I
105TH CONGRESS
1ST SESSION
H. R. 391
To amend the Internal Revenue Code of 1986 to provide incentives for
investments in tax enterprise zone businesses and domestic businesses.
IN THE HOUSE OF REPRESENTATIVES
JANUARY 9, 1997
Mr. ANDREWS introduced the following bill; which was referred to the
Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to provide
incentives for investments in tax enterprise zone busi-
nesses and domestic businesses.
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 ‘‘Domestic Investment
Economic Growth Act’’.
SEC. 2. EXCLUSION FOR GAIN ON INVESTMENTS IN ENTER-
PRISE ZONE BUSINESSES AND DOMESTIC
BUSINESSES.
(a) IN GENERAL.—Part III of subchapter B of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to
items specifically excluded from gross income) is amended
by redesignating section 138 as section 139 and by insert-
ing after section 137 the following new section:
‘‘SEC. 138. GAIN ON INVESTMENTS IN ENTERPRISE ZONE
BUSINESSES AND DOMESTIC BUSINESSES.
‘‘(a) GENERAL RULE.—Gross income does not in-
clude any qualified investment gain.
‘‘(b) QUALIFIED INVESTMENT GAIN.—For purposes
of this section—
‘‘(1) IN GENERAL.—The term ‘qualified invest-
ment gain’ means the eligible percentage of any
long-term capital gain properly attributable to any
sale or exchange of a qualified investment, other
than a sale or exchange to a related person (within
the meaning of section 267(b)).
‘‘(2) ELIGIBLE PERCENTAGE.—The term ‘eligi-
ble percentage’ means—
‘‘(A) 100 percent, in the case of a qualified
investment with respect to an enterprise zone
business or urban enterprise zone, and
‘‘(B) 50 percent, in the case of any quali-
fied investment not described in subparagraph
(A).
‘‘(c) QUALIFIED INVESTMENTS.—For purposes of
this section—
‘‘(1) IN GENERAL.—The term ‘qualified invest-
ment’ means any eligible investment, if the holding
period of the taxpayer with respect to such invest-
ment is not less than 1 year.
‘‘(2) ELIGIBLE INVESTMENT.—The term ‘eligi-
ble investment’ means the following:
‘‘(A) Any stock, partnership interest, or
other ownership interest in an enterprise zone
business or domestic business.
‘‘(B) Any real property located entirely
within an urban enterprise zone.
‘‘(C) Any fund of a regulated investment
company, if all of the investments held by such
fund in each year are qualified investments.
‘‘(3) ENTERPRISE ZONE BUSINESS.—The term
‘enterprise zone business’ has the meaning given to
such term by section 1397B.
‘‘(4) DOMESTIC BUSINESS.—The term ‘domes-
tic business’ means any corporation or partnership
(other than an enterprise zone business) incor-
porated or formed in the United States if—
‘‘(A) not less than 80 percent of the em-
ployees of the corporation or partnership are
United States citizens employed within the
United States, and
‘‘(B) either—
‘‘(i) the corporation devotes more then
25 percent of its annual expenses to pay-
roll, or
‘‘(ii) substantially all of the activities
of the corporation or partnership involve
the active conduct of 1 or more trades or
businesses in the United States.
‘‘(d) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) URBAN
ENTERPRISE
ZONE.—The term
‘urban enterprise zone’ means any empowerment
zone, or enterprise community, which is located
within an urban area (as defined in section 1393).
‘‘(2) TREATMENT
OF
NEW
BUSINESSES.—A
new corporation or partnership shall be treated as
an enterprise zone business or domestic business if
such corporation or partnership certifies an intent to
comply with the requirements set forth in subsection
(c)(3) or (c)(4), as the case may be.
‘‘(e) COORDINATION WITH INVESTMENT SAVINGS
ACCOUNT PROVISIONS.—Subsection (a) shall not apply to
any amount distributed out of an investment savings ac-
count (within the meaning of section 221(c)).’’
(b) CLERICAL AMENDMENT.—The table of sections
for part III of subchapter B of chapter 1 of such Code
is amended by striking the item relating to section 138
and inserting the following:
‘‘Sec. 138. Gain on investments in enterprise zone businesses and
domestic businesses.
‘‘Sec. 139. Cross references to other Acts.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply taxable years beginning after the
date of the enactment of this Act.
SEC. 3. DEDUCTION FOR CONTRIBUTIONS TO INVESTMENT
SAVINGS ACCOUNTS.
