[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[H.R. 850 Introduced in House (IH)]

103d CONGRESS
  1st Session
                                H. R. 850

 To amend the Internal Revenue Code of 1986 to provide tax incentives 
             for the establishment of tax enterprise zones.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                            February 4, 1993

Mr. Moakley (for himself and Mr. Studds) 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 tax incentives 
             for the establishment of tax enterprise zones.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Tax Enterprise 
Zone Act of 1993''.
    (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. STATEMENT OF PURPOSE.

    It is the purpose of this Act to establish a demonstration program 
of providing incentives for the creation of tax enterprise zones in 
order--
            (1) to revitalize economically and physically distressed 
        areas, primarily by encouraging the formation of new businesses 
        and the retention and expansion of existing businesses,
            (2) to promote meaningful employment for tax enterprise 
        zone residents, and
            (3) to encourage individuals to reside in the tax 
        enterprise zones in which they are employed.

SEC. 3. DESIGNATION AND TREATMENT OF URBAN TAX ENTERPRISE ZONES AND 
              RURAL DEVELOPMENT INVESTMENT ZONES.

    (a) In General.--Chapter 1 (relating to normal taxes and surtaxes) 
is amended by inserting after subchapter T the following new 
subchapter:

   ``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 enterprise 
                zone, or
                    ``(B) the Secretary of Agriculture, in consultation 
                with the Secretary of Commerce, in the case of a rural 
                development investment zone.
    ``(b) Number of Designations.--
            ``(1) Aggregate limit.--The appropriate Secretaries may 
        designate in the aggregate 50 nominated areas as tax enterprise 
        zones under this section, subject to the availability of 
        eligible nominated areas. Not more than 25 urban tax enterprise 
        zones may be designated and not more than 25 rural development 
        investment zones may be designated. Such designations may be 
        made only during calendar years after 1992 and before 1998.
            ``(2) Annual limits.--
                    ``(A) Urban tax enterprise zones.--The number of 
                urban tax enterprise zones designated under paragraph 
                (1)--
                            ``(i) before 1995 shall not exceed 8,
                            ``(ii) before 1996 shall not exceed 15, and
                            ``(iii) before 1997 shall not exceed 21.
                    ``(B) Rural development investment zones.--The 
                number of rural development investment zones designated 
                under paragraph (1)--
                            ``(i) before 1995 shall not exceed 8,
                            ``(ii) before 1996 shall not exceed 15, and
                            ``(iii) before 1997 shall not exceed 21.
            ``(3) Advance designations permitted.--For purposes of this 
        subchapter, a designation during any calendar year shall be 
        treated as made on January 1 of the following calendar year if 
        the appropriate Secretary, in making such designation, 
        specifies that such designation is effective as of such January 
        1.
    ``(c) Limitations on Designations.--The appropriate Secretary may 
not make any designation under subsection (a) unless--
            ``(1) the local governments and the State in which the 
        nominated area is located have the authority--
                    ``(A) to nominate the area for designation as a tax 
                enterprise zone, and
                    ``(B) to provide assurances satisfactory to the 
                appropriate Secretary that the commitments 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 included in a tax 
        enterprise zone or in an area otherwise nominated to be 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 revokes 
                the designation under paragraph (2).
            ``(2) Revocation of designation.--
                    ``(A) In general.--The appropriate Secretary shall 
                revoke the designation of an area as a tax enterprise 
                zone if such Secretary determines 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 pursuant to 
                        section 1392(c).
                    ``(B) Applicable procedures.--A designation 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 1391 only on the basis of the 
eligibility and selection criteria set forth in this section.
    ``(b) Eligibility Criteria.--
            ``(1) Urban tax enterprise zones.--A nominated area which 
        is not 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 recent census 
                data available) of not less than 4,000.
                    ``(B) Distress.--The nominated area is one of 
                pervasive poverty, unemployment, and general distress. 
                For purposes of determining whether any area is an area 
                of general distress, the factors to be taken into 
                account may include high crime rates, high vacancy 
                rates, and designation as a disaster area or high 
                density drug trafficking area.
                    ``(C) Size.--The nominated area--
                            ``(i) does not exceed 20 square miles,
                            ``(ii) has a boundary which is continuous, 
                        or consists of not more than 3 noncontiguous 
                        parcels within the same metropolitan area, and
                            ``(iii) is located entirely within 1 State.
                    ``(D) Unemployment rate.--The unemployment rate (as 
