[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[S. 363 Introduced in Senate (IS)]

103d CONGRESS
  1st Session
                                 S. 363

  To amend the Internal Revenue Code of 1986 to provide a 50 percent 
  exclusion for gain from certain small business stock, and for other 
                               purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

             February 16 (legislative day, January 5), 1993

  Mr. Heflin introduced the following bill; which was read twice and 
                  referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
  To amend the Internal Revenue Code of 1986 to provide a 50 percent 
  exclusion for gain from certain small business stock, and for other 
                               purposes.

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

SECTION 1. SHORT TITLE, ETC.

    (a) Short Title.--This Act may be cited as the ``____''.
    (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. 50-PERCENT EXCLUSION FOR GAIN FROM CERTAIN SMALL BUSINESS 
              STOCK.

    (a) General Rule.--Part I of subchapter P of chapter 1 (relating to 
capital gains and losses) is amended by adding at the end thereof the 
following new section:

``SEC. 1202. 50-PERCENT EXCLUSION FOR GAIN FROM CERTAIN SMALL BUSINESS 
              STOCK.

    ``(a) General Rule.--Gross income shall not include 50 percent of 
any gain from the sale or exchange of qualified small business stock 
held for more than 2 years.
    ``(b) Qualified Small Business Stock.--For purposes of this 
section--
            ``(1) In general.--Except as otherwise provided in this 
        section, the term `qualified small business stock' means any 
        stock in a corporation which is originally issued on or after 
        January 1, 1993, if--
                    ``(A) as of the date of issuance, such corporation 
                is a qualified small business, and
                    ``(B) except as provided in subsections (d) and 
                (e), such stock is acquired by the taxpayer at its 
                original issue (directly or through an underwriter)--
                            ``(i) in exchange for money or other 
                        property (not including stock), or
                            ``(ii) as compensation for services (other 
                        than services performed as an underwriter of 
                        such stock).
            ``(2) Active business requirement.--Stock in a corporation 
        shall not be treated as qualified small business stock unless, 
        during substantially all of the taxpayer's holding period for 
        such stock, such corporation meets the active business 
        requirements of subsection (d).
            ``(3) Certain purchases by corporation of its own stock.--
                    ``(A) In general.--Stock issued by a corporation 
                shall not be treated as qualified small business stock 
                if such corporation has purchased or purchases any of 
                its stock within the 5-year period beginning 1 year 
                before the date of the issuance of such stock.
                    ``(B) Exception where business purpose.--
                Subparagraph (A) shall not apply where the issuing 
                corporation establishes that there was a business 
                purpose for the purchase of the stock and such purchase 
                is not inconsistent with the purposes of this section.
                    ``(C) Members of affiliated group.--For purposes of 
                this paragraph, the purchase by any corporation which 
                is a member of the same affiliated group (within the 
                meaning of section 1504) as the issuing corporation of 
                any stock in any corporation which is a member of such 
                group shall be treated as a purchase by the issuing 
                corporation of its stock.
    ``(c) Qualified Small Business.--For purposes of this section--
            ``(1) In general.--The term `qualified small business' 
        means any domestic corporation if--
                    ``(A) the aggregate capitalization of such 
                corporation (or any predecessor thereof) at all times 
                on or after January 1, 1993 and before the issuance did 
                not exceed $25,000,000, and
                    ``(B) the aggregate capitalization of such 
                corporation immediately after the issuance (determined 
                by taking into account amounts to be received in the 
                issuance) does not exceed $25,000,000.
            ``(2) Aggregate capitalization.--For purposes of paragraph 
        (1), the term `aggregate capitalization' means the excess of--
                    ``(A) the amount of cash and the aggregate adjusted 
                bases of other property held by the corporation, over
                    ``(B) the aggregate amount of the short-term 
                indebtedness of the corporation.
        For purposes of the preceding sentence, the term `short-term 
        indebtedness' means any indebtedness which, when incurred, did 
        not have a term in excess of 1 year.
            ``(3) Look-thru in case of subsidiaries.--In determining 
        whether a corporation meets the requirements of this 
        subsection--
                    ``(A) stock and debt of any subsidiary (as defined 
                in subsection (d)(4)(C)) held by such corporation shall 
                be disregarded, and
                    ``(B) such corporation shall be treated as holding 
                its ratable share of the assets of such subsidiary and 
                as being liable for its ratable share of the 
                indebtedness of such subsidiary.
    ``(d) Active Business Requirement.--For purposes of this section--
            ``(1) In general.--For purposes of subsection (b)(2), the 
        requirements of this subsection are met for any period if 
        during such period--
                    ``(A) the corporation is engaged in the active 
                conduct of a trade or business,
                    ``(B) substantially all of the assets of such 
                corporation are used in the active conduct of a trade 
                or business, and
                    ``(C) such corporation is an eligible corporation.
            ``(2) Special rule for certain activities.--For purposes of 
        paragraph (1), if, in connection with any future trade or 
        business, a corporation is engaged in--
                    ``(A) start-up activities described in section 
                195(c)(1)(A),
                    ``(B) activities resulting in the payment or 
