‘‘(iii) during substantially all of the
taxpayer’s holding period for such prop-
erty, substantially all of the use of such
property was in a tax enterprise zone and
in an enterprise zone business of the tax-
payer.
‘‘(B) SPECIAL RULE FOR SUBSTANTIAL IM-
PROVEMENTS.—The requirements of clauses (i)
and (ii) of subparagraph (A) shall be treated as
satisfied with respect to—
‘‘(i) property which is substantially
improved by the taxpayer, and
‘‘(ii) any land on which such property
is located.
For purposes of the preceding sentence, prop-
erty shall be treated as substantially improved
by the taxpayer if, during any 24-month period
beginning after the date on which the designa-
tion of the tax enterprise zone took effect, addi-
tions to basis with respect to such property in
the hands of the taxpayer exceed the greater of
(i) an amount equal to the adjusted basis at the
beginning of such 24-month period in the hands
of the taxpayer, or (ii) $5,000.
‘‘(C) LIMITATION
ON
LAND.—The term
‘qualified zone business property’ shall not in-
clude land which is not an integral part of a
qualified business (as defined in section
1397C(c)).
‘‘(4) QUALIFIED
ZONE
PARTNERSHIP
INTER-
EST.—The term ‘qualified zone partnership interest’
means any interest in a partnership if—
‘‘(A) such interest is acquired by the tax-
payer from the partnership solely in exchange
for cash,
‘‘(B) as of the time such interest was ac-
quired, such partnership was an enterprise zone
business (or, in the case of a new partnership,
such partnership was being organized for pur-
poses of being an enterprise zone business), and
‘‘(C) during substantially all of the tax-
payer’s holding period for such interest, such
partnership qualified as an enterprise zone
business.
A rule similar to the rule of paragraph (2)(C) shall
apply for purposes of this paragraph.
‘‘(5) 
TREATMENT
OF
SUBSEQUENT
PUR-
CHASERS.—The term ‘qualified zone asset’ includes
any property which would be a qualified zone asset
but for paragraph (2)(A)(i), (3)(A)(ii), or (4)(A) in
the hands of the taxpayer if such property was a
qualified zone asset in the hands of any prior holder.
‘‘(6) 10-YEAR SAFE HARBOR.—If any property
ceases to be a qualified zone asset by reason of para-
graph (2)(A)(iii), (3)(A)(iii), or (4)(C) after the 10-
year period beginning on the date the taxpayer ac-
quired such property, such property shall continue to
be treated as meeting the requirements of such
paragraph; except that the amount of gain to which
subsection (a) applies on any sale or exchange of
such property shall not exceed the amount which
would be qualified capital gain had such property
been sold on the date of such cessation.
‘‘(7) TREATMENT OF ZONE TERMINATIONS.—
The termination of any designation of an area as a
tax enterprise zone shall be disregarded for purposes
of determining whether any property is a qualified
zone asset.
‘‘(c) OTHER DEFINITIONS AND SPECIAL RULES.—
For purposes of this section—
‘‘(1) QUALIFIED
CAPITAL
GAIN.—Except as
otherwise provided in this subsection, the term
‘qualified capital gain’ means any long-term capital
gain.
‘‘(2) CERTAIN GAIN ON REAL PROPERTY NOT
QUALIFIED.—The term ‘qualified capital gain’ shall
not include any gain which would be treated as ordi-
nary income under section 1250 if section 1250 ap-
plied to all depreciation rather than the additional
depreciation.
‘‘(3) GAIN ATTRIBUTABLE TO PERIODS AFTER
TERMINATION OF ZONE DESIGNATION NOT QUALI-
FIED.—The term ‘qualified capital gain’ shall not in-
clude any gain attributable to periods after the ter-
mination of any designation of an area as a tax en-
terprise zone.
‘‘(d) TREATMENT OF PASS-THRU ENTITIES.—
‘‘(1) SALES
AND
EXCHANGES.—Gain on the
sale or exchange of an interest in a pass-thru entity
held by the taxpayer (other than an interest in an
entity which was an enterprise zone business during
substantially all of the period the taxpayer held such
interest) for more than 5 years shall be treated as
gain described in subsection (a) to the extent such
gain is attributable to amounts which would be
qualified capital gain on qualified zone assets (deter-
mined as if such assets had been sold on the date
of the sale or exchange) held by such entity for more
than 5 years and throughout the period the taxpayer
held such interest. A rule similar to the rule of para-
graph (2)(C) shall apply for purposes of the preced-
ing sentence.
