[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1949 Introduced in House (IH)]

103d CONGRESS
  1st Session
                                H. R. 1949

 To amend the Internal Revenue Code of 1986 to provide a capital gain 
 exclusion for investments in qualified businesses with employee stock 
          ownership programs within Federal enterprise zones.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             April 29, 1993

 Mr. Weldon (for himself and Mr. Andrews of New Jersey) introduced the 
 following bill; which was referred to the Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to provide a capital gain 
 exclusion for investments in qualified businesses with employee stock 
          ownership programs within Federal enterprise zones.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled, That (a) chapter 1 of 
the Internal Revenue Code of 1986 (relating to normal taxes and 
surtaxes) is amended by inserting after subchapter T the following new 
subchapter:

  Subchapter U--Capital Gain Exclusion For Investments In Enterprise 
                                 Zones

                              ``Sec. 1391. 100 percent exclusion for 
                                        gain from new zone investments.
                              ``Sec. 1392. Enterprise zone business 
                                        defined.
                              ``Sec. 1393. Tax enterprise zone.

``SEC. 1391. 100 PERCENT EXCLUSION FOR GAIN FROM NEW ZONE INVESTMENTS.

    ``(a) General Rule.--Gross income shall not include 100 percent of 
any qualified capital gain recognized on the sale or exchange of a 
qualified zone asset held for more than 5 years.
    ``(b) Qualified Zone Asset.--For purposes of this section--
            ``(1) In general.--The term `qualified zone asset' means--
                    ``(A) any qualified zone stock,
                    ``(B) any qualified zone business property, and
                    ``(C) any qualified zone partnership interest.
            ``(2) Qualified zone stock.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the term `qualified zone stock' means 
                any stock in a domestic corporation if--
                            ``(i) such stock is acquired by the 
                        taxpayer on original issue from the corporation 
                        solely in exchange for cash,
                            ``(ii) as of the time such stock was 
                        issued, such corporation was an enterprise zone 
                        business (or, in the case of a new corporation, 
                        such corporation was being organized for 
                        purposes of being an enterprise zone business), 
                        and
                            ``(iii) during substantially all of the 
                        taxpayer's holding period for such stock, such 
                        corporation qualified as an enterprise zone 
                        business.
                    ``(B) Redemptions.--The term `qualified zone stock' 
                shall not include any stock acquired from a corporation 
                which made a substantial stock redemption or 
                distribution (without a bona fide business purpose 
                therefor) in an attempt to avoid the purposes of this 
                section.
            ``(3) Qualified zone business property.--
                    ``(A) In general.--The term `qualified 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 the date on which the 
                        designation of the tax enterprise zone took 
                        effect,
                            ``(ii) the original use of such property in 
                        a tax enterprise 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 tax enterprise zone and in an 
                        enterprise zone business of the taxpayer.
                    ``(B) Special rule for substantial improvements.--
                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, property shall 
                be treated as subtantially improved by the taxpayer if, 
                during any 24-month period beginning after the date on 
                which the designation of the tax enterprise zone took 
                effect, 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 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 include land which is not 
                an integral part of a qualified business (as defined in 
                section 1392(c)).
            ``(4) Qualified zone partnership interest.--The term 
        `qualified zone partnership interest' means any interest in a 
        partnership if--
                    ``(A) such interest is acquired by the taxpayer 
                from the partnership solely in exchange for cash,
                    ``(B) as of the time such interest was acquired, 
                such partnership was an enterprise zone business (or, 
                in the case of a new partnership, such partnership was 
                being organized for purposes of being an enterprise 
                zone business), and
                    ``(C) during substantially all of the taxpayer's 
                holding period for such interest, such partnership 
                qualified as an enterprise zone business.
        A rule similar to the rule of paragraph (2)(B) shall apply for 
        purposes of this paragraph.
            ``(5) Treatment of subsequent purchasers.--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 (3)(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 paragraph (2)(A)(iii), 
        (3)(A)(iii), or (3)(C) after the 10-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 
        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 ordinary income under section 1250 if 
        section 1250 applied to all depreciation rather than the 
        additional depreciation.
            ``(3) Gain attributable to periods after termination of 
        zone designation not qualified.--The term `qualified capital 
        gain' shall not include any gain attributable to periods after 
        the termination of any designation of an area as a tax 
        enterprise 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 (determined 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 paragraph 
        (2)(C) shall apply for purposes of the preceding 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 substantially all of the period the 
                taxpayer held the interest to which such inclusion 
                relates) shall be treated as gain described in 
                subsection (a) if such amount meets the requirements of 
                subparagraph (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 which was 
                        held by the taxpayer on the date on which such 
                        pass-thru entity acquired such asset and at all 
                        times thereafter before the disposition of such 
                        asset by such pass-thru entity.
                    ``(C) Limitation based on interest originally held 
                by taxpayer.--Subparagraph (A) shall not apply to any 
                amount to the extent such amount exceeds the amount to 
                which subparagraph (A) would have applied if such 
                amount were determined by reference to the interest the 
                taxpayer held in the pass-thru entity on the date the 
                qualified zone asset was acquired.
            ``(3) Pass-thru entity.--For purposes of this subsection, 
        the term `pass-thru entity' means--
                    ``(A) any partnership,
                    ``(B) any S corporation,
                    ``(C) any regulated investment company, and
                    ``(D) any common trust fund.
    ``(e) Sales and Exchanges of Interests in Partnerships and S 
Corporations Which are Qualified 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 an enterprise 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--
            ``(1) any intangible, and any land, which is not an 
        integral part of any qualified business (as defined in section 
        1392(b)), and
            ``(2) gain attributable to periods before the designation 
        of an area as a tax enterprise zone.
    ``(f) Certain Tax-Free and Other Transfers.--For purposes of this 
section--
            ``(1) In general.--In the case of a transfer of a qualified 
        zone asset to which this subsection applies, the transferee 
        shall be treated as--
                    ``(A) having acquired such asset in the same manner 
                as the transferor, and
                    ``(B) having held such asset during any continuous 
                period immediately preceding the transfer during which 
                it was held (or treated as held under this subsection) 
                by the transferor.
            ``(2) Transfers to which subsection applies.--This 
        subsection shall apply to any transfer--
                    ``(A) by gift,
                    ``(B) at death, or
                    ``(C) from a partnership to a partner thereof of a 
                qualified zone asset with respect to which the 
                requirements of subsection (d)(2) are met at the time 
                of the transfer (without regard to the 5-year holding 
                requirement).
            ``(3) Certain rules made applicable.--Rules similar to the 
        rules of section 1244(d)(2) shall apply for purposes of this 
        section.
    ``(g) 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 1392 except that, in applying 
section 1392 for such purposes, the term `qualified business' shall not 
include any trade or business of producing property of a character 
subject to the allowance for depletion under section 611.