                incurring of expenditures which may be treated as 
                research and experimental expenditures under section 
                174, or
                    ``(C) activities with respect to in-house research 
                expenses described in section 41(b)(4),
        such corporation shall be treated with respect to such 
        activities as engaged in (and assets used in such activities 
        shall be treated as used in) the active conduct of a trade or 
        business. Any determination under this paragraph shall be made 
        without regard to whether a corporation has any gross income 
        from such activities at the time of the determination.
            ``(3) Eligible corporation.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `eligible corporation' 
                means any domestic corporation; except that such term 
                shall not include--
                            ``(i) any corporation predominantly engaged 
                        in a disqualified business,
                            ``(ii) any corporation the principal 
                        activity of which is the performance of 
                        personal services,
                            ``(iii) a DISC,
                            ``(iv) a corporation with respect to which 
                        an election under 936 is in effect,
                            ``(v) any regulated investment company, 
                        real estate investment trust, or REMIC,
                            ``(vi) any cooperative, and
                            ``(vii) in the case of a corporate 
                        shareholder, any corporation which at any time 
                        was a subsidiary (as defined in paragraph 
                        (4)(C)) of such corporate shareholder.
                    ``(B) Disqualified business.--The term 
                `disqualified business' means--
                            ``(i) any banking, insurance, financing, or 
                        similar business,
                            ``(ii) any farming business (other than the 
                        business of raising or harvesting trees),
                            ``(iii) any business involving the 
                        production or extraction of products of a 
                        character with respect to which a deduction is 
                        allowable under section 613 or 613A, and
                            ``(iv) any business of operating a hotel, 
                        motel, or restaurant or similar business.
            ``(4) Stock in other corporations.--
                    ``(A) Look-thru in case of subsidiaries.--For 
                purposes of this subsection, stock and debt in any 
                subsidiary corporation shall be disregarded and the 
                parent corporation shall be deemed to own its ratable 
                share of the subsidiary's assets, and to conduct its 
                ratable share of the subsidiary's activities.
                    ``(B) Portfolio stock or securities.--A corporation 
                shall be treated as failing to meet the requirements of 
                paragraph (1) for any period during which more than 10 
                percent of the value of its assets (in excess of 
                liabilities) consist of stock or securities in other 
                corporations which are not subsidiaries of such 
                corporation (other than assets described in paragraph 
                (5)).
                    ``(C) Subsidiary.--For purposes of this paragraph, 
                a corporation shall be considered a subsidiary if the 
                parent owns more than 50 percent of the combined voting 
                power of all classes of stock entitled to vote, or more 
                than 50 percent in value of all outstanding stock, of 
                such corporation.
            ``(5) Working capital.--For purposes of paragraph (1)(B), 
        any assets which--
                    ``(A) are held for investment, and
                    ``(B) are to be used to finance future research and 
                experimentation or working capital needs of the 
                corporation,
        shall be treated as used in the active conduct of a trade or 
        business.
            ``(6) Maximum real estate holdings.--A corporation shall 
        not be treated as meeting the requirements of paragraph (1) for 
        any period during which more than 10 percent of the total value 
        of its assets is real property which is not used in the active 
        conduct of a trade or business. For purposes of the preceding 
        sentence, the ownership of, dealing in, or renting of real 
        property shall not be treated as the active conduct of a trade 
        or business.
            ``(7) Computer software royalties.--For purposes of 
        paragraph (1), rights to computer software which produces 
        income described in section 543(d) shall be treated as an asset 
        used in the active conduct of a trade or business.
    ``(e) Stock Acquired on Conversion of Preferred Stock.--If any 
stock is acquired through the conversion of other stock which is 
qualified small business stock in the hands of the taxpayer--
            ``(1) the stock so acquired shall be treated as qualified 
        small business stock in the hands of the taxpayer, and
            ``(2) the stock so acquired shall be treated as having been 
        held during the period during which the converted stock was 
        held.
    ``(f) Treatment of Pass-Thru Entities.--
            ``(1) In general.--Any amount included in income by reason 
        of holding an interest in a pass-thru entity shall be treated 
        as gain described in subsection (a) if such amount meets the 
        requirements of paragraph (2).
            ``(2) Requirements.--An amount meets the requirements of 
        this paragraph if--
                    ``(A) such amount is attributable to gain on the 
                sale or exchange by the pass-thru entity of stock which 
                is qualified small business stock in the hands of such 
                entity and which was held by such entity for more than 
                2 years, and
                    ``(B) 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 stock 
                and at all times thereafter before the disposition of 
                such stock by such pass-thru entity.
            ``(3) Limitation based on interest originally held by 
        taxpayer.--Paragraph (1) shall not apply to any amount to the 
        extent such amount exceeds the amount to which paragraph (1) 
