Enterprise Capital Formation Act of 1997

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 otherwise expressly 
provided, whenever in this Act an amendment 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 
provision of the Internal Revenue Code of 1986.

SEC. 2. FINDINGS.

    The Congress hereby finds that--
            (1) investments in small business venture capital stock 
        should be encouraged because of both the special risks and the 
        social and economic benefits associated with such investments,
            (2) the exclusion from income of gain on small business 
        venture capital stock is an important incentive for individuals 
        and corporations to invest in such stock, and
            (3) tax incentives for investments in capital assets in 
        general should be supplemented with an effective tax incentive 
        for investments in small business venture capital stock.

SEC. 3. MODIFICATIONS TO EXCLUSION OF GAIN ON CERTAIN 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 inserting ``Partial''.
                    (B) The table of sections for part I of subchapter 
                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 corporation''.
            (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 controlled group not 
        eligible.--Stock of a member of a parent-subsidiary controlled 
        group (as defined 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 amended 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 limitation.--In the 
        case of stock issued in any calendar year after 1997, the 
        $100,000,000 amount contained in paragraph (1) shall be 
        increased by an amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, determined by substituting 
                `calendar year 1996' for `calendar year 1992' in 
                subparagraph (B) thereof.
        If any amount as adjusted under the preceding sentence 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 limitation.--Paragraph (6) of 
        section 1202(e) is amended--
                    (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 section 1202(c) is amended by adding 
        at the end the following new subparagraph:
                    ``(D) Waiver where business purpose.--A purchase of 
                stock by the issuing corporation shall be disregarded 
                for purposes of subparagraph (B) if the issuing 
                corporation establishes 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 subparagraph (D) and inserting a period, and by striking 
subparagraph (E).
    (i) Effective Dates.--
            (1) In general.--Except as provided in paragraph (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 issued 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 qualified stock issued after 
        August 10, 1993, if the taxpayer elects to apply such 
        amendments with respect to such stock.
            (2) Qualified stock.--For purposes of paragraph (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 Internal Revenue 
                Code of 1986) when issued but which would be qualified 
                small business stock (as so defined) if the amendments 
                made by subsections (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 market value.
                The preceding sentence shall not apply for purposes of 
                determining whether the stock is qualified small 
                business stock (as so defined).
                    (B) Treatment of gain or loss.--
                            (i) Any gain resulting from subparagraph 
                        (A) shall be treated as received or accrued on 
the date of the enactment of this Act, and shall be recognized 
notwithstanding any provision of the Internal Revenue Code of 1986.
                            (ii) Any loss resulting from subparagraph 
                        (A) shall not be allowed for any taxable 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 chapter 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 purposes of this 
section--
            ``(1) Qualified small business stock.--The term `qualified 
        small business stock' has the meaning given such term by 
        section 1202(c).
            ``(2) Eligible gain.--The term `eligible gain' means any 
        gain from the sale or exchange of qualified small business 
        stock held for more than 3 years.
            ``(3) Purchase.--A taxpayer shall be treated as having 
        purchased any property if, but for paragraph (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 acquired) 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 Replacement Stock.--
            ``(1) Holding period for accrued gain.--For purposes of 
        this chapter, gain from the disposition of any replacement 
        qualified small business stock shall be treated as gain from 
        the sale or exchange 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 purposes of deferral.--
        Solely for purposes of applying 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 business 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 subchapter 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.

Summary: Enterprise Capital Formation Act of 1997 - Amends the Internal Revenue Code to increase from 50 to 75 percent the exclusion from gain for a taxpayer (currently, excludes corporations) resulting from the sale or exchange of qualified small business stock held more than three (currently, five) years.  Exempts such exclusion from alternative minimum tax provisions.  Doubles the aggregate gross assets a business may have and still be considered a qualified small business. 
Provides for the nontaxable rollover of gain from qualified small business stock to another small business stock.