                determined by the appropriate 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) 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 action 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 recent 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) does not exceed 10,000 square miles,
                            ``(ii) consists of areas within not more 
                        than 4 contiguous counties,
                            ``(iii) has a boundary which is continuous, 
                        or consists of not more than 3 noncontiguous 
                        parcels, and
                            ``(iv) is located entirely within 1 State.
                    ``(D) Additional criteria.--Not less than 2 of the 
                following criteria:
                            ``(i) Unemployment rate.--The criterion 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 population 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 action 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 governments 
        will follow a specified course of action designed to reduce the 
        various burdens borne by employers 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 applying 
                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 requirements applicable 
                within the tax enterprise zone,
                    ``(E) the involvement in the program by public 
                authorities or private entities, organizations, 
                neighborhood associations, and community groups, 
                particularly those within the nominated area, including 
                a written commitment to provide jobs and job training 
                for, and technical, financial, or other assistance to, 
                employers, employees, 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 operate 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 encourage 
                local financial institutions to satisfy their 
                obligations under the Community Reinvestment Act of 
                1977 (12 U.S.C. 2901 et seq.) by making loans to 
                enterprise zone businesses, with emphasis on startup 
                and other small-business 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 
                facilities located in tax enterprise zones, in the 
                allocation 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 involved.
            ``(4) Prohibition of assistance for business relocations.--
                    ``(A) In general.--The course of action implemented 
                under paragraph (1) may not include any action to 
                assist any establishment in relocating from one area to 
                another area.
                    ``(B) Exception.--The limitation established in 
                subparagraph (A) shall not be construed to prohibit 
                assistance for the expansion of an existing business 
                entity through the establishment of a new branch, 
                affiliate, or subsidiary if--
                            ``(i) the establishment of the new branch, 
                        affiliate, or subsidiary will not result in an 
                        increase in unemployment in the area of 
                        original location or in any other area where 
                        the existing business entity conducts business 
                        operations, and
                            ``(ii) there is no reason to believe that 
                        the new branch, affiliate, or subsidiary is 
                        being established with the intention of closing 
                        down the operations of the existing business 
                        entity in the area of its original location or 
                        in any other area where the existing business 
                        entity conducts business operations.
    ``(d) Selection Criteria.--From among the nominated areas eligible 
for designation under subsection (b) by the appropriate Secretary, such 
appropriate Secretary shall make designations of tax enterprise zones 
on the basis of the following factors (each of which is to be given 
equal weight):
            ``(1) State and local commitments.--The strength and 
        quality of the commitments which have been promised as part of 
        the course of action relative to the fiscal ability of the 
        nominating State and local governments.
            ``(2) Implementation of course of action.--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 resources and contributions to 
        the economy of the nominated area, including the creation of 
        new or expanded business activities.
            ``(4) Average rankings.--The average ranking with respect 
        to--
                    ``(A) the criteria set forth in subparagraphs (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 potential 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 enterprise 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 government seeks 
        to nominate an area as a tax enterprise 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, parish, 
                village, or other general purpose political subdivision 
                of a State, and
                    ``(B) any combination of political subdivisions 
                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 Agriculture, 
                after consultation with the Secretary of Commerce, to 
                be a rural area.
            ``(7) Appropriate secretary.--The term `appropriate 
        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 corporations.--An area 
        shall be treated as nominated by a State and a local government 
        if it is nominated by an economic development corporation 
        chartered by the State.

