‘‘Subchapter U—Designation and Treatment
of Tax Enterprise Zones
‘‘Part I. Designation of tax enterprise zones.
‘‘Part II. Incentives for tax enterprise zones.
‘‘PART I—DESIGNATION OF TAX ENTERPRISE
ZONES
‘‘Sec. 1391. Designation procedure.
‘‘Sec. 1392. Eligibility and selection criteria.
‘‘Sec. 1393. Definitions and special rules.
‘‘SEC. 1391. DESIGNATION PROCEDURE.
‘‘(a) IN GENERAL.—For purposes of this title, the
term ‘tax enterprise zone’ means any area which is, under
this part—
‘‘(1) nominated by 1 or more local governments
and the State in which it is located for designation
as a tax enterprise zone, and
‘‘(2) designated by—
‘‘(A) the Secretary of Housing and Urban
Development in the case of an urban tax enter-
prise zone, or
‘‘(B) the Secretary of Agriculture, in con-
sultation with the Secretary of Commerce, in
the case of a rural development investment
zone.
‘‘(b) NUMBER OF DESIGNATIONS.—
‘‘(1) AGGREGATE LIMIT.—The appropriate Sec-
retaries may designate in the aggregate 100 nomi-
nated areas as tax enterprise zones under this sec-
tion, subject to the availability of eligible nominated
areas. Not less than 33 large city zones shall be des-
ignated; not less than 33 other urban zones shall be
designated; and not less than 33 rural development
investment zones may be designated. Such designa-
tions may be made only during calendar years after
1992 and before 1997.
‘‘(2) ANNUAL LIMITS.—
‘‘(A) 1993.—During 1993, the number of
urban tax enterprise zones designated under
paragraph (1) shall not exceed 9, and the num-
ber of rural development investment zones des-
ignated under paragraph (1) shall not exceed 8.
‘‘(B) AFTER 1993.—As of the close of each
calendar year after 1993, the number of urban
tax enterprise zones and rural development in-
vestment zones shall not exceed the numbers
determined in accordance with the following
table:
The maximium number is:
‘‘As of the close of:
Urban tax enter-
prise zones
Rural develop-
ment investment
zones
1993
1994
1995
1996
1997
‘‘(3) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) LARGE CITY ZONE.—The term ‘large
city zone’ means any urban tax enterprise zone
located in a city having a population (as deter-
mined by the most recent census data available)
of at least 100,000.
‘‘(B) OTHER
URBAN
ZONE.—The term
‘other urban zone’ means any urban tax enter-
prise zone not located in a city described in
subparagraph (A).
‘‘(4) ADVANCE
DESIGNATIONS
PERMITTED.—
For purposes of this subchapter, a designation dur-
ing any calendar year shall be treated as made on
January 1 of the following calendar year if the ap-
propriate Secretary, in making such designation,
specifies that such designation is effective as of such
January 1.
‘‘(c) LIMITATIONS ON DESIGNATIONS.—The appro-
priate Secretary may not make any designation under sub-
section (a) unless—
‘‘(1) the local governments and the State in
which the nominated area is located have the au-
thority—
‘‘(A) to nominate the area for designation
as a tax enterprise zone, and
‘‘(B) to provide assurances satisfactory to
the appropriate Secretary that the commit-
ments under section 1392(c) will be fulfilled,
‘‘(2) a nomination of the area is submitted
within a reasonable time before the calendar year for
which designation as a tax enterprise zone is sought
(or, if later, a reasonable time after the date of the
enactment of this subchapter),
‘‘(3) the appropriate Secretary determines that
any information furnished is reasonably accurate,
and
‘‘(4) the State and local governments certify
that no portion of the area nominated is already in-
cluded in a tax enterprise zone.
‘‘(d) PERIOD
FOR
WHICH
DESIGNATION
IS
IN
EFFECT.—
‘‘(1) IN GENERAL.—Any designation of an area
as a tax enterprise zone shall remain in effect during
the period beginning on the date of the designation
and ending on the earliest of—
‘‘(A) December 31 of the 15th calendar
year following the calendar year in which such
date occurs,
‘‘(B) the termination date designated by
the State and local governments as provided for
in their nomination, or
‘‘(C) the date the appropriate Secretary re-
vokes the designation under paragraph (2).
