Entrepreneurial Equity Capital Formation Act

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Entrepreneurial Equity Capital 
Formation Act''.

TITLE I--TAX-FREE CONVERSIONS OF SPECIALIZED SMALL BUSINESS INVESTMENT 
                   COMPANIES INTO PASS-THRU ENTITIES

SEC. 101. MODIFICATIONS TO PROVISIONS RELATING TO REGULATED INVESTMENT 
              COMPANIES.

    (a) In General.--Section 851 of the Internal Revenue Code of 1986 
(relating to definition of regulated investment company) is amended by 
adding at the end the following new subsection:
    ``(i) Special Rules for Specialized Small Business Investment 
Companies.--
            ``(1) In general.--For purposes of determining whether a 
        specialized small business investment company is a regulated 
        investment company for purposes of this subchapter--
                    ``(A) income derived in connection with activities 
                as a specialized small business investment company 
                (including compensation for services rendered in 
                connection with investments made as part of such 
                activities) shall be treated as qualifying income under 
                subsection (b)(2),
                    ``(B) subsection (b)(3) shall not apply, and
                    ``(C) the requirements of subsection (b)(4) shall 
                be treated as met if, at the close of each quarter of 
                the taxable year, at least 50 percent of the value of 
                its total assets is represented by--
                            ``(i) assets described in subsection 
                        (b)(4)(A)(i), and
                            ``(ii) other investments permitted under 
                        the Small Business Investment Act of 1958.
            ``(2) Waiver of distribution requirement; certain earnings 
        and profits disregarded.--In the case of a specialized small 
        business investment company--
                    ``(A) section 852(a)(1) and section 4982(a) shall 
                not apply, and
                    ``(B) earning and profits accumulated while the 
                company is a specialized small business investment 
                company shall be disregarded for purposes of section 
                852(a)(2).
            ``(3) Specialized small business investment company.--For 
        purposes of this subsection, the term `specialized small 
        business investment company' means any corporation which--
                    ``(A) as of September 30, 1996, held a license to 
                operate under section 301(d) of the Small Business 
                Investment Act of 1958, or
                    ``(B) holds a license from the Small Business 
                Administration, issued after such date, to operate as a 
                specialized small business investment company.''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1996.

SEC. 102. TAX-FREE REORGANIZATION OF SPECIALIZED SMALL BUSINESS 
              INVESTMENT COMPANY AS A PARTNERSHIP.

    (a) In General.--If, during the 180-day period beginning on the 
date of the enactment of this Act, a corporation which is a specialized 
small business investment company transfers substantially all of its 
assets to a partnership (including its license to operate as a 
specialized small business investment company) solely in exchange for 
partnership interests in such partnership, no gain or loss shall be 
recognized to the corporation on such a transfer if--
            (1) immediately after such exchange, such corporation holds 
        partnership interests in such partnership having a value equal 
        to at least 80 percent of the total value of all partnership 
        interests in such partnership, and
            (2) before the close of such period, such corporation 
        transfers all partnership interests held by the corporation in 
        such partnership, and all remaining assets of the corporation, 
        to its shareholders in the complete liquidation of such 
        corporation.
If, prior to the date of enactment of this Act or at any time before 
the close of the 120-day period beginning on such date, a corporation 
files an application with the Small Business Administration for 
approval of a transfer described in the preceding sentence, the 180-day 
period referred to in the preceding sentence shall not expire before 
the date which is 180 days after the date such Administration grants 
preliminary approval of such transfer.
    (b) Nonrecognition of Gain or Loss to Corporation on Distribution 
of Partnership Interests.--In the case of any distribution of a 
partnership interest acquired by the liquidating corporation in an 
exchange to which subsection (a) applies--
            (1) no gain or loss shall be recognized to the liquidating 
        corporation by reason of such distribution, and
            (2) such distribution shall not be treated as a sale or 
        exchange for purposes of section 708(b)(1)(B) of the Internal 
        Revenue Code of 1986.
    (c) Gain Recognized by Shareholders on Receipt of Property Other 
Than Partnership Interests.--
            (1) In general.--No gain or loss shall be recognized to a 
        shareholder of a corporation on the transfer of such 
        shareholder's stock in such corporation to such corporation 
        solely in exchange for a partnership interest in the 
        partnership referred to in subsection (a)(1).
            (2) Receipt of property.--If paragraph (1) would apply to 
        an exchange but for the fact that there is received, in 
        addition to the partnership interests permitted to be received 
        under paragraph (1), other property or money, then--
                    (A) gain (if any) to such recipient shall be 
                recognized, but not in excess of--
                            (i) the amount of money received, plus
                            (ii) the fair market value of such other 
                        property received, and
                    (B) no loss to such recipient shall be recognized.
    (d) Basis.--The basis of property received in any exchange to which 
this section applies shall be determined in accordance with rules 
similar to the rules of section 358 of the Internal Revenue Code of 
1986.
    (e) Imposition of Tax in Certain Cases.--If, at any time during the 
3-year period beginning on the date of the transfer referred to in 
subsection (a) to a partnership, such partnership ceases its investment 
activities or ceases to have at least 75 percent of the value of its 
assets (at cost) represented by investments permitted for specialized 
small business investment companies under the Small Business Investment 
Act of 1958, there is hereby imposed a tax on the income of such 
partnership equal to the aggregate amount of tax which would have been 
imposed under chapter 1 of the Internal Revenue Code of 1986 but for 
subsections (a) and (b). Any tax imposed by this subsection shall be 
treated for purposes of such Code as a tax imposed by chapter 1.
    (f) Specialized Small Business Investment Company.--For purposes of 
this section, the term ``specialized small business investment 
company'' has the meaning given such term by section 1202(k) of the 
Internal Revenue Code of 1986 (as added by this Act).