             ``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. 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 employer 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 section, 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 qualified zone employee, the 
        amount of qualified zone wages which may be taken into account 
        for the taxable 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 individual 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 provided in this 
        subsection, the term `qualified zone employee' means, with 
        respect to any period, any employee of an employer if--
                    ``(A) substantially all of the services performed 
                during such period by such employee for such employer 
                are performed within a tax enterprise zone in a trade 
                or business of the employer, 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 include--
                    ``(A) any individual described in subparagraph (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 employer at 
                any facility described in section 144(c)(6)(B), and
                    ``(D) any individual employed by the employer in a 
                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 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 Secretary),
                exceeds $500,000.
    ``(d) Early Termination of Employment by Employer.--
            ``(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 employee shall 
                be taken into account under subsection (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 terminated 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 adjusted.--In the case of 
        any termination of employment 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 employment 
                        of the taxpayer,
                            ``(ii) a termination of employment of an 
                        individual who before the close of the period 
                        referred to in paragraph (1) becomes 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 reemployment to such individual, or
                            ``(iii) a termination of employment of an 
                        individual if it is determined under the 
                        applicable State unemployment compensation 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 employee 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 business of the 
                        taxpayer if the employee continues to be 
                        employed in such trade or business and the 
                        taxpayer retains a substantial 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. 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 section 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 Payment of Earned Income 
Credit.--Each employer shall take reasonable steps to notify all 
qualified zone employees of the availability to eligible individuals of 
receiving advanced payments of the credit under section 32 (relating to 
the earned income credit).

                   ``Subpart B--Investment Incentives

                              ``Sec. 1396. Deduction for purchase of 
                                        enterprise zone stock.
                              ``Sec. 1397. 50 percent exclusion for 
                                        gain from new zone investments.
                              ``Sec. 1397A. Nonrecognition of gain from 
                                        new zone investments.
                              ``Sec. 1397B. Other incentives.
                              ``Sec. 1397C. Enterprise zone business 
                                        defined.

``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 enterprise zone stock.
    ``(b) Limitation.--
            ``(1) In general.--The maximum amount allowed as a 
        deduction under subsection (a) to a taxpayer 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 section to the 
                taxpayer for all prior taxable years.
            ``(2) Excess amounts.--If the amount otherwise 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 paragraph (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 qualified enterprise 
        zone property.--
                    ``(A) In general.--Such term shall include such 
                stock only to the extent that the proceeds 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 property.--For 
                purposes of this section, the term `qualified 
                enterprise zone property' means property 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 redemption or distribution (without a bona 
        fide business 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 individuals 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 reduced 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 depreciation.
        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 (determined without regard to this paragraph).
            ``(3) Certain events treated as dispositions.--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 enterprise 
                        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 reference to the adjusted 
                        basis of such stock) before the end of the 5-
                        year period beginning 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 (determined 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 aggregate 
                        decrease in tax of the taxpayer resulting 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 
        disposing of such stock (and any other property the basis of 
        which is determined in whole or in part by reference 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 partnerships and s 
        corporations.--In the case of a partnership or an S 
        corporation, the limitations under subsection (b) shall apply 
        at the partner and shareholder 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 treated as individuals for purposes of 
        this section.

``SEC. 1397. 50 PERCENT EXCLUSION FOR GAIN FROM NEW ZONE INVESTMENTS.

    ``(a) General Rule.--In the case of an individual, gross income 
shall not include 50 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) Exclusion of stock for which deduction under 
                section 1396 allowed.--The term `qualified zone stock' 
                shall not include any stock the basis of which is 
                reduced under section 1396(e)(1).
                    ``(C) 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 substantially 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 1397C(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)(C) 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 (4)(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 (4)(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 
        1397C(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 and section 1397A, the term `enterprise zone 
business' has the meaning given such term by section 1397C except that, 
in applying section 1397C 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. 1397A. NONRECOGNITION OF GAIN FROM NEW ZONE INVESTMENTS.

    ``(a) General Rule.--At the election of an individual, qualified 
capital gain (within the meaning of section 1397) 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 exchange, 
        exceeds
            ``(2) the cost (not heretofore taken into account under 
        this subsection) of any qualified zone asset purchased directly 
        by the taxpayer during the reinvestment 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 1397.
            ``(2) Time for testing.--
                    ``(A) Sales.--In the case of a sale or exchange of 
                property, the determination of whether 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 purchase 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 `reinvestment 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 Qualify.--
            ``(1) In general.--If, during the 10-year period beginning 
        on the date any qualified zone replacement asset was purchased 
        by the taxpayer, such asset ceases to be a qualified zone 
        asset, notwithstanding any provision of this subtitle other 
        than paragraph (3), the taxpayer shall be treated as disposing 
        of such asset during the taxable year during 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 nonrecognition 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 subsection (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 realized 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 expire 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 prescribe) of--
                    ``(A) the taxpayer's cost of purchasing any 
                qualified zone replacement asset,
                    ``(B) the taxpayer's intention not to purchase 
                qualified zone replacement asset within the 
                reinvestment period, or
                    ``(C) a failure to make such purchase within 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 otherwise prevent such assessment.