(a) IN GENERAL.—Part VII of subchapter B of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to
additional itemized deductions for individuals) is amended
by redesignating section 221 as section 222 and by insert-
ing after section 220 the following new section:
‘‘SEC. 221. CONTRIBUTIONS TO INVESTMENT SAVINGS AC-
COUNTS.
‘‘(a) DEDUCTION ALLOWED.—
‘‘(1) IN GENERAL.—In the case of an individ-
ual, there shall be allowed as a deduction for the
taxable year an amount equal to the sum of—
‘‘(A) 50 percent of the qualified contribu-
tions of the individual to an investment savings
account for the taxable year, and
‘‘(B) if the individual is not less than 591⁄2
years of age at the end of the taxable year, an
amount equal to the sum of—
‘‘(i) 50 percent of the qualified con-
tributions of the individual to an invest-
ment savings account for the 10th preced-
ing taxable year, to the extent such con-
tributions remain in the account, and
‘‘(ii) 50 percent of the qualified con-
tributions of the individual to an invest-
ment savings account for the 20th preced-
ing taxable year, to the extent such con-
tributions remain in the account.
‘‘(2) 
MAXIMUM
ANNUAL
AMOUNT.—The
amount allowable as a deduction under paragraph
(1) to any individual for a taxable year shall not ex-
ceed $100,000.
‘‘(b) QUALIFIED CONTRIBUTIONS.—For purposes of
this section—
‘‘(1) IN GENERAL.—The qualified contributions
of an individual for any taxable year shall be the
amount equal to the lesser of—
‘‘(A) the individual’s qualified savings in-
crease amount for the taxable year, or
‘‘(B) the contributions made by the indi-
vidual to the investment savings account during
the taxable year.
‘‘(2) QUALIFIED SAVINGS INCREASE AMOUNT.—
The term ‘qualified savings increase amount’ means
the amount (if any) by which—
‘‘(A) the individual’s qualified net worth
increase amount, exceeds
‘‘(B) the applicable threshold amount.
‘‘(3) 
QUALIFIED
NET
WORTH
INCREASE
AMOUNT.—
‘‘(A) IN
GENERAL.—The term ‘qualified
net worth increase amount’ means the amount
(if any) by which—
‘‘(i) qualified net worth on December
31 of the taxable year, exceeds
‘‘(ii) qualified net worth on January 1
of such taxable year.
‘‘(B) QUALIFIED NET WORTH.—The term
‘qualified net worth’ means net worth, deter-
mined without regard to any portion of the
value of property which is in excess of the ad-
justed basis.
‘‘(4) APPLICABLE THRESHOLD AMOUNT.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), the term ‘applicable thresh-
old amount’ means the national average quali-
fied net worth increase amount determined by
the Secretary for the taxable year for the tax
rate category of the taxpayer.
‘‘(B) 1ST YEAR.—For taxable years begin-
ning in 1997, the term ‘applicable threshold
amount’ means the applicable percentage of the
taxpayer’s adjusted gross income, determined in
accordance with the following table:
Applicable
‘‘If adjusted gross income is:
Percentage:
Not over $13,000 .....................................................................
Over $13,000 but not over $24,000 ........................................
Over $24,000 but not over $36,000 ........................................
Over $36,000 but not over $55,000 ........................................
Over $55,000 but not over $70,000 ........................................
Over $70,000 but not over $100,000 ......................................
Over $100,000 but not over $140,000 ....................................
Over $140,000 but not over $200,000 ....................................
Over $200,000 but not over $500,000 ....................................
Over $500,000 but not over $1,000,000 .................................
Over $1,000,000 ......................................................................
30.
‘‘(5) TIME
WHEN
CONTRIBUTIONS
DEEMED
MADE.—A taxpayer shall be deemed to have made a
contribution to an investment savings account on the
last day of the preceding taxable year if the con-
tribution is made on account of such taxable year
and is made not later than the time prescribed by
law for filing the return for such taxable year (not
including extensions thereof).
‘‘(c) INVESTMENT SAVINGS ACCOUNT.—For pur-
poses of this section, the term ‘investment savings ac-
count’ means a trust created or organized in the United
States for the exclusive benefit of an individual and the
individual’s beneficiaries, but only if the written governing
instrument creating the trust meets the following require-
ments:
‘‘(1) No contribution will be accepted unless it
is in cash.