  TITLE II--ADDITIONAL INCENTIVES RELATED TO INVESTING IN SPECIALIZED 
                  SMALL BUSINESS INVESTMENT COMPANIES

SEC. 201. EXPANSION OF NONRECOGNITION TREATMENT FOR SECURITIES GAIN 
              ROLLED OVER INTO SPECIALIZED SMALL BUSINESS INVESTMENT 
              COMPANIES.

    (a) Extension of Rollover Period.--Paragraph (1) of section 1044(a) 
of the Internal Revenue Code of 1986 (relating to nonrecognition of 
gain) is amended by striking ``60-day period'' and inserting ``180-day 
period''.
    (b) Increase of Maximum Exclusion.--
            (1) In general.--Paragraphs (1) and (2) of section 1044(b) 
        of such Code (relating to limitations) are amended to read as 
        follows:
            ``(1) Limitation on individuals.--In the case of an 
        individual, the amount of gain which may be excluded under 
        subsection (a) for any taxable year shall not exceed--
                    ``(A) $750,000, reduced by
                    ``(B) the amount of gain excluded under subsection 
                (a) for all preceding taxable years.
            ``(2) Limitation on C corporations.--In the case of a C 
        corporation, the amount of gain which may be excluded under 
        subsection (a) for any taxable year shall not exceed--
                    ``(A) $2,000,000, reduced by
                    ``(B) the amount of gain excluded under subsection 
                (a) for all preceding taxable years.''
            (2) Conforming amendment.--Subparagraph (A) of section 
        1044(b)(3) of such Code (relating to special rules for married 
        individuals) is amended to read as follows:
                    ``(A) Separate returns.--In the case of a separate 
                return by a married individual, paragraph (1) shall be 
                applied by substituting `$375,000' for `$750,000'.''
    (c) Extension to Preferred Stock.--Paragraph (1) of section 1044(a) 
of such Code is amended by striking ``common''.
    (d) Definition of Specialized Small Business Investment Company.--
Paragraph (3) of section 1044(c) of such Code (relating to definitions 
and special rules) is amended to read as follows:
            ``(3) Specialized small business investment company.--The 
        term `specialized small business investment company' means any 
        partnership or corporation which--
                    ``(A) as of September 30, 1996, is licensed by the 
                Small Business Administration under section 301(d) of 
                the Small Business Investment Act of 1958, or
                    ``(B) holds a license from the Small Business 
                Administration, issued after such date, to operate as a 
                specialized small business investment company.''
    (e) Effective Date.--The amendments made by this section shall 
apply to sales occurring after the date of the enactment of this Act.