``SEC. 1397B. 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 1397(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 paragraph (1), the 
        term `real property' means any property which is section 1250 
        property (as defined in section 1250(c)).
            ``(3) Special rules.--
                    ``(A) Certain rules made applicable.--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 (b)(6), (c)(3), (d), 
                        (e), and (f) of section 1397.
                    ``(B) Coordination with section 1231.--Losses 
                treated as ordinary losses by reason of this subsection 
                shall not be taken into account in applying section 
                1231.

``SEC. 1397C. 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 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 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,
            ``(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) 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
            ``(7) less than 5 percent of the average of the aggregate 
        unadjusted bases of the property of such entity is attributable 
        to nonqualified financial property.
    ``(c) Qualified Proprietorship.--For purposes of this section, the 
term `qualified proprietorship' means, with respect to any taxable 
year, any qualified business carried on by an individual as a 
proprietorship if for such year--
            ``(1) at least 80 percent of the total gross income of such 
        individual from such business is derived from the active 
        conduct of such business in a tax enterprise zone,
            ``(2) substantially all of the use of the tangible property 
        of such individual in such business (whether owned or leased) 
        is within a tax enterprise zone,
            ``(3) substantially all of the intangible property of such 
        business is used in, and exclusively related to, the active 
        conduct of such business,
            ``(4) substantially all of the services performed for such 
        individual in such business by employees of such business are 
        performed in a tax enterprise zone,
            ``(5) at least \1/3\ of such employees are residents of a 
        tax enterprise zone,
            ``(6) less than 5 percent of the average of the aggregate 
        unadjusted bases of the property of such individual which is 
        used in such business 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
            ``(7) less than 5 percent of the average of the aggregate 
        unadjusted bases of the property of such individual which is 
        used in such business is attributable to nonqualified financial 
        property.
For purposes of this subsection, the term `employee' includes the 
proprietor.
    ``(d) 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.
    ``(e) 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).

                        ``Subpart C--Regulations

                              ``Sec. 1397C. Regulations.

``SEC. 1397C. REGULATIONS.

    ``The Secretary shall prescribe such regulations as may be 
necessary or appropriate to carry out the purposes of this part, 
including--
            ``(1) regulations limiting the benefit of this part in 
        circumstances where such benefits, in combination with benefits 
        provided under other Federal programs, would result in an 
        activity being 100 percent or more subsidized by the Federal 
        Government,
            ``(2) regulations preventing abuse of the provisions of 
        this part, and
            ``(3) regulations dealing with inadvertent failures of 
        entities to be qualified zone businesses.''
    (b) Clerical Amendment.--The table of subchapters for chapter 1 is 
amended by inserting after the item relating to subchapter T the 
following new item:

                              ``Subchapter U. Designation and treatment 
                                        of tax enterprise zones.''

SEC. 4. SPECIAL RULES FOR REDEVELOPMENT BONDS PROVIDING FINANCING FOR 
              TAX ENTERPRISE ZONES.