‘‘(2) The trustee is a bank (as defined in sec-
tion 408(n)) or another person who demonstrates to
the satisfaction of the Secretary that the manner in
which that person will administer the trust will be
consistent with the requirements of this section.
‘‘(3) The trust assets will be invested only in—
‘‘(A) eligible investments (as defined by
section 138(c)(2)),
‘‘(B) bonds issued by enterprise zone busi-
ness and domestic business, and
‘‘(C) loans to enterprise zone businesses
and domestic businesses.
‘‘(4) The interest of the individual in the bal-
ance of the individual’s account is nonforfeitable.
‘‘(5) The assets of the trust will not be commin-
gled with other property except in a common trust
fund or common investment fund.
‘‘(d) TAX TREATMENT OF DISTRIBUTIONS.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, any amount distributed out
of an investment savings account shall be included
in the gross income of the distributee for the taxable
year in which the distribution is received.
‘‘(2) AMOUNTS
HELD
IN
ACCOUNT
FOR
YEARS.—Paragraph (1) shall not apply to any dis-
tribution from an investment savings account to the
extent attributable to amounts held in the account
for at least a 10-year period.
‘‘(3) EXCESS CONTRIBUTIONS RETURNED BE-
FORE DUE DATE OF RETURN.—Paragraph (1) shall
not apply to the distribution of any contribution paid
during a taxable year to an investment savings ac-
count to the extent that such contribution exceeds
the amount allowable as a deduction under sub-
section (a) if—
‘‘(A) such distribution is received on or be-
fore the day prescribed by law (including exten-
sions of time) for filing such individual’s return
for such taxable year,
‘‘(B) no deduction is allowed under sub-
section (a) with respect to such excess contribu-
tion, and
‘‘(C) such distribution is accompanied by
the amount of net income attributable to such
excess contribution.
Any net income described in subparagraph (C) shall
be included in the gross income of the individual for
the taxable year in which such excess contribution
was made.
‘‘(e) TAX TREATMENT OF ACCOUNTS.—
‘‘(1) EXEMPTION FROM TAX.—An investment
savings account is exempt from taxation under this
subtitle unless such account has ceased to be an in-
vestment savings account by reason of paragraph
(2). Notwithstanding the preceding sentence, any
such account is subject to the taxes imposed by sec-
tion 511 (relating to imposition of tax on unrelated
business income of charitable, etc. organizations).
‘‘(2) LOSS OF EXEMPTION OF ACCOUNT WHERE
INDIVIDUAL
ENGAGES
IN
PROHIBITED
TRANS-
ACTION.—
‘‘(A) IN GENERAL.—If the individual for
whose benefit an investment savings account is
established or any individual who contributes to
such account engages in any transaction prohib-
ited by section 4975 with respect to the ac-
count, the account shall cease to be an invest-
ment savings account as of the first day of the
taxable year (of the individual so engaging in
such transaction) during which such transaction
occurs.
‘‘(B) ACCOUNT TREATED AS DISTRIBUTING
ALL ITS ASSETS.—In any case in which any ac-
count ceases to be an investment savings ac-
count by reason of subparagraph (A) as of the
first day of any taxable year, paragraph (1) of
subsection (d) shall apply as if there was a dis-
tribution on such first day in an amount equal
to the fair market value (on such first day) of
all assets in the account (on such first day).
‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU-
RITY.—If, during any taxable year, the individual for
whose benefit an investment savings account is es-
tablished, or any individual who contributes to such
account, uses the account or any portion thereof as
security for a loan, the portion so used shall be
treated as distributed to the individual so using such
portion.
‘‘(f) ADDITIONAL TAX ON CERTAIN AMOUNTS IN-
CLUDED IN GROSS INCOME.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, in the case of any distribu-
tion from an investment savings account, the tax li-
ability of each distributee under this chapter for the
taxable year in which the distribution is received
shall be increased by an amount equal to 10 percent
of the amount of the distribution which is includible
in the gross income of such distributee for such tax-
able year.
‘‘(2) 
QUALIFIED
DISTRIBUTIONS
FROM
AMOUNTS HELD IN ACCOUNT FOR 5 YEARS.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
not apply to any qualified distribution from an
investment savings account, to the extent at-
tributable to amounts held in the account for at
least a 5-year period.