SEC. 202. MODIFICATIONS TO EXCLUSION FOR GAIN FROM QUALIFIED SMALL 
              BUSINESS STOCK.

    (a) In General.--Section 1202 of the Internal Revenue Code of 1986 
(relating to 50-percent exclusion for gain from certain small business 
stock) is amended by redesignating subsection (k) as subsection (l) and 
by inserting after subsection (j) the following new subsection:
    ``(k) Special Rules for Specialized Small Business Investment 
Companies.--
            ``(1) Increase in exclusion; corporate investors 
        eligible.--In the case of--
                    ``(A) the sale or exchange of stock in a 
                specialized small business investment company, and
                    ``(B) any amount treated under subsection (g) or 
                paragraph (2) of this subsection as gain described in 
                subsection (a) by reason of the holding, sale, or 
                exchange of an interest in a specialized small business 
                investment company,
        subsection (a) shall be applied by substituting `60 percent' 
        for `50 percent' and, in the case of interests acquired after 
        the date of the enactment of this subsection, without being 
        limited to taxpayers other than corporations.
            ``(2) Exclusion allowable for certain gain on sale or 
        exchange of interests in certain specialized small business 
        investment companies.--
                    ``(A) In general.--If any interest in a specialized 
                small business investment company which is a pass-thru 
                entity (as defined in subsection (g)(4)) is sold or 
                exchanged, gain on such sale or exchange shall be 
                treated as gain described in subsection (a) to the 
                extent attributable to unrealized small business stock 
                gain.
                    ``(B) Unrealized small business stock gain.--For 
                purposes of subparagraph (A), the term `unrealized 
                small business stock gain' means the amount which would 
                be eligible gain if the qualified small business stock 
                held by such company had been sold at the time of the 
                sale of the interest referred to in subparagraph (A).
                    ``(C) Certain rules to apply.--Rules similar to the 
                rules of paragraphs (2)(B) and (3) of subsection (g) 
                shall apply for purposes of this subsection.
            ``(3) Application of active business requirement to stock 
        held by specialized small business investment companies.--For 
        purposes of determining whether stock held by a specialized 
        small business investment company is qualified small business 
        stock, subsection (e) shall be applied by treating as a 
        qualified trade or business any trade or business in which such 
        company is permitted to invest under the Small Business 
        Investment Act of 1958.
            ``(4) Specialized small business investment company.--For 
        purposes of this subsection, the term `specialized small 
        business investment company' means any partnership or 
        corporation which--
                    ``(A) as of September 30, 1996, is licensed by the 
                Small Business Administration under section 301(d) of 
                the Small Business Investment Act of 1958, or
                    ``(B) holds a license from the Small Business 
                Administration, issued after such date, to operate as a 
                specialized small business investment company.''
    (b) Definition of Specialized Small Business Investment Company for 
Purposes of Waiver of Active Business Requirement.--Subparagraph (B) of 
section 1202(c)(2) of such Code is amended to read as follows:
                    ``(B) Special rule for specialized small business 
                investment companies.--Notwithstanding any provision of 
                subsection (e), a corporation shall be treated as 
                meeting the active business requirements of such 
                subsection for any period during which such corporation 
                qualifies as a specialized small business investment 
                company (as defined in subsection (k)(4)).''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.

Summary: TABLE OF CONTENTS: 
     Title I:  Tax-Free Conversions of Specialized Small Business 
          Investment Companies Into Pass-Thru Entities 
     Title II:  Additional Incentives Related to Investing in 
          Specialized Small Business Investment Companies 
Entrepreneurial Equity Capital Formation Act - 
Title I:  Tax-Free Conversions of Specialized Small Business Investment Companies Into Pass-Thru Entities
 - Amends the Internal Revenue Code to set forth special rules for determining whether a specialized small business investment company is a regulated investment company, to define such a company, to waive the distribution requirement for such a company, and to disregard certain earnings and profits of such a company. 
Permits the tax-free reorganization of a specialized small investment company as a partnership if the reorganization is carried out within a specified time period following enactment and other specified conditions are met. 
Title II:  Additional Incentives Related to Investing in Specialized Small Business Investment Companies
 - Sets forth additional tax incentives for investing in specialized small business investment companies.