        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 small business stock was acquired.
            ``(4) 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.
    ``(g) Certain Tax-Free and Other Transfers.--For purposes of this 
section--
            ``(1) In general.--In the case of a transfer of stock to 
        which this subsection applies, the transferee shall be treated 
        as--
                    ``(A) having acquired such stock in the same manner 
                as the transferor, and
                    ``(B) having held such stock 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,
                    ``(C) from a partnership to a partner of stock with 
                respect to which the requirements of subsection (f) are 
                met at the time of the transfer (without regard to the 
                2-year holding requirement), or
                    ``(D) to the extent that the basis of the property 
                in the hands of the transferee is determined by 
                reference to the basis of the property in the hands of 
                the transferor by reason of section 334(b), but only if 
                requirements similar to the requirements of subsection 
                (f) are met with respect to the stock.
            ``(3) Certain rules made applicable.--Rules similar to the 
        rules of section 1244(d)(2) shall apply for purposes of this 
        section.
            ``(4) Incorporations and reorganizations involving 
        nonqualified stock.--
                    ``(A) In general.--In the case of a transaction 
                described in section 351 or a reorganization described 
                in section 368, if a qualified small business stock is 
                transferred for other stock, such transfer shall be 
                treated as a transfer to which this subsection applies 
                solely with respect to the person receiving such other 
                stock.
                    ``(B) Limitation.--This section shall apply to the 
                sale or exchange of stock treated as qualified small 
                business stock by reason of subparagraph (A) only to 
                the extent of the gain (if any) which would have been 
                recognized at the time of the transfer described in 
                subparagraph (A) if section 351 or 368 had not applied 
                at such time.
                    ``(C) Successive application.--For purposes of this 
                paragraph, stock treated as qualified small business 
                stock under subparagraph (A) shall be so treated for 
                subsequent transactions or reorganizations, except that 
                the limitation of subparagraph (B) shall be applied as 
                of the time of the first transfer to which subparagraph 
                (A) applied.
                    ``(D) Control test.--Except in the case of a 
                transaction described in section 368, this paragraph 
                shall apply only if, immediately after the transaction, 
                the corporation issuing the stock owns directly or 
                indirectly stock representing control (within the 
                meaning of section 368(c)) of the corporation whose 
                stock was transferred.
    ``(h) Basis Rules.--
            ``(1) Stock exchanged for property.--For purposes of this 
        section, in the case where the taxpayer transfers property 
        (other than money or stock) to a corporation in exchange for 
        stock in such corporation--
                    ``(A) such stock shall be treated as having been 
                acquired by the taxpayer on the date of such exchange, 
                and
                    ``(B) the basis of such stock in the hands of the 
                taxpayer shall in no event be less than the fair market 
                value of the property exchanged.
            ``(2) Basis of s corporation stock.--For purposes of this 
        section, the adjusted basis of stock in an S corporation shall 
        in no event be less than its adjusted basis determined without 
        regard to any adjustment to the basis of such stock under 
        section 1367.
    ``(i) Regulations.--The Secretary shall prescribe such regulations 
as may be appropriate to carry out the purposes of this section, 
including regulations to prevent the avoidance of the purposes of this 
section through split-ups or otherwise.''
    (b) Exclusion Treated as Preference for Minimum Tax.--
            (1) In general.--Subsection (a) of section 57 (relating to 
        items of tax preference) is amended by adding at the end 
        thereof the following new paragraph:
            ``(8) Exclusion for gains on sale of certain small business 
        stock.--An amount equal to the amount excluded from gross 
        income for the taxable year under section 1202.''.
            (2) Conforming amendment.--Subclause (II) of section 
        53(d)(2)(B)(ii) is amended by striking ``and (6)'' and 
        inserting ``(6), and (8)''.
    (c) Conforming 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 1202 shall 
                not be allowed.''.
            (B) Subparagraph (B) of section 172(d)(4) is amended by 
        inserting ``, (2)(B),'' after ``paragraph (1)''.
            (2) 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 1202(a), proper adjustment shall be made 
        for any exclusion allowable to the estate or trust under 
        section 1202. In the case of a trust, the deduction allowed by 
        this subsection shall be subject to section 681 (relating to 
        unrelated business income).''.
            (3) Paragraph (3) of section 643(a) is amended by adding at 
        the end thereof the following new sentence: ``The exclusion 
        under section 1202 shall not be taken into account.''.
            (4) Paragraph (4) of section 691(c) is amended by striking 
        ``1201, and 1211'' and inserting ``1201, 1202, and 1211''.
            (5) 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 1202 and'' after ``except 
        that''.
            (6) The table of sections for part I of subchapter P of 
        chapter 1 is amended by adding after the item relating to 
        section 1201 the following new item:

                              ``Sec. 1202. 50-percent exclusion for 
                                        gain from certain small 
                                        business stock.''.

    (d) Effective Date.--The amendments made by this section shall 
apply to stock issued on or after January 1, 1993.

                                 <all>

S 363 IS----2