‘‘(B) 
QUALIFIED
DISTRIBUTION.—For
purposes of subparagraph (A), the term ‘quali-
fied distribution’ means any distribution re-
ceived from an investment savings account, to
the extent used within a reasonable period to
pay any of the following expenses:
‘‘(i) HOME
PURCHASE
EXPENSES.—
Expenses relating to the acquisition of a
principal residence (within the meaning of
section 1034) for the individual for whose
benefit the account is established.
‘‘(ii) AUTOMOBILE
PURCHASE
EX-
PENSES.—Expenses relating to the acquisi-
tion of an automobile for the individual for
whose benefit the account is established.
‘‘(iii) EDUCATION EXPENSES.—Quali-
fied higher education expenses (within the
meaning of section 135(c)(2)).
‘‘(iv) MEDICAL
EXPENSES.—Medical
expenses (within the meaning of section
72(t)(2)(B)).
‘‘(3) ADDITIONAL EXCEPTIONS.—Paragraph (1)
shall not apply if the distribution is made after the
individual for whose benefit the investment savings
account is established—
‘‘(A) attains 591⁄2 years of age, or
‘‘(B) becomes disabled within the meaning
of section 72(m)(7) or dies.
‘‘(4) DISQUALIFICATION CASES.—If an amount
is includible in the gross income of an individual for
a taxable year because such amount is required to
be treated as a distribution under paragraph (2) or
(3) of subsection (e), such individual’s tax liability
under this chapter for such taxable year shall be in-
creased by an amount equal to 10 percent of such
amount required to be treated as a distribution and
included in the gross income of such individual.
‘‘(g) COMMUNITY PROPERTY LAWS.—This section
shall be applied without regard to any community property
laws.
‘‘(h) SPECIAL RULES.—For purposes of this sec-
tion—
‘‘(1) ORDERING RULE.—Distributions from an
investment savings account shall be treated as hav-
ing been made—
‘‘(A) first from the earliest contribution re-
maining in the account at the time of the dis-
tribution,
‘‘(B) second from other contributions in
the order in which made, and
‘‘(C) third from earnings.
‘‘(2) CUSTODIAL ACCOUNTS.—A custodial ac-
count shall be treated as a trust if the assets of such
account are held by a bank (as defined in section
408(n)) or another person who demonstrates, to the
satisfaction of the Secretary, that the manner in
which he will administer the account will be consist-
ent with the requirements of this section, and if the
custodial account would, except for the fact that it
is not a trust, constitute an investment savings ac-
count described in subsection (c). For purposes of
this title, in the case of a custodial account treated
as a trust by reason of the preceding sentence, the
custodian of such account shall be treated as the
trustee thereof.
‘‘(i) REPORTS.—
‘‘(1) IN GENERAL.—The trustee of an invest-
ment savings account shall make such reports re-
garding such account to the Secretary and to the in-
dividual for whose benefit the account is maintained
with respect to contributions, distributions, and such
other matters as the Secretary may require under
regulations. Except as provided in paragraph (2),
the reports required by this subsection shall be filed
at such time and in such manner and furnished to
such individuals at such time and in such manner as
may be required by those regulations.
‘‘(2) FIRST REPORT.—The trustee of an invest-
ment savings account shall make the first report re-
quired under paragraph (1) not later than the expi-
ration of the 3-month period beginning on the date
on which the account is established.’’
(b) ALLOWANCE OF DEDUCTION IN COMPUTING AD-
JUSTED GROSS INCOME.—Subsection (a) of section 62 of
such Code (defining adjusted gross income) is amended
by inserting after paragraph (16) the following new para-
graph:
‘‘(17) CONTRIBUTIONS
TO
INVESTMENT
SAV-
INGS ACCOUNTS.—The deduction allowed by section
221(a).’’
(c) CONTRIBUTION NOT SUBJECT TO GIFT TAX.—
Section 2503 of such Code (relating to taxable gifts) is
amended by adding at the end the following new sub-
section:
‘‘(h) INVESTMENT SAVINGS ACCOUNTS.—Any con-
tribution made by an individual to an investment savings
account described in section 221(c) which is allowable as
a deduction under section 221 shall not be treated as a
transfer of property by gift for purposes of this chapter.’’