``SEC. 1392. ENTERPRISE ZONE BUSINESS DEFINED.

    ``(a) In General.--For purposes of this subpart, the term 
`enterprise zone business' means, with respect to any taxable year, any 
corporation or partnership 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 income of such 
        entity is derived from the active conduct of such businesses,
            ``(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) such entity offers its employees an opportunity to 
        purchase equity interests in such entity and at least 5 percent 
        (by value) of the equity interests in such entity are held 
        (directly or through a defined contribution plan which meets 
        the requirements of section 401(a)) by employees who (as of the 
        time of the acquisition of the interests) were disadvantaged 
        residents of a tax enterprise zone,
            ``(7) 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
            ``(8) less than 5 percent of the average of the aggregate 
        unadjusted bases of the property of such entity is attributable 
        to nonqualified financial property.
    ``(b) Disadvantaged Residents.--For purposes of subsection (a), an 
employee is a disadvantaged resident of a tax enterprise zone if such 
employee is a resident of such zone and if--
            ``(1) such employee is a member of an economically 
        disadvantaged family (within the meaning of section 51(d)(11)), 
        or
            ``(2) the family income (within the meaning of section 
        143(f)(2)) of such employee is less than 50 percent of the 
        applicable median family income (as defined in section 
        143(f)(4)).
    ``(c) Qualified Business.--For purposes of this section--
            ``(1) In general.--Except as otherwise provided 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 property 
                (as so defined)--
                            ``(i) such property was originally placed 
                        in service after the date the tax enterprise 
                        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 property.--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 
        residents of a tax enterprise zone.
            ``(4) Treatment of business holding intangibles.--The term 
        `qualified business' shall not include any trade or business 
        consisting predominantly 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.
    ``(d) Nonqualified Financial Property.--For purposes of this 
section, the term `nonqualified financial property' means debt, stock, 
partnership interests, options, futures contracts, forward contracts, 
warrants, notional 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).

``SEC. 1393. TAX ENTERPRISE ZONE.

    ``For purposes of this subchapter, the term `tax enterprise zone' 
means any area hereafter designated as an enterprise zone or tax 
enterprise zone pursuant to any law enacted after the date of the 
enactment of this section.''
    (b) Clerical Amendment.--The table of subchapters for chapter 1 of 
such Code is amended by inserting after the item relating to subchapter 
T the following new subchapter:

                              ``Subchapter U--Capital gain exclusion 
                                        for investments in enterprise 
                                        zones.''

                                 <all>

HR 1949 IH----2