‘‘(2) INCOME INCLUSIONS.—
‘‘(A) IN GENERAL.—Any amount included
in income by reason of holding an interest in a
pass-thru entity (other than an entity which
was an enterprise zone business during substan-
tially all of the period the taxpayer held the in-
terest to which such inclusion relates) shall be
treated as gain described in subsection (a) if
such amount meets the requirements of sub-
paragraph (B).
‘‘(B) REQUIREMENTS.—An amount meets
the requirements of this subparagraph if—
‘‘(i) such amount is attributable to
qualified capital gain recognized on the
sale or exchange by the pass-thru entity of
property which is a qualified zone asset in
the hands of such entity and which was
held by such entity for the period required
under subsection (a), and
‘‘(ii) such amount is includible in the
gross income of the taxpayer by reason of
the holding of an interest in such entity
‘‘(2) the cost (not heretofore taken into account
under this subsection) of any qualified zone asset
purchased directly by the taxpayer during the rein-
vestment period.
‘‘(b) QUALIFIED ZONE ASSET.—For purposes of this
section—
‘‘(1) IN GENERAL.—The term ‘qualified zone
asset’ has the meaning given such term by section
1397.
‘‘(2) TIME FOR TESTING.—
‘‘(A) SALES.—In the case of a sale or ex-
change of property, the determination of wheth-
er such property is a qualified zone asset shall
be made as of the time of the sale or exchange.
‘‘(B) PURCHASES.—In the case of a pur-
chase of property, the determination of whether
such property is a qualified zone asset shall be
made as of the time of such purchase.
‘‘(c) OTHER DEFINITIONS.—For purposes of this
section—
‘‘(1) REINVESTMENT PERIOD.—The term ‘rein-
vestment period’ means, with respect to any sale or
exchange, the 6-month period beginning on the date
of such sale or exchange.
‘‘(2) PURCHASE.—The term ‘purchase’ has the
meaning given to such term by section 179(d)(2).
‘‘(d) BUSINESS OR PROPERTY CEASES TO QUAL-
IFY.—
‘‘(1) IN GENERAL.—If, during the 10-year pe-
riod beginning on the date any qualified zone re-
placement asset was purchased by the taxpayer,
such asset ceases to be a qualified zone asset, not-
withstanding any provision of this subtitle other
than paragraph (3), the taxpayer shall be treated as
disposing of such asset during the taxable year dur-
ing which such cessation occurs at its fair market
value as of the 1st day of such taxable year.
‘‘(2) LIMITATION ON GAIN RECOGNIZED.—The
amount of gain recognized pursuant to paragraph
(1) with respect to any asset shall not exceed the
lesser of—
‘‘(A) the amount of gain which was not
recognized under subsection (a) by the reason
of the purchase of such asset, or
‘‘(B) the excess of the fair market value
referred to in paragraph (1) over the adjusted
basis of such asset.
‘‘(3) CESSATION OF ENTERPRISE ZONE STATUS
NOT TO CAUSE RECAPTURE.—An asset shall not fail
to be treated as a qualified zone asset for purposes
of paragraph (1) solely by reason of the termination
of a tax enterprise zone designation.
‘‘(4) QUALIFIED ZONE REPLACEMENT ASSET.—
For purposes of paragraph (1), the term ‘qualified
zone replacement asset’ means any qualified zone
asset the purchase of which resulted in the non-
recognition of gain under subsection (a) with respect
to any other property.
‘‘(e) BASIS
OF QUALIFIED ZONE REPLACEMENT
ASSET.—If gain from the sale or exchange of any property
is not recognized by reason of subsection (a), such gain
shall be applied to reduce (in the order acquired) the basis
of any qualified zone replacement asset (as defined in sub-
section (d)(4)) purchased during the reinvestment period.
‘‘(f) COORDINATION WITH INSTALLMENT METHOD
REPORTING.—This section shall not apply to any gain
from any installment sale (as defined in section 453(b))
if section 453(a) applies to such sale.
‘‘(g) STATUTE OF LIMITATIONS.—If any gain is real-
ized by the taxpayer on any sale or exchange to which
an election under this section applies, then—
‘‘(1) the statutory period for the assessment of
any deficiency with respect to such gain shall not ex-
pire before the expiration of 3 years from the date
the Secretary is notified by the taxpayer (in such
manner as the Secretary may by regulations pre-
scribe) of—
‘‘(A) the taxpayer’s cost of purchasing any
qualified zone replacement asset,
‘‘(B) the taxpayer’s intention not to pur-
chase qualified zone replacement asset within
the reinvestment period, or
‘‘(C) a failure to make such purchase with-
in the reinvestment period, and
‘‘(2) such deficiency may be assessed before the
expiration of such 3-year period notwithstanding the
provisions of any law or rule of law which would oth-
erwise prevent such assessment.