‘‘(2) REVOCATION OF DESIGNATION.—
‘‘(A) IN GENERAL.—The appropriate Sec-
retary shall revoke the designation of an area
as a tax enterprise zone if such Secretary deter-
mines that the local government or the State in
which it is located—
‘‘(i) has modified the boundaries of
the area, or
‘‘(ii) is not complying substantially
with the State and local commitments pur-
suant to section 1392(c).
‘‘(B) APPLICABLE PROCEDURES.—A des-
ignation may be revoked by the appropriate
Secretary under subparagraph (A) only after a
hearing on the record involving officials of the
State or local government involved.
‘‘SEC. 1392. ELIGIBILITY AND SELECTION CRITERIA.
‘‘(a) IN GENERAL.—The appropriate Secretary may
make a designation of any nominated area under section
poses of the most recent Census of Retail
Trade).
‘‘(D) UNEMPLOYMENT RATE.—The unem-
ployment rate (as determined by the appro-
priate available data) is not less than 1.5 times
the national unemployment rate.
‘‘(E) POVERTY
RATE.—The poverty rate
(as determined by the most recent census data
available) for not less than 90 percent of the
population census tracts (or where not tracted,
the equivalent county divisions as defined by
the Bureau of the Census for the purposes of
defining poverty areas) located entirely within
the nominated area is not less than 20 percent.
‘‘(F) COURSE OF ACTION.—There has been
adopted for the nominated area a course of ac-
tion which meets the requirements of subsection
(c).
‘‘(2) 
RURAL
DEVELOPMENT
INVESTMENT
ZONES.—A nominated area which is a rural area
shall be eligible for designation under section 1391
only if it meets the following criteria:
‘‘(A) POPULATION.—The nominated area
has a population (as determined by the most re-
cent census data available) of not less than
1,000.
‘‘(B) DISTRESS.—The nominated area is
one of general distress.
‘‘(C) SIZE.—The nominated area—
‘‘(i)(I) does not exceed 10,000 square
miles, or
‘‘(II) consists of areas within not
more than 4 contiguous counties,
‘‘(ii) has a boundary which is continu-
ous, or consists of not more than 3 non-
contiguous parcels, and
‘‘(iii) is located entirely within 1
State.
‘‘(D) ADDITIONAL
CRITERIA.—Not less
than 2 of the following criteria:
‘‘(i) UNEMPLOYMENT RATE.—The cri-
terion set forth in paragraph (1)(D).
‘‘(ii) POVERTY
RATE.—The criterion
set forth in paragraph (1)(E).
‘‘(iii) JOB
LOSS.—The amount of
wages attributable to employment in the
area, and subject to tax under section
3301 during the preceding calendar year,
is not more than 95 percent of such wages
during the 5th preceding calendar year.
‘‘(iv) 
OUT-MIGRATION.—The 
popu-
lation of the area decreased (as determined
by the most recent census data available)
by 10 percent or more between 1980 and
1990.
‘‘(E) COURSE OF ACTION.—There has been
adopted for the nominated area a course of ac-
tion which meets the requirements of subsection
(c).
‘‘(c) REQUIRED STATE
AND LOCAL COURSE
OF
ACTION.—
‘‘(1) IN GENERAL.—No nominated area may be
designated as a tax enterprise zone unless the local
government and the State in which it is located
agree in writing that, during any period during
which the area is a tax enterprise zone, the govern-
ments will follow a specified course of action de-
signed to reduce the various burdens borne by em-
ployers or employees in the area.
