means the conduct of a trade or business that derives no 
more than 5 percent of its gross income from passive ac-
tivities (as defined by section 469). 
‘‘(b) INCOME AND EXPENSES WITHIN A NATIONAL 
ENTERPRISE ZONE.— 
‘‘(1) GROSS INCOME.—Gross income from with-
in a National Enterprise Zone shall mean— 
‘‘(A) compensation for labor or personal 
services performed by a natural person who is 
based in a National Enterprise Zone; 
‘‘(B) rentals or royalties from property lo-
cated in a National Enterprise Zone; 
‘‘(C) gains, profits and income derived 
from the sale of inventory property held within 
a National Enterprise Zone; and 
‘‘(D) income from the sale of property that 
is produced, created, fabricated, manufactured, 
extracted, processed, cured, aged, grown or har-
vested within the zone. 
‘‘(2) EXPENSES.—Expenses shall be allocated 
and apportioned to the income producing activities 
to which they are related. Expenses which are not 
allocable or apportioned to any specific income pro-
ducing activities shall be allocated on the basis of 
gross income such that the ratio of the expense allo-
cated to the National Enterprise Zone is the same 
as the ratio of gross income within the National En-
terprise Zone to all gross income within the United 
States of the taxpayer or controlled group (in the 
case of a corporation that is a member of a con-
trolled group). 
‘‘(c) ALTERNATIVE FORMULARY METHOD.— 
‘‘(1) IN
GENERAL.—A corporation (or con-
trolled group in the case of a corporation that is a 
member of a controlled group), partnership or sole 
proprietor that so elects, in a form and manner pre-
scribed by the Secretary, may determine the share of 
its income, expense and other items attributable to 
the conduct of an active trade or business within a 
National Enterprise Zone by multiplying its appor-
tionment ratio by the amount of the income, expense 
and other items for purposes of determining its Na-
tional Enterprise Zone Corporate taxable income. 
‘‘(2) APPORTIONMENT RATIO.—The apportion-
ment ratio shall be the ratio of— 
‘‘(A) the sum of the remaining basis in de-
preciable property held in zone for the entire 
taxable year, of the inventory held in a zone at 
the end of the taxable year and of the com-
pensation paid to zone-based employees during 
the taxable year, and 
‘‘(B) the sum of the remaining basis in de-
preciable property held in the United States for 
the entire taxable year, of the inventory held in 
the United States at the end of the taxable year 
and of the compensation paid to employees 
within the United States during the taxable 
year. 
‘‘(3) MANDATORY USE OF ALTERNATIVE FOR-
MULARY METHOD.—If a taxpayer— 
‘‘(A) derives greater than 10 percent of its 
gross income from sales to related parties (as 
defined in section 1313(c)), or 
‘‘(B) expenses attributable to purchases 
from related parties (as defined in section 
1313(c)) account for greater than 10 percent of 
its expenses, 
then said taxpayer must use the alternative for-
mulary method. 
‘‘SEC. 1400T. DEFINITIONS AND SPECIAL RULES. 
‘‘(a) BASED IN A NATIONAL ENTERPRISE ZONE.— 
A person is based in a National Enterprise Zone if that 
person works out of an office, factory, store or other facil-
ity located in a National Enterprise Zone not less than
80 percent of the hours worked by said person in a cal-
endar year. In the case of a person that works for an em-
ployer for less than the full calendar year or was engaged 
in the conduct of an active trade or business within a Na-
tional Enterprise Zone for less than the full calendar year, 
then a person shall be deemed based in a National Enter-
prise Zone if that person worked out of an office, factory, 
store or other facility located in a National Enterprise 
Zone not less than 80 percent of the hours worked by said 
person while employed by said employer or engaged in the 
conduct of an active trade or business within a National 
Enterprise Zone. 
‘‘(b) INVENTORY.— 
‘‘(1) INVENTORY PROPERTY.—For purposes of 
sections 1400P and 1400R, inventory property shall 
mean property described in section 1221(a)(1) and 
any expenditures that were capitalized pursuant to 
section 263A. 
‘‘(2) NO DOUBLE COUNTING.—The deductions 
afforded by section 1400P(d)(3) and 1400R(b)(1) 
are in lieu of the deduction provided upon the sale 
of inventory property. 
‘‘(c) NOMINATOR.—Nominator means the governor of 
a state or territory or the Mayor of the District of Colum-
bia who nominated a zone by application to be a National 
Enterprise Zone. 
‘‘(d) RESIDENCY.—For purposes of this subchapter, 
a person is resident in national enterprise zone for the 
entire taxable year if— 
‘‘(1) his or her principal residence (within the 
meaning of section 121) is within the national enter-
prise zone, and 
‘‘(2) he or she was present (within the meaning 
of section 7701(b)(3)) in the national enterprise 
zone no fewer than 245 calendar days during the 
taxable year. 
‘‘(e) SECRETARY.—Secretary shall mean the Sec-
retary of the Treasury.’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 179 of the Internal Revenue Code 
of 1986 is amended by inserting at the end the fol-
lowing new subsection: 
‘‘(e) NO LIMITATION ON AMOUNT IN NATIONAL EN-
TERPRISE ZONES.— 
‘‘(1) IN
GENERAL.—The limitations of sub-
section (b) shall not apply with respect to property 
placed in service in a National Enterprise Zone. 
‘‘(2) PROPERTY REMOVED FROM NATIONAL EN-
TERPRISE
ZONE.—Property expensed pursuant to