‘‘SEC. 1397B. ADDITIONAL INCENTIVES.
‘‘(a) INCREASE
IN EXPENSING UNDER SECTION
179.—In the case of an enterprise zone business, section
179(b)(1) shall be applied by substituting ‘$20,000’ for
‘$10,000’.
‘‘(b) ORDINARY LOSS TREATMENT
FOR CERTAIN
PROPERTY.—
‘‘(1) IN GENERAL.—Loss on any qualified zone
asset (as defined in section 1397(b)) held for more
than 2 years (5 years in the case of real property)
shall be treated as an ordinary loss.
‘‘(2) REAL PROPERTY.—For purposes of para-
graph (1), the term ‘real property’ means any prop-
erty which is section 1250 property (as defined in
section 1250(c)).
‘‘(3) SPECIAL RULES.—
‘‘(A) CERTAIN
RULES
MADE
APPLICA-
BLE.—For purposes of this subsection, rules
similar to the following rules shall apply:
‘‘(i) Paragraphs (1), (2), and (3) of
section 1244(d).
‘‘(ii) Subsections (b)(6), (c)(3), (d),
(e), and (f) of section 1397.
‘‘(B) 
COORDINATION
WITH
SECTION
1231.—Losses treated as ordinary losses by rea-
son of this subsection shall not be taken into
account in applying section 1231.
‘‘SEC. 1397C. ENTERPRISE ZONE BUSINESS DEFINED.
‘‘(a) IN GENERAL.—For purposes of this subpart, the
term ‘enterprise zone business’ means—
‘‘(1) any qualified business entity, and
‘‘(2) any qualified proprietorship.
‘‘(b) QUALIFIED BUSINESS ENTITY.—For purposes
of this section, the term ‘qualified business entity’ means,
with respect to any taxable year, any corporation or part-
nership if for such year—
‘‘(1)(A) every trade or business of such entity
is the active conduct of a qualified business within
a tax enterprise zone, and
‘‘(B) at least 80 percent of the total gross in-
come of such entity is derived from the active con-
duct of such business,
‘‘(2) substantially all of the use of the tangible
property of such entity (whether owned or leased) is
within a tax enterprise zone,
‘‘(3) substantially all of the intangible property
of such entity is used in, and exclusively related to,
the active conduct of any such business,
‘‘(4) substantially all of the services performed
for such entity by its employees are performed in a
tax enterprise zone,
‘‘(5) at least 1⁄3 of its employees are residents
of a tax enterprise zone,
‘‘(6) less than 5 percent of the average of the
aggregate unadjusted bases of the property of such
entity is attributable to collectibles (as defined in
section 408(m)(2)) other than collectibles that are
held primarily for sale to customers in the ordinary
course of such business, and
‘‘(7) less than 5 percent of the average of the
aggregate unadjusted bases of the property of such
entity is attributable to nonqualified financial prop-
erty.
‘‘(c) QUALIFIED PROPRIETORSHIP.—For purposes of
this section, the term ‘qualified proprietorship’ means,
with respect to any taxable year, any qualified business
carried on by an individual as a proprietorship if for such
year—
‘‘(1) at least 80 percent of the total gross in-
come of such individual from such business is de-
rived from the active conduct of such business in a
tax enterprise zone,
‘‘(2) substantially all of the use of the tangible
property of such individual in such business (wheth-
er owned or leased) is within a tax enterprise zone,
‘‘(3) substantially all of the intangible property
of such business is used in, and exclusively related
to, the active conduct of such business,
‘‘(4) substantially all of the services performed
for such individual in such business by employees of
such business are performed in a tax enterprise
zone,
‘‘(5) at least 1⁄3 of such employees are residents
of a tax enterprise zone,
‘‘(6) less than 5 percent of the average of the
aggregate unadjusted bases of the property of such
individual which is used in such business is attrib-
utable 
to 
collectibles 
(as 
defined 
in 
section
408(m)(2)) other than collectibles that are held pri-
marily for sale to customers in the ordinary course
of such business, and
‘‘(7) less than 5 percent of the average of the
aggregate unadjusted bases of the property of such
individual which is used in such business is attrib-
utable to nonqualified financial property.
For purposes of this subsection, the term ‘employee’ in-
cludes the proprietor.
‘‘(d) QUALIFIED BUSINESS.—For purposes of this
section—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, the term ‘qualified business’
means any trade or business.
