I
105TH CONGRESS
1ST SESSION
H. R. 420
To amend the Internal Revenue Code of 1986 to modify the exclusion of
gain on certain small business stock and to allow nonrecognition on
gain from the sale of such stock if other small business stock is pur-
chased.
IN THE HOUSE OF REPRESENTATIVES
JANUARY 9, 1994
Mr. MATSUI (for himself and Mr. ENGLISH of Pennsylvania) 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 modify
the exclusion of gain on certain small business stock
and to allow nonrecognition on gain from the sale of
such stock if other small business stock is purchased.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Enterprise Capital Formation Act of 1997’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
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. FINDINGS.
The Congress hereby finds that—
(1) investments in small business venture cap-
ital stock should be encouraged because of both the
special risks and the social and economic benefits as-
sociated with such investments,
(2) the exclusion from income of gain on small
business venture capital stock is an important incen-
tive for individuals and corporations to invest in
such stock, and
(3) tax incentives for investments in capital as-
sets in general should be supplemented with an ef-
fective tax incentive for investments in small busi-
ness venture capital stock.
SEC. 3. MODIFICATIONS TO EXCLUSION OF GAIN ON CER-
TAIN SMALL BUSINESS STOCK.
(a) INCREASE IN EXCLUSION PERCENTAGE.—
(1) IN
GENERAL.—Subsection (a) of section
1202 is amended—
(A) by striking ‘‘50 percent’’ and inserting
‘‘75 percent’’, and
(B) by striking ‘‘50-PERCENT’’ in the
heading and inserting ‘‘Partial’’.
(2) CONFORMING AMENDMENTS.—
(A) The heading for section 1202 is
amended by striking ‘‘50-PERCENT’’ and in-
serting ‘‘PARTIAL’’.
(B) The table of sections for part I of sub-
chapter P of chapter 1 is amended by striking
‘‘50-percent’’ in the item relating to section
1202 and inserting ‘‘Partial’’.
(b) REDUCTION IN HOLDING PERIOD.—Subsection
(a) of section 1202 is amended by striking ‘‘5 years’’ and
inserting ‘‘3 years’’.
(c) EXCLUSION AVAILABLE TO CORPORATIONS.—
(1) IN
GENERAL.—Subsection (a) of section
1202 is amended by striking ‘‘other than a corpora-
tion’’.
(2) TECHNICAL AMENDMENT.—Subsection (c)
of section 1202 is amended by adding at the end the
following new paragraph:
‘‘(4) STOCK HELD AMONG MEMBERS OF CON-
TROLLED GROUP NOT ELIGIBLE.—Stock of a mem-
ber of a parent-subsidiary controlled group (as de-
fined in subsection (d)(3)) shall not be treated as
qualified small business stock while held by another
member of such group.’’.
(d) REPEAL OF MINIMUM TAX PREFERENCE.—
(1) IN GENERAL.—Subsection (a) of section 57
is amended by striking paragraph (7).
(2) TECHNICAL AMENDMENT.—Subclause (II)
of section 53(d)(1)(B)(ii) is amended by striking ‘‘,
(5), and (7)’’ and inserting ‘‘and (5)’’.
(e) STOCK OF LARGER BUSINESSES ELIGIBLE FOR
EXCLUSION.—
(1) Paragraph (1) of section 1202(d) is amend-
ed by striking ‘‘$50,000,000’’ each place it appears
and inserting ‘‘$100,000,000’’.
(2) Subsection (d) of section 1202 is amended
by adding at the end the following new paragraph:
‘‘(4) INFLATION ADJUSTMENT OF ASSET LIMI-
TATION.—In the case of stock issued in any calendar
year after 1997, the $100,000,000 amount con-
tained in paragraph (1) shall be increased by an
amount equal to—
‘‘(A) such dollar amount, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the calendar
year in which the taxable year begins, deter-
mined by substituting ‘calendar year 1996’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sen-
tence is not a multiple of $10,000, such amount
shall be rounded to the nearest multiple of
$10,000.’’.
(f) REPEAL OF PER-ISSUER LIMITATION.—Section
1202 is amended by striking subsection (b).
(g) OTHER MODIFICATIONS.—
(1) REPEAL
OF
WORKING
CAPITAL
LIMITA-
TION.—Paragraph (6) of section 1202(e) is amend-
ed—
(A) by striking ‘‘2 years’’ in subparagraph
(B) and inserting ‘‘5 years’’, and
(B) by striking the last sentence.
(2) EXCEPTION
FROM
REDEMPTION
RULES
WHERE BUSINESS PURPOSE.—Paragraph (3) of sec-
tion 1202(c) is amended by adding at the end the
following new subparagraph:
‘‘(D) WAIVER
WHERE
BUSINESS
PUR-
POSE.—A purchase of stock by the issuing cor-
poration shall be disregarded for purposes of
subparagraph (B) if the issuing corporation es-
tablishes that there was a business purpose for
such purchase and one of the principal purposes
of the purchase was not to avoid the limitations
of this section.’’.
(h) QUALIFIED
TRADE
OR
BUSINESS.—Section
1202(e)(3) is amended by inserting ‘‘and’’ at the end of
subparagraph (C), by striking ‘‘, and’’ at the end of sub-
paragraph (D) and inserting a period, and by striking sub-
paragraph (E).
(i) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to stock issued after August 10, 1993.