    (a) In General.--Subsection (c) of section 144 (relating to 
qualified redevelopment bonds) is amended by adding at the end thereof 
the following new paragraph:
            ``(9) Special rules for tax enterprise zones.--For purposes 
        of this subsection, in the case of bonds issued during the 60-
        month period beginning on the date a tax enterprise zone is 
        designated--
                    ``(A) Treatment as designated blighted area.--Such 
                tax enterprise zone shall be treated as a designated 
                blighted area during such 60-month period (or, if 
                shorter, the period such designation is in effect). Any 
                area designated by reason of the preceding sentence 
                shall not be taken into account in applying paragraph 
                (4)(C).
                    ``(B) Security for bonds.--The requirements of 
                paragraph (2)(B) shall be treated as met with respect 
                to a financed area that is within a tax enterprise zone 
                if the general purpose governmental unit guarantees the 
                payment of principal and interest on the issue either 
                directly or through insurance, a letter of credit, or a 
                similar agreement but only if the cost thereof is 
                financed other than with proceeds of any tax-exempt 
                private activity bond or earnings on such proceeds.
                    ``(C) Expansion of redevelopment purposes.--
                            ``(i) In general.--The term `redevelopment 
                        purposes' includes the making of loans to any 
                        enterprise zone business (as defined in section 
                        1397B) for--
                                    ``(I) the acquisition of land 
                                within the tax enterprise zone for use 
                                in such business, or
                                    ``(II) the acquisition, 
                                construction, reconstruction, or 
                                improvement by such business of land, 
                                or property of a character subject to 
                                the allowance for depreciation, for use 
                                in such business.
                            ``(ii) $2,500,000 limitation.--Clause (i) 
                        shall apply to loans made to any enterprise 
                        zone business only if the aggregate principal 
                        amount of such loans (whether or not financed 
                        by the same issue) does not exceed $2,500,000. 
                        For purposes of the preceding sentence, all 
                        persons treated as a single employer under 
                        subsection (a) or (b) of section 52 shall be 
                        treated as 1 person.
                            ``(iii) Loans must be made within 18 months 
                        after bonds issued; repayments must be used for 
                        redemptions.--Clause (i) shall apply only to 
                        loans--
                                    ``(I) made during the 18-month 
                                period beginning on the date of 
                                issuance of the issue financing such 
                                loan,
                                    ``(II) repayments of principal on 
                                which are used not later than the close 
                                of the 1st semiannual period beginning 
                                after the date the repayment is 
                                received to redeem bonds which are part 
                                of such issue, and
                                    ``(III) the effective rate of 
                                interest on which does not exceed the 
                                yield on the issue by more than 0.125 
                                percentage points.
                        In determining the effective rate of interest 
                        for purposes of subclause (III), there shall be 
                        taken into account all fees, charges, and other 
                        amounts (other than amounts for any credit 
                        report) borne by the borrower which are 
                        attributable to the loan or the bond issue.
                            ``(iv) Housing loans excluded.--Clause (i) 
                        shall not apply to any loan to be used directly 
                        or indirectly to provide residential real 
                        property.
                            ``(v) Coordination with restrictions on use 
                        of proceeds.--Paragraphs (6) and (8) shall 
                        apply notwithstanding clause (i); except that 
                        in applying paragraph (6), subsection (a)(8) 
                        shall be treated as not including a reference 
                        to a facility the primary purpose of which is 
                        retail food services.
                    ``(D) Issuer to designate amount of issue to be 