‘‘(2) RENTAL OF REAL PROPERTY.—The rental
to others of real property located in a tax enterprise
zone shall be treated as a qualified business if and
only if—
‘‘(A) in the case of real property which is
not residential rental property (as defined in
section 168(e)(2)), the lessee is an enterprise
zone business, or
‘‘(B) in the case of residential rental prop-
erty (as so defined)—
‘‘(i) such property was originally
placed in service after the date the tax en-
terprise zone was designated, or
‘‘(ii) such property is rehabilitated
after such date in a rehabilitation which
meets requirements based on the principles
of section 42(e)(3).
‘‘(3) RENTAL OF TANGIBLE PERSONAL PROP-
ERTY.—The rental to others of tangible personal
property shall be treated as a qualified business if
and only if substantially all of the rental of such
property is by enterprise zone businesses or by resi-
dents of a tax enterprise zone.
‘‘(4) TREATMENT OF BUSINESS HOLDING IN-
TANGIBLES.—The term ‘qualified business’ shall not
include any trade or business consisting predomi-
nantly of the development or holding of intangibles
for sale or license.
‘‘(5) CERTAIN
BUSINESSES
EXCLUDED.—The
term ‘qualified business’ shall not include—
‘‘(A) any trade or business consisting of
the operation of any facility described in section
144(c)(6)(B), and
‘‘(B) any trade or business the principal
activity 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
preceding taxable year, the sum of—
‘‘(i) the aggregate unadjusted bases
(or, if greater, the fair market value) of
the assets owned by the taxpayer which are
used in such a trade or business, and
‘‘(ii) the aggregate value of assets
leased by the taxpayer which are used in
such a trade or business,
exceeds $500,000.
For purposes of subparagraph (B), rules similar to
the rules of section 1395(b) shall apply.
‘‘(e) NONQUALIFIED FINANCIAL PROPERTY.—For
purposes of this section, the term ‘nonqualified financial
property’ means debt, stock, partnership interests, op-
tions, futures contracts, forward contracts, warrants, no-
tional principal contracts, annuities, and other similar
property specified in regulations; except that such term
shall not include—
‘‘(1) reasonable amounts of working capital
held in cash, cash equivalents, or debt instruments
with a term of 18 months or less, or
‘‘(2) debt instruments described in section
1221(4).
‘‘Subpart C—Regulations
‘‘Sec. 1397C. Regulations.
‘‘SEC. 1397C. REGULATIONS.
‘‘The Secretary shall prescribe such regulations as
may be necessary or appropriate to carry out the purposes
of this part, including—
‘‘(1) regulations limiting the benefit of this part
in circumstances where such benefits, in combination
with benefits provided under other Federal pro-
grams, would result in an activity being 100 percent
or more subsidized by the Federal Government,
‘‘(2) regulations preventing abuse of the provi-
sions of this part, and
‘‘(3) regulations dealing with inadvertent fail-
ures of entities to be qualified zone businesses.’’
(b) CLERICAL AMENDMENT.—The table of sub-
chapters for chapter 1 is amended by inserting after the
item relating to subchapter T the following new item:
‘‘Subchapter U. Designation and treatment of tax enterprise
zones.’’
SEC. 4. SPECIAL RULES FOR REDEVELOPMENT BONDS
PROVIDING FINANCING FOR TAX ENTER-
PRISE ZONES.
(a) IN GENERAL.—Subsection (c) of section 144 (re-
lating to qualified redevelopment bonds) is amended by
adding at the end thereof the following new paragraph:
‘‘(9) SPECIAL
RULES
FOR
TAX
ENTERPRISE
ZONES.—For purposes of this subsection, in the case
of bonds issued during the 60-month period begin-
ning on the date a tax enterprise zone is des-
ignated—
‘‘(A) 
TREATMENT
AS
DESIGNATED
BLIGHTED
AREA.—Such tax enterprise zone
shall be treated as a designated blighted area
during such 60-month period (or, if shorter, the
period such designation is in effect). Any area
designated by reason of the preceding sentence
shall not be taken into account in applying
paragraph (4)(C).
‘‘(B) SECURITY FOR BONDS.—The require-
ments of paragraph (2)(B) shall be treated as
met with respect to a financed area that is
within a tax enterprise zone if the general pur-
pose governmental unit guarantees the payment
of principal and interest on the issue either di-
rectly or through insurance, a letter of credit,
or a similar agreement but only if the cost
thereof is financed other than with proceeds of
any tax-exempt private activity bond or earn-
ings on such proceeds.
