For
purposes of this section, in the case where the tax-
payer transfers property (other than money or
stock) to a corporation in exchange for stock in such
corporation—
‘‘(A) such stock shall be treated as having
been acquired by the taxpayer on the date of
such exchange, and
‘‘(B) the basis of such stock in the hands
of the taxpayer shall in no event be less than
the fair market value of the property ex-
changed.
Notwithstanding subparagraph (B), for purposes of
subsection (c)(1), the adjusted basis to the corpora-
tion of the property received shall be the fair market
value of such property at the time of the determina-
tion.
‘‘(2) BASIS OF S CORPORATION STOCK.—For
purposes of determining the amount of gain to which
this section applies, the adjusted basis of stock in an
S corporation shall in no event be less than its ad-
justed basis determined without regard to any ad-
justment to the basis of such stock under section
1367.
‘‘(k) APPLICATION OF TAX INCENTIVE TO CURRENT
STOCK HOLDINGS OF INVESTORS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) a taxpayer holds any stock on Decem-
ber 31, 1992, which, at the time it was issued,
would have been treated as qualified small busi-
ness stock if such determination had been made
without regard to the time such stock was is-
sued, and
‘‘(B) the value of such stock on December
31, 1992 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 attributable to such sale shall be treated
as realized and recognized or accrued (and the hold-
ing period of the reacquired stock shall be treated as
beginning) on December 31, 1992. For purposes of
applying this section, the requirement of subsection
(b)(1) that the stock must have been issued on or
after January 1, 1993, shall not apply.
‘‘(2) ELECTION.—An election under paragraph
(1) with respect to any stock shall be made in such
manner as the Secretary may prescribe. Such an
election, once made with respect to any stock, shall
be irrevocable.
‘‘(l) REGULATIONS.—The Secretary shall prescribe
such regulations as may be appropriate to carry out the
purposes of this section, including regulations to prevent
the avoidance of the purposes of this section through split-
ups or otherwise.’’
(b) MAXIMUM 14 PERCENT TAX RATE.—
(1) INDIVIDUALS.—Section 1(h) 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 rates 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 gain
for any taxable year attributable to the sale or
exchange of any qualified small business stock
held for more than 5 years, then the tax im-
posed 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 gain or loss from quali-
fied small business stock held for
more than 5 years for purposes of
subparagraphs (A) and (B) thereof,
plus
‘‘(II) 14 percent of the net cap-
ital gain determined by only taking
into account such gain or loss.
‘‘(B) DEFINITION.—For purposes of this
paragraph, the term ‘qualified small business
stock’ has the meaning given such term by sec-
tion 1202.’’
(2) 
CORPORATIONS.—Section 
1201(a) 
is
amended—