                used for loans.--Subparagraph (C) shall not apply with 
                respect to any issue unless the issuer designates 
                before the date of issuance the amount of the proceeds 
                of such issue which is to be used for loans to which 
                subparagraph (C)(i) applies. If such amount exceeds the 
                principal amount of loans to which subparagraph (C)(i) 
                applies, an amount of proceeds equal to such excess 
                shall be used not later than the close of the 1st 
                semiannual period beginning after the close of the 18-
                month period referred to in subparagraph (C)(iii) to 
                redeem bonds which are part of such issue.
                    ``(E) De minimis redemptions not required.--
                Subparagraphs (C)(iii) and (D) shall not be construed 
                to require amounts of less than $250,000 to be used to 
                redeem bonds. The Secretary may by regulation treat 
                related issues as 1 issue for purposes of the preceding 
                sentence.
                    ``(F) Penalty.--
                            ``(i) In general.--In the case of property 
                        with respect to which financing was provided 
                        under this paragraph, if at any time during the 
                        10-period beginning on the date such financing 
                        was provided--
                                    ``(I) such property ceases to be in 
                                use in an enterprise zone business (as 
                                defined in section 1397B), or
                                    ``(II) substantially all of the use 
                                of such property ceases to be in a tax 
                                enterprise zone,
                        there is hereby imposed on the trade or 
                        business to which such financing was provided a 
                        penalty equal to 1.25 percent of so much of the 
                        face amount of all financing provided (whether 
                        or not from the same issue and whether or not 
                        such issue is outstanding) before such 
                        cessation to the trade or business using such 
                        property.
                            ``(ii) No penalty by reason of zone 
                        termination.--No penalty shall be imposed under 
                        clause (i) solely by reason of the termination 
                        or revocation of a tax enterprise zone 
                        designation.
                            ``(iii) Exception for bankruptcy.--Clause 
                        (i) shall not apply to any cessation resulting 
                        from bankruptcy.''
    (b) Volume Cap Only Charged With 50 Percent of Tax Enterprise Zone 
Redevelopment Bonds.--Subsection (g) of section 146 is amended by 
striking ``and'' at the end of paragraph (3), by striking the period at 
the end of paragraph (4) and inserting ``, and'', and by adding at the 
end thereof the following new paragraph:
            ``(5) 50 percent of any qualified redevelopment bond 
        issued--
                    ``(A) as part of an issue 95 percent or more of the 
                net proceeds of which are to be used for 1 or more 
                redevelopment purposes (as defined in section 144(c)) 
                in a tax enterprise zone, and
                    ``(B) during the 60-month period beginning on the 
                date of the designation of such zone.''
    (c) Penalties for Loans Made To Businesses That Cease To Be 
Enterprise Zone Businesses, Etc.--Subsection (b) of section 150 is 
amended by adding at the end thereof the following new paragraph:
            ``(6) Enterprise zone redevelopment bonds.--In the case of 
        any financing provided by an issue the interest on which is 
        exempt from tax by reason of section 144(c)(9)--
                    ``(A) In general.--No deduction shall be allowed 
                under this chapter for interest on such financing which 
                accrues during the period beginning on the first day of 
                the calendar year which includes the date on which--
                            ``(i) the trade or business to which the 
                        financing was provided ceases to be an 
                        enterprise zone business (as defined in section 
                        1397B), or
                            ``(ii) substantially all of the use of the 
                        property (determined in accordance with 
                        subchapter U) with respect to which the 
                        financing was provided ceases to be in a tax 
                        enterprise zone.
                The preceding sentence shall not apply solely by reason 
                of the termination or revocation of a tax enterprise 
                zone designation.
                    ``(B) Exception for bankruptcy.--This paragraph 
                shall not apply to any cessation resulting from 
                bankruptcy.''