‘‘(C) EXPANSION
OF
REDEVELOPMENT
PURPOSES.—
‘‘(i) IN GENERAL.—The term ‘redevel-
opment purposes’ includes the making of
loans to any enterprise zone business (as
defined in section 1397B) for—
‘‘(I) the acquisition of land with-
in the tax enterprise zone for use in
such business, or
‘‘(II) the acquisition, construc-
tion, reconstruction, or improvement
by such business of land, or property
of a character subject to the allowance
for depreciation, for use in such busi-
ness.
‘‘(ii) $2,500,000 LIMITATION.—Clause
(i) shall apply to loans made to any enter-
prise zone business only if the aggregate
principal amount of such loans (whether or
not financed by the same issue) does not
exceed $2,500,000. For purposes of the
preceding sentence, all persons treated as a
single employer under subsection (a) or (b)
of section 52 shall be treated as 1 person.
‘‘(iii) LOANS MUST BE MADE WITHIN
18 MONTHS AFTER BONDS ISSUED; REPAY-
MENTS
MUST
BE
USED
FOR
REDEMP-
TIONS.—Clause (i) shall apply only to
loans—
‘‘(I) made during the 18-month
period beginning on the date of issu-
ance of the issue financing such loan,
‘‘(II) repayments of principal on
which are used not later than the
close of the 1st semiannual period be-
ginning after the date the repayment
is received to redeem bonds which are
part of such issue, and
‘‘(III) the effective rate of inter-
est on which does not exceed the yield
on the issue by more than 0.125 per-
centage points.
In determining the effective rate of interest
for purposes of subclause (III), there shall
be taken into account all fees, charges, and
other amounts (other than amounts for
any credit report) borne by the borrower
which are attributable to the loan or the
bond issue.
‘‘(iv) HOUSING LOANS EXCLUDED.—
Clause (i) shall not apply to any loan to be
used directly or indirectly to provide resi-
dential real property.
‘‘(v) COORDINATION
WITH
RESTRIC-
TIONS ON USE OF PROCEEDS.—Paragraphs
(6) and (8) shall apply notwithstanding
clause (i); except that in applying para-
graph (6), subsection (a)(8) shall be treat-
ed as not including a reference to a facility
the primary purpose of which is retail food
services.
‘‘(D) ISSUER TO DESIGNATE AMOUNT OF
ISSUE TO BE USED FOR LOANS.—Subparagraph
(C) shall not apply with respect to any issue
unless the issuer designates before the date of
issuance the amount of the proceeds of such
issue which is to be used for loans to which
subparagraph (C)(i) applies. If such amount ex-
ceeds the principal amount of loans to which
subparagraph (C)(i) applies, an amount of pro-
ceeds equal to such excess shall be used not
later than the close of the 1st semiannual pe-
riod beginning after the close of the 18-month
period referred to in subparagraph (C)(iii) to
redeem bonds which are part of such issue.
‘‘(E) DE MINIMIS REDEMPTIONS NOT RE-
QUIRED.—Subparagraphs (C)(iii) and (D) shall
not be construed to require amounts of less
than $250,000 to be used to redeem bonds. The
Secretary may by regulation treat related issues
as 1 issue for purposes of the preceding sen-
tence.
‘‘(F) PENALTY.—
‘‘(i) IN
GENERAL.—In the case of
property with respect to which financing
was provided under this paragraph, if at
any time during the 10-period beginning
on the date such financing was provided—
‘‘(I) such property ceases to be in
use in an enterprise zone business (as
defined in section 1397B), or
‘‘(II) substantially all of the use
of such property ceases to be in a tax
enterprise zone,
there is hereby imposed on the trade or
business to which such financing was pro-
vided a penalty equal to 1.25 percent of so
much of the face amount of all financing
provided (whether or not from the same
issue and whether or not such issue is out-
standing) before such cessation to the
trade or business using such property.
‘‘(ii) NO
PENALTY
BY
REASON
OF
ZONE TERMINATION.—No penalty shall be
imposed under clause (i) solely by reason
of the termination or revocation of a tax
enterprise zone designation.
‘‘(iii) 
EXCEPTION
FOR
BANK-
RUPTCY.—Clause (i) shall not apply to any
cessation resulting from bankruptcy.’’
(b) VOLUME CAP ONLY CHARGED WITH 50 PER-
CENT
OF TAX ENTERPRISE ZONE REDEVELOPMENT
BONDS.—Subsection (g) of section 146 is amended by
striking ‘‘and’’ at the end of paragraph (3), by striking
the period at the end of paragraph (4) and inserting ‘‘,
and’’, and by adding at the end thereof the following new
paragraph:
‘‘(5) 50 percent of any qualified redevelopment
bond issued—
‘‘(A) as part of an issue 95 percent or
more of the net proceeds of which are to be