‘‘(2) COURSE OF ACTION.—The course of action
under paragraph (1) may be implemented by both
governments and private nongovernmental entities,
may not be funded from proceeds of any Federal
program (other than discretionary proceeds), and
may include—
‘‘(A) a certification by the State insurance
commissioner (or similar State official) that
basic commercial property insurance of a type
comparable to that insurance generally in force
in urban or rural areas, whichever is applicable,
throughout the State is available to businesses
within the tax enterprise zone,
‘‘(B) a reduction of tax rates or fees apply-
ing within the tax enterprise zone,
‘‘(C) an increase in the level, or efficiency
of delivery, of local public services within the
tax enterprise zone,
‘‘(D) actions to reduce, remove, simplify,
or streamline government paperwork require-
ments applicable within the tax enterprise zone,
‘‘(E) the involvement in the program by
public authorities or private entities, organiza-
tions, neighborhood associations, and commu-
nity groups, particularly those within the nomi-
nated area, including a written commitment to
provide jobs and job training for, and technical,
financial, or other assistance to, employers, em-
ployees, and residents of the nominated area,
‘‘(F) the giving of special preference to
contractors owned and operated by members of
any socially and economically disadvantaged
group (within the meaning of section 8(a) of
the Small Business Act (15 U.S.C. 637(a)),
‘‘(G) the gift (or sale at below fair market
value) of surplus land in the tax enterprise zone
to neighborhood organizations agreeing to oper-
ate a business on the land,
‘‘(H) the establishment of a program
under which employers within the tax enterprise
zone may purchase health insurance for their
employees on a pooled basis,
‘‘(I) the establishment of a program to en-
courage local financial institutions to satisfy
their obligations under the Community Rein-
vestment Act of 1977 (12 U.S.C. 2901 et seq.)
by making loans to enterprise zone businesses,
with emphasis on startup and other small-busi-
ness concerns (as defined in section 3(a) of the
Small Business Act (15 U.S.C. 632(a)),
‘‘(J) the giving of special preference to
qualified low-income housing projects located in
tax enterprise zones, in the allocation of the
State housing credit ceiling applicable under
section 42, and
‘‘(K) the giving of special preference to fa-
cilities located in tax enterprise zones, in the al-
location of the State ceiling on private activity
bonds applicable under section 146.
‘‘(3) RECOGNITION
OF
PAST
EFFORTS.—In
evaluating courses of action agreed to by any State
or local government, the appropriate Secretary shall
take into account the past efforts of the State or
local government in reducing the various burdens
borne by employers and employees in the area in-
volved.
‘‘(4) PROHIBITION OF ASSISTANCE FOR BUSI-
NESS RELOCATIONS.—
‘‘(A) IN GENERAL.—The course of action
implemented under paragraph (1) may not in-
clude any action to assist any establishment in
relocating from 1 area to another area.
‘‘(B) EXCEPTION.—The limitation estab-
lished in subparagraph (A) shall not be con-
strued to prohibit assistance for the expansion
of an existing business entity through the estab-
lishment of a new branch, affiliate, or subsidi-
ary if—
‘‘(2) IMPLEMENTATION
OF
COURSE
OF
AC-
TION.—The effectiveness and enforceability of the
guarantees that the course of action will actually be
carried out, including the specificity with which the
commitments under paragraph (1) are described in
order that the applicable Secretary will be better
able 
to 
determine 
annually 
under 
section
1391(d)(2)(A)(ii) whether the commitments are
being carried out.
‘‘(3) PRIVATE
COMMITMENTS.—The level of
commitments by private entities of additional re-
sources and contributions to the economy of the
nominated area, including the creation of new or ex-
panded business activities.
‘‘(4) AVERAGE RANKINGS.—The average rank-
ing with respect to—
‘‘(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
retained.
‘‘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—
‘‘(A) an economic development corporation
chartered by the State, or
‘‘(B) a community development corpora-
tion—
‘‘(i) which is described in section
501(c)(3) and exempt from tax under sec-
tion 501(a), and
‘‘(ii) the principal purposes of which
include promoting employment of, and
business opportunities for, low-income indi-
viduals who are residents of its operational
area.
‘‘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. 1394A. Credit to qualified zone employees of tax-exempt or-
ganizations.
‘‘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. 1394A. CREDIT TO QUALIFIED ZONE EMPLOYEES OF
TAX-EXEMPT ORGANIZATIONS.
‘‘(a) ALLOWANCE
OF CREDIT.—In the case of a
qualified zone employee who received qualified zone wages
during the taxable year from any tax-exempt employer,
there shall be allowed as a credit against the tax imposed
by this chapter for such taxable year an amount equal to
15 percent of the qualified zone wages received by such
employee from such employer during such taxable year.
‘‘(b) ONLY FIRST $20,000 OF WAGES PER YEAR
TAKEN INTO ACCOUNT.—With respect to each qualified
zone employee, the amount of qualified zone wages which
may be taken into account for the taxable year shall not
exceed $20,000.
‘‘(c) LIMITATION BASED ON AMOUNT OF TAX.—For
purposes of this title, the credit allowed under this section
shall be treated as allowed under subpart A of part IV
of subchapter A of this chapter (relating to nonrefundable
personal credits).
‘‘(d) TAX-EXEMPT EMPLOYER.—For purposes of this
section, the term ‘tax-exempt employer’ means any em-
ployer who is exempt from tax under this subtitle. Such
term shall not include the Federal Government, any State
or local government or political subdivision thereof, or any
agency or instrumentality of any of the foregoing.
‘‘(e) OTHER DEFINITIONS AND SPECIAL RULES.—
‘‘(1) DEFINITIONS.—Terms used in this section
which are also used in section 1394 shall have the
respective meanings given such terms in section
1394.
‘‘(2) SPECIAL
RULES.—Rules similar to the
rules of section 1394(d) shall apply for purposes of
this section.
‘‘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. Nonrecognition of gain from new zone investments.
‘‘Sec. 1397A. Other incentives.
‘‘Sec. 1397B. Enterprise zone business defined.
‘‘Sec. 1397C. Other definitions.
‘‘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
section 179(d)(2)) qualified enterprise zone
property.
‘‘(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. NONRECOGNITION OF GAIN FROM NEW ZONE
INVESTMENTS.
‘‘(a) GENERAL RULE.—At the election of an individ-
ual, qualified capital gain (as defined in section 1397C)
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
‘‘(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
1397C.
‘‘(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.
‘‘(h) CERTAIN
BUSINESSES
TREATED
AS
NOT
QUALIFIED BUSINESSES.—For purposes of this section,
the term ‘enterprise zone business’ has the meaning given
such term by section 1397B except that, in applying sec-
tion 1397B for such purposes, the term ‘qualified busi-
ness’ shall not include any trade or business of producing
property of a character subject to the allowance for deple-
tion under section 611.
‘‘SEC. 1397A. 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 1397C(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 (a)(6), (b)(3), (c),
(d), and (e) of section 1397C.
‘‘(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.
‘‘(c) ADDITIONS
TO RESERVES
FOR BAD DEBTS
WITH RESPECT TO LOANS TO ENTERPRISE ZONE BUSI-
NESSES.—
‘‘(1) IN
GENERAL.—For purposes of section
585(a)—
‘‘(A) the deduction for a reasonable addi-
tion to a reserve for bad debts shall be com-
puted separately with respect to qualified enter-
prise zone loans, and
‘‘(B) section 585(c) shall not apply to the
deduction computed under this subsection for a
reasonable addition to a reserve for bad debts
with respect to qualified enterprise zone loans.
‘‘(2) 
ADDITION
TO
RESERVE
FOR
BAD
DEBTS.—For purposes of section 585(a), the reason-
able addition to the reserve for bad debts of any fi-
nancial institution to which section 585 applies
(after the application of paragraph (1)) shall be an
amount determined by the taxpayer which shall not
exceed the addition to the reserve for losses on quali-
fied enterprise zone loans under the percentage
method as provided by paragraph (3).
‘‘(3) PERCENTAGE METHOD.—The amount de-
termined under this paragraph for any taxable year
shall be the amount necessary to increase the bal-
ance of the reserve for losses on loans (at the close
of the taxable year) to 10 percent of qualified enter-
prise zone loans outstanding at such time.
‘‘(4) BANKS USING EXPERIENCE METHOD.—In
the case of a bank to which section 585(a) applies
(determined without regard to this subsection), the
amount determined under paragraph (3) of this sub-
section for any taxable year shall in no event be less
than the amount determined under section 585(b)
for such taxable year with respect to qualified enter-
prise zone loans.
‘‘(5) QUALIFIED ENTERPRISE ZONE LOANS.—
For purposes of this subsection, the term ‘qualified
enterprise zone loan’ means any loan made to an en-
terprise zone business for use in the conduct of a
qualified business within a tax enterprise zone.
‘‘SEC. 1397B. 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,