(d) TAX ON EXCESS CONTRIBUTIONS.—Section 4973
of such Code (relating to tax on excess contributions to
individual retirement accounts, certain section 403(b) con-
tracts, and certain individual retirement annuities) is
amended—
(1) in subsection (a), by striking ‘‘or’’ at the
end of paragraph (2), by redesignating paragraph
(3) as paragraph (4), and by inserting after para-
graph (2) the following new paragraph:
‘‘(3) an investment savings account (within the
meaning of section 221(c)), or’’, and
(2) by adding at the end the following new sub-
section:
‘‘(e) EXCESS CONTRIBUTIONS TO INVESTMENT SAV-
INGS ACCOUNTS.—For purposes of this section, in the
case of an investment savings account, the term ‘excess
contributions’ means the amount by which the amount
contributed for the taxable year to the account exceeds
the amount allowable as a deduction under section 221
for such taxable year. For purposes of this subsection, any
contribution which is distributed out of the investment
savings account in a distribution to which section
221(d)(3) applies shall be treated as an amount not con-
tributed.’’
(e) TAX ON PROHIBITED TRANSACTIONS.—
(A) Section 4975 of such Code (relating to
prohibited transactions) is amended by adding
at the end of subsection (c) the following new
paragraph:
‘‘(5) SPECIAL RULE FOR INVESTMENT SAVINGS
ACCOUNTS.—An individual for whose benefit an in-
vestment savings account is established and any con-
tributor to such account shall be exempt from the
tax imposed by this section with respect to any
transaction concerning such account (which would
otherwise be taxable under this section) if, with re-
spect to such transaction, the account ceases to be
an investment savings account by reason of the ap-
plication of section 221(e)(2)(A) to such account.’’,
and
(B) Paragraph (1) of section 4975(e) of
such Code is amended by striking ‘‘or’’ at the
end of subparagraph (D), by redesignating sub-
paragraph (E) as subparagraph (F), and by in-
serting after subparagraph (D) the following
new subparagraph:
‘‘(E) an investment savings account de-
scribed in section 221(c), or’’.
(f) FAILURE TO PROVIDE REPORTS ON INVESTMENT
SAVINGS ACCOUNTS.—Paragraph (2) of section 6693(a)
of such Code (relating to failure to provide reports on indi-
vidual retirement accounts or annuities) is amended by
striking ‘‘and’’ at the end of subparagraph (A), by striking
the period at the end of subparagraph (B) and inserting
‘‘, and’’, and by adding at the end the following new sub-
paragraph:
‘‘(C) section 221(i) (relating to investment
savings accounts).’’
(g) ADDITIONAL PENALTIES.—Part I of subchapter
B of chapter 68 of such Code (relating to assessable pen-
alties) is amended by adding at the end the following new
section:
‘‘SEC. 6716. PROMOTION OF NONQUALIFIED INVESTMENT
AS ELIGIBLE FOR DOMESTIC INVESTMENT
ECONOMIC GROWTH EXCLUSION OR DEDUC-
TION.
‘‘(a) IMPOSITION OF PENALTY.—If any person—
‘‘(1) makes a statement that an investment or
account is eligible for an exclusion under section 138
or deduction under section 221, and
‘‘(2) at the time such statement is made, there
was no reasonable basis for such statement,
such person shall pay a penalty equal to twice the aggre-
gate amount of exclusions and deductions taken by other
persons under such sections in reliance on such statement.
‘‘(b) PENALTY
IN
ADDITION
TO
OTHER
PEN-
ALTIES.—The penalty imposed by subsection (a) shall be
in addition to any other penalty provided by law.’’
(h) CLERICAL AMENDMENTS.—
(1) The table of sections for part VII of sub-
chapter B of chapter 1 of such Code is amended by
striking the item relating to section 221 and insert-
ing the following new items:
‘‘Sec. 221. Contributions to investment savings accounts.
‘‘Sec. 222. Cross reference.’’
(2)(A) The section heading for section 4973 of
such Code is amended to read as follows:
‘‘SEC. 4973. TAX ON EXCESS CONTRIBUTIONS TO INDIVID-
UAL RETIREMENT ACCOUNTS, MEDICAL SAV-
INGS ACCOUNTS, INVESTMENT SAVINGS AC-
COUNTS, CERTAIN 403(b) CONTRACTS, AND
CERTAIN INDIVIDUAL RETIREMENT ANNU-
ITIES.’’
(B) The table of sections for chapter 43 of such
Code is amended by striking the item relating to sec-
tion 4973 and inserting the following new item:
‘‘Sec. 4973. Tax on excess contributions to individual retirement
accounts, medical savings accounts, investment sav-
ings accounts, certain 403(b) contracts, and certain
individual retirement annuities.’’
(3)(A) The section heading for section 6693 of
such Code is amended to read as follows: