To amend the Internal Revenue Code of 1986 to provide tax incentives for Hurricane Katrina recovery in the Gulf Opportunity Zone.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Katrina Economic Opportunity Act''.

SEC. 2. TAX BENEFITS FOR GULF OPPORTUNITY ZONE.

    (a) In General.--Subchapter Y of chapter 1 of the Internal Revenue 
Code of 1986 is amended by adding at the end the following new section:

``SEC. 1400M. TAX BENEFITS FOR GULF OPPORTUNITY ZONE.

    ``(a) Zero Percent Capital Gains Rate.--
            ``(1) Exclusion.--Gross income shall not include qualified 
        capital gain from the sale or exchange of any Gulf Opportunity 
        Zone asset held for more than 5 years.
            ``(2) Gulf opportunity zone.--For purposes of this 
        subsection, the term `Gulf Opportunity Zone asset' means--
                    ``(A) any Gulf Opportunity Zone business stock,
                    ``(B) any Gulf Opportunity Zone partnership 
                interest, and
                    ``(C) any Gulf Opportunity Zone business property.
            ``(3) Gulf opportunity zone business stock.--For purposes 
        of this subsection--
                    ``(A) In general.--The term `Gulf Opportunity Zone 
                business stock' means any stock in a domestic 
                corporation which is originally issued after August 28, 
                2005, if--
                            ``(i) such stock is acquired by the 
                        taxpayer, before January 1, 2007, at its 
                        original issue (directly or through an 
                        underwriter) solely in exchange for cash,
                            ``(ii) as of the time such stock was 
                        issued, such corporation was a Gulf Opportunity 
                        Zone business (or, in the case of a new 
                        corporation, such corporation was being 
                        organized for purposes of being a Gulf 
                        Opportunity Zone business), and
                            ``(iii) during substantially all of the 
                        taxpayer's holding period for such stock, such 
                        corporation qualified as a Gulf Opportunity 
                        Zone business.
                    ``(B) Redemptions.--A rule similar to the rule of 
                section 1202(c)(3) shall apply for purposes of this 
                paragraph.
            ``(4) Gulf opportunity zone partnership interest.--For 
        purposes of this subsection, the term `Gulf Opportunity Zone 
        partnership interest' means any capital or profits interest in 
        a domestic partnership which is originally issued after August 
        28, 2005, if--
                    ``(A) such interest is acquired by the taxpayer, 
                before January 1, 2007, from the partnership solely in 
                exchange for cash,
                    ``(B) as of the time such interest was acquired, 
                such partnership was a Gulf Opportunity Zone business 
                (or, in the case of a new partnership, such partnership 
                was being organized for purposes of being a Gulf 
                Opportunity Zone business), and
                    ``(C) during substantially all of the taxpayer's 
                holding period for such interest, such partnership 
                qualified as a Gulf Opportunity Zone business.
        A rule similar to the rule of subparagraph (B)(ii) shall apply 
        for purposes of this paragraph.
            ``(5) Gulf opportunity zone business property.--For 
        purposes of this subsection--
                    ``(A) In general.--The term `Gulf Opportunity Zone 
                business property' means tangible property if--
                            ``(i) such property was acquired by the 
                        taxpayer by purchase (as defined in section 
                        179(d)(2)) after August 28, 2005, and before 
                        January 1, 2007,
                            ``(ii) the original use of such property in 
                        the Gulf Opportunity Zone commences with the 
                        taxpayer, and
                            ``(iii) during substantially all of the 
                        taxpayer's holding period for such property, 
                        substantially all of the use of such property 
                        was in a Gulf Opportunity Zone business of the 
                        taxpayer.
                    ``(B) Special rule for buildings which are 
                substantially improved.--
                            ``(i) In general.--The requirements of 
                        clauses (i) and (ii) of subparagraph (A) shall 
                        be treated as met with respect to--
                                    ``(I) property which is 
                                substantially improved by the taxpayer 
                                before January 1, 2007, and
                                    ``(II) any land on which such 
                                property is located.
                            ``(ii) Substantial improvement.--For 
                        purposes of clause (i), property shall be 
                        treated as substantially improved by the 
                        taxpayer only if, during any 24-month period 
                        beginning after August 28, 2005, additions 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 of such property at the 
                                beginning of such 24-month period in 
                                the hands of the taxpayer, or
                                    ``(II) $5,000.
            ``(6) Gulf opportunity zone business.--For purposes of this 
        subsection, the term `Gulf Opportunity Zone business' means any 
        corporation, partnership, or business which would be an 
        enterprise zone business (as defined in section 1397C) if such 
        section were applied by substituting `Gulf Opportunity Zone' 
        for `empowerment zone' each place it appears.
            ``(7) Special rules related to gulf opportunity zone 
        assets.--For purposes of this subsection--
                    ``(A) Treatment of subsequent purchasers, etc.--For 
                purposes of this subsection, the term `Gulf Opportunity 
                Zone asset' includes any property which would be a Gulf 
                Opportunity Zone asset but for paragraph (3)(A)(i), 
                (4)(A), or (5)(A)(i) or (ii) in the hands of the 
                taxpayer if such property was a Gulf Opportunity Zone 
                asset in the hands of a prior holder.
                    ``(B) 5-year safe harbor.--If any property ceases 
                to be a Gulf Opportunity Zone asset by reason of 
                paragraph (3)(A)(iii), (4)(C), or (5)(A)(iii) after the 
                5-year period beginning on the date the taxpayer 
                acquired such property, such property shall continue to 
                be treated as meeting the requirements of such 
                paragraph; except that the amount of gain to which 
                paragraph (1) 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.
            ``(8) Qualified capital gain.--For purposes of this 
        subsection--
                    ``(A) In general.--Except as otherwise provided in 
                this paragraph, the term `qualified capital gain' means 
                any gain recognized on the sale or exchange of--
                            ``(i) a capital asset, or
                            ``(ii) property used in the trade or 
                        business (as defined in section 1231(b).
                    ``(B) Gain before hurricane or after 2011 not 
                qualified.--The term `qualified capital gain' shall not 
                include any gain attributable to periods before August 
                29, 2005, or after December 31, 2011.
                    ``(C) Certain ordinary income gain not qualified.--
                The term `qualified capital gain' shall not include any 
                gain which would be treated as ordinary income under 
                section 1245 or under section 1250 if section 1250 
                applied to all depreciation rather than the additional 
                depreciation.
                    ``(D) Intangibles and land not integral part of 
                gulf opportunity zone business.--The term `qualified 
                capital gain' shall not include any gain which is 
                attributable to real property, or an intangible asset, 
                which is not an integral part of a Gulf Opportunity 
                Zone business.
                    ``(E) Related party transactions.--The term 
                `qualified capital gain' shall not include any gain 
                attributable, directly or indirectly, in whole or in 
                part, to a transaction with a related person. For 
                purposes of this subparagraph, persons are related to 
                each other if such persons are described in section 
                267(b) or 707(b)(1).
            ``(9) Certain other rules to apply.--Rules similar to the 
        rules of subsections (g), (h), (i)(2), and (j) of section 1202 
        shall apply for purposes of this subsection.
            ``(10) Sales and exchanges of interests in partnerships and 
        s corporations which are gulf opportunity zone businesses.--In 
        the case of the sale or exchange of an interest in a 
        partnership, or of stock in an S corporation, which was a Gulf 
        Opportunity Zone business during substantially all of the 
        period the taxpayer held such interest or stock, the amount of 
        qualified capital gain shall be determined without regard to--
                    ``(A) any gain which is attributable to real 
                property, or an intangible asset, which is not an 
                integral part of a Gulf Opportunity Zone business, and
                    ``(B) any gain attributable to periods before 
                August 29, 2005, or after December 31, 2011.
    ``(b) Increase and Expansion of Expensing of Business Property.--
            ``(1) Waiver of dollar limitations.--The limitations of 
        paragraphs (1) and (2) of section 179(b) shall not apply to 
        Gulf Opportunity Zone property and shall be applied to other 
        property without regard to Gulf Opportunity Zone property.
            ``(2) Inclusion of real property, etc.--Gulf Opportunity 
        Zone property shall be treated as section 179 property (as 
        defined in section 179(d)) without regard to the limitation of 
        subparagraph (B) of section 179(d)(1).
            ``(3) Gulf opportunity zone property.--The term `Gulf 
        Opportunity Zone property' means any property--
                    ``(A) placed in service by the taxpayer during the 
                period beginning on August 28, 2005, and ending on 
                December 31, 2007, in the Gulf Opportunity Zone, and
                    ``(B) substantially all of the use of which is in 
                such Zone and is in the active conduct of a trade or 
                business by the taxpayer in such Zone.
            ``(4) Recapture.--Rules similar to the rules under section 
        170(d)(10) shall apply with respect to any Gulf Opportunity 
        Zone property which ceases to be used in the Gulf Opportunity 
        Zone.
    ``(c) Application of New Markets Tax Credit.--
            ``(1) In general.--The Gulf Opportunity Zone shall be 
        treated as a low-income community for purposes of section 45D.
            ``(2) Coordination with national limitation.--
                    ``(A) In general.--Any credit allowed under section 
                45D by reason of paragraph (1) shall not be taken into 
                account under section 45D(f).
                    ``(B) Separate limitation.--There is a limitation 
                on the aggregate credits allowed under section 45D by 
                reason of paragraph (1). Such limitation is--
                            ``(i) $32,200,000 for 2005,
                            ``(ii) $56,300,000 for 2006, and
                            ``(iii) $56,300,000 for 2007.
                    ``(C) Allocation of limitation.--The limitation 
                under subparagraph (B) shall be allocated by the 
                Secretary among those qualified community development 
                entities (as defined in section 45D(c)) with respect to 
                the Gulf Opportunity Zone which are selected by the 
                Secretary. In making allocations under the preceding 
                sentence, the Secretary shall give priority to entities 
                described in subparagraph (A) or (B) of section 
                45D(f)(2).
                    ``(D) Carryover of unused limitation.--The rules of 
                paragraph (3) of section 45D(f) shall apply for 
                purposes of this paragraph.
    ``(d) Gulf Opportunity Zone.--For purposes of this section, the 
term `Gulf Opportunity Zone' means an area determined by the President 
to warrant individual or individual and public assistance from the 
Federal Government under the Robert T. Stafford Disaster Relief and 
Emergency Assistance Act by reason of Hurricane Katrina.''.
    (b) Conforming Amendments.--
            (1) The heading for subchapter Y of chapter 1 of such Code 
        is amended to read as follows:

             ``Subchapter Y--Temporary Regional Benefits''.

            (2) The table of sections for such subchapter is amended by 
        adding at the end the following new item:

``Sec. 1400M. Tax benefits for Gulf Opportunity Zone.''.

Summary: Katrina Economic Opportunity Act - Amends the Internal Revenue Code to: (1) exclude from gross income gain from the sale or exchange of a Gulf Opportunity Zone asset (business stock, partnership interest, or property in a Hurricane Katrina disaster area) held for more than five years; (2) waive small business asset expensing limits for Gulf Opportunity Zone assets; and (3) qualify Gulf Opportunity Zone investments for the new markets tax credit.