(2) SPECIAL RULE.—The amendments made by
subsections (b), (c), and (e) shall apply to stock is-
sued after the date of the enactment of this Act.
(j) ELECTION TO APPLY AMENDMENTS TO STOCK
ISSUED AFTER AUGUST 10, 1993.—
(1) IN GENERAL.—The amendments made by
subsections (b), (c), and (e) shall apply to any quali-
fied stock issued after August 10, 1993, if the tax-
payer elects to apply such amendments with respect
to such stock.
(2) QUALIFIED STOCK.—For purposes of para-
graph (1), the term ‘‘qualified stock’’ means stock—
(A) which is held by the taxpayer on the
date of the enactment of this Act, and
(B) which was not qualified small business
stock (as defined section 1202(c) of the Inter-
nal Revenue Code of 1986) when issued but
which would be qualified small business stock
(as so defined) if the amendments made by sub-
sections (b), (c), and (e) applied to stock issued
after August 10, 1993.
(3) RECOGNITION OF GAIN.—For purposes of
the Internal Revenue Code of 1986—
(A) IN GENERAL.—Any qualified stock to
which the election under paragraph (1) applies
shall be treated—
(i) as having been sold on the date of
the enactment of this Act for an amount
equal to its fair market value on such date,
and
(ii) as having been reacquired on such
date for an amount equal to such fair mar-
ket value.
The preceding sentence shall not apply for pur-
poses of determining whether the stock is quali-
fied small business stock (as so defined).
(B) TREATMENT OF GAIN OR LOSS.—
(i) Any gain resulting from subpara-
graph (A) shall be treated as received or
accrued on the date of the enactment of
this Act, and shall be recognized notwith-
standing any provision of the Internal Rev-
enue Code of 1986.
(ii) Any loss resulting from subpara-
graph (A) shall not be allowed for any tax-
able year.
(4) ELECTION.—An election under paragraph
(1) shall be made in such manner as the Secretary
may prescribe and shall specify the stock for which
such election is made. Such an election, once made
with respect to any stock, shall be irrevocable.
SEC. 4. ROLLOVER OF GAIN FROM SALE OF QUALIFIED
STOCK.
(a) IN GENERAL.—Part III of subchapter O of chap-
ter 1 is amended by adding at the end the following new
section:
‘‘SEC. 1045. ROLLOVER OF GAIN FROM QUALIFIED SMALL
BUSINESS STOCK TO ANOTHER QUALIFIED
SMALL BUSINESS STOCK.
‘‘(a) NONRECOGNITION OF GAIN.—In the case of any
sale of qualified small business stock with respect to which
the taxpayer elects the application of this section, eligible
gain from such sale shall be recognized only to the extent
that the amount realized on such sale exceeds—
‘‘(1) the cost of any qualified small business
stock purchased by the taxpayer during the 60-day
period beginning on the date of such sale, reduced
by
‘‘(2) any portion of such cost previously taken
into account under this section.
This section shall not apply to any gain which is treated
as ordinary income for purposes of this title.
‘‘(b) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) QUALIFIED SMALL BUSINESS STOCK.—The
term ‘qualified small business stock’ has the mean-
ing given such term by section 1202(c).
‘‘(2) ELIGIBLE GAIN.—The term ‘eligible gain’
means any gain from the sale or exchange of quali-
fied small business stock held for more than 3 years.
‘‘(3) PURCHASE.—A taxpayer shall be treated
as having purchased any property if, but for para-
graph (4), the unadjusted basis of such property in
the hands of the taxpayer would be its cost (within
the meaning of section 1012).’’
‘‘(4) BASIS ADJUSTMENTS.—If gain from any
sale is not recognized by reason of subsection (a),
such gain shall be applied to reduce (in the order ac-
quired) the basis for determining gain or loss of any
qualified small business stock which is purchased by
the taxpayer during the 60-day period described in
subsection (a).
‘‘(c) SPECIAL RULES FOR TREATMENT OF REPLACE-
MENT STOCK.—
‘‘(1) HOLDING PERIOD FOR ACCRUED GAIN.—
For purposes of this chapter, gain from the disposi-
tion of any replacement qualified small business
stock shall be treated as gain from the sale or ex-
change of qualified small business stock held more
than 3 years to the extent that the amount of such
gain does not exceed the amount of the reduction in
the basis of such stock by reason of subsection
(b)(4).
‘‘(2) TACKING OF HOLDING PERIOD FOR PUR-
POSES OF DEFERRAL.—Solely for purposes of apply-
ing this section, if any replacement qualified small
business stock is disposed of before the taxpayer has
held such stock for more than 3 years, gain from
such stock shall be treated eligible gain for purposes
of subsection (a).
‘‘(3) REPLACEMENT
QUALIFIED
SMALL
BUSI-
NESS STOCK.—For purposes of this subsection, the
term ‘replacement qualified small business stock’
means any qualified small business stock the basis
of which was reduced under subsection (b)(4).’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 1016(a)(23) is amended—
(A) by striking ‘‘or 1044’’ and inserting ‘‘,
1044, or 1045’’, and
(B) by striking ‘‘or 1044(d)’’ and inserting
‘‘, 1044(d), or 1045(b)(4)’’.
(2) The table of sections for part III of sub-
chapter O of chapter 1 is amended by adding at the
end the following new item:
‘‘Sec. 1045. Rollover of gain from qualified small business stock
to another qualified small business stock.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to stock sold or exchanged after
the date of the enactment of this Act.
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