‘‘(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-
mined at the rate applicable under section
6621(a)(2)) that would accrue—
‘‘(i) during the period beginning on
the date the stock was purchased by the
taxpayer and ending on the date of such
disposition by the taxpayer,
‘‘(ii) on an amount equal to the aggre-
gate decrease in tax of the taxpayer result-
ing from the deduction allowed under this
subsection (a) with respect to such stock.
‘‘(C) SPECIAL RULE.—Any increase in tax
under subparagraph (A) shall not be treated as
a tax imposed by this chapter for purposes of—
‘‘(i) determining the amount of any
credit allowable under this chapter, and
‘‘(ii) determining the amount of the
tax imposed by section 55.
‘‘(f) DISQUALIFICATION.—
‘‘(1) ISSUER CEASES TO QUALIFY.—If, during
the 10-year period beginning on the date enterprise
zone stock was purchased by the taxpayer, the issuer
of such stock ceases to be a qualified enterprise zone
issuer (determined without regard to subsection
(d)(3)), then notwithstanding any provision of this
subtitle other than paragraph (2), the taxpayer shall
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
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