SEC. 5. TECHNICAL AND CONFORMING AMENDMENTS.

    (a) Enterprise Zone Employment Credit Part of General Business 
Credit.--
            (1) Subsection (b) of section 38 (relating to current year 
        business credit) is amended by striking ``plus'' at the end of 
        paragraph (7), by striking the period at the end of paragraph 
        (8) and inserting ``, plus'', and by adding at the end the 
        following new paragraph:
            ``(9) the enterprise zone employment credit determined 
        under section 1394(a).''
            (2) Subsection (d) of section 39 is amended by adding at 
        the end thereof the following new paragraph:
            ``(4) No carryback of section 1394 credit before 
        enactment.--No portion of the unused business credit for any 
        taxable year which is attributable to the enterprise zone 
        employment credit determined under section 1394 may be carried 
        to a taxable year ending before the date of the enactment of 
        section 1394.''
    (b) Nonitemizers Allowed Deduction for Enterprise Zone Stock.--
Subsection (a) of section 62 is amended by inserting after paragraph 
(14) the following new paragraph:
            ``(15) Enterprise zone stock.--The deduction allowed by 
        section 1396.''
    (c) Denial of Deduction for Portion of Wages Equal to Enterprise 
Zone Employment Credit.--
            (1) Subsection (a) of section 280C (relating to rule for 
        targeted jobs credit) is amended--
                    (A) by striking ``the amount of the credit 
                determined for the taxable year under section 51(a)'' 
                and inserting ``the sum of the credits determined for 
                the taxable year under sections 51(a) and 1394(a)'', 
                and
                    (B) by striking ``Targeted Jobs Credit'' in the 
                subsection heading and inserting ``Employment 
                Credits''.
            (2) Subsection (c) of section 196 (relating to deduction 
        for certain unused business credits) is amended by striking 
        ``and'' at the end of paragraph (4), by striking the period at 
        the end of paragraph (5) and inserting ``, and'', and by adding 
        at the end the following new paragraph:
            ``(6) the enterprise zone employment credit determined 
        under section 1394(a).''
    (d) Other Amendments.--
            (1)(A) Section 172(d)(2) (relating to modifications with 
        respect to net operating loss deduction) is amended to read as 
        follows:
            ``(2) Capital gains and losses of taxpayers other than 
        corporations.--In the case of a taxpayer other than a 
        corporation--
                    ``(A) the amount deductible on account of losses 
                from sales or exchanges of capital assets shall not 
                exceed the amount includable on account of gains from 
                sales or exchanges of capital assets; and
                    ``(B) the exclusion provided by section 1397 shall 
                not be allowed.''
            (B) Subparagraph (B) of section 172(d)(4) is amended by 
        inserting ``, (2)(B),'' after ``paragraph (1)''.
            (2) Subsection (c) of section 381 (relating to carryovers 
        in certain corporate acquisitions) is amended by adding at the 
        end the following new paragraph:
            ``(26) Enterprise zone provisions.--The acquiring 
        corporation shall take into account (to the extent proper to 
        carry out the purposes of this section and subchapter U, and 
        under such regulations as may be prescribed by the Secretary) 
        the items required to be taken into account for purposes of 
        subchapter U in respect of the distributor or transferor 
        corporation.''
            (3) Paragraph (4) of section 642(c) is amended to read as 
        follows:
            ``(4) Adjustments.--To the extent that the amount otherwise 
        allowable as a deduction under this subsection consists of gain 
        described in section 1397(a), proper adjustment shall be made 
        for any exclusion allowable to the estate or trust under 
        section 1397. In the case of a trust, the deduction allowed by 
        this subsection shall be subject to section 681 (relating to 
        unrelated business income).''
            (4) Paragraph (3) of section 643(a) is amended by adding at 
        the end thereof the following new sentence: ``The exclusion 
        under section 1397 shall not be taken into account.''
            (5) Paragraph (4) of section 691(c) is amended by striking 
        ``1201, and 1211'' and inserting ``1201, 1397, and 1211''.
            (6) The second sentence of paragraph (2) of section 871(a) 
        is amended by inserting ``such gains and losses shall be 
        determined without regard to section 1397 and'' after ``except 
        that''.
            (7) Paragraph (1) of section 1371(d) (relating to 
        coordination with investment credit recapture) is amended by 
        inserting before the period at the end the following ``and for 
        purposes of section 1394(d)(3)''.
            (8) Subsection (a) of section 1016 (relating to adjustments 
        to basis) is amended by striking ``and'' at the end of 
        paragraph (25), by striking the period at the end of paragraph 
        (26) and inserting a semicolon, and by adding at the end 
        thereof the following new paragraphs:
            ``(27) in the case of stock with respect to which a 
        deduction was allowed under section 1396(a), to the extent 
        provided in section 1396(e); and
            ``(28) in the case of property the acquisition of which 
        resulted under section 1397A in the nonrecognition of any part 
        of the gain realized on the sale or exchange of other property, 
        to the extent provided in section 1397A(e).''
            (9) Section 1223 (relating to holding period of property) 
        is amended by redesignating paragraph (15) as paragraph (16) 
        and by inserting after paragraph (14) the following new 
        paragraph:
            ``(15) In determining the period for which the taxpayer has 
        held property the acquisition of which resulted under section 
        1397A in the nonrecognition of any part of the gain realized on 
        the sale or exchange of any qualified zone asset (as defined in 
        section 1397A(b)), there shall be included the period for which 
        such asset had been held as of the date of such sale or 
        exchange.''

SEC. 6. EFFECTIVE DATE.

    (a) General Rule.--The amendments made by this Act shall take 
effect on the date of the enactment of this Act.
    (b) Requirement for Rules.--Not later than the date 4 months after 
the date of the enactment of this Act, the appropriate Secretaries 
shall issue rules--
            (1) establishing the procedures for nominating areas for 
        designation as tax enterprise zones,
            (2) establishing a method for comparing the factors listed 
        in section 1392(d) of the Internal Revenue Code of 1986 (as 
        added by this Act),
            (3) establishing recordkeeping requirements necessary or 
        appropriate to assist the studies required by part IV, and
            (4) providing that State and local governments shall have 
        at least 30 days after such rules are published to file 
        applications for nominated areas before such applications are 
        evaluated and compared and any area designated as a tax 
        enterprise zone.

                                 <all>

HR 850 IH----2
HR 850 IH----3
HR 850 IH----4
HR 850 IH----5