Short title

This Act may be cited as the

District of Columbia Tax Incentives Improvement Act of 2006

Establishment of DC Target Areas to replace expired DC Zone

(a)

In general

Section 1400 of the Internal Revenue Code of 1986 (relating to establishment of DC Zone) is amended to read as follows:

1400.

Establishment of DC Target Areas

(a)

Establishment of DC Development Target Area

(1)

In general

For purposes of this title— (A)the modified DC area is hereby designated as the DC Development Target Area, and (B)except for purposes of sections 51 and 1396 and as otherwise provided in this subchapter, the DC Development Target Area shall be treated as an empowerment zone designated under subchapter U. (2)

Modified DC area

For purposes of this section— (A)

In general

The term modified DC area means the area consisting of— (i)the census tracts located in the District of Columbia which are part of an enterprise community designated under subchapter U before August 5, 1997, (ii)all other census tracts— (I)which are located in the District of Columbia, and (II)for which the poverty rate is not less than 20 percent as determined on the basis of the 1990 census, and (iii)the 31 census tracts identified for commercial and industrial development (as of October 11, 2005) by the Deputy Mayor for Planning and Economic Development of the District of Columbia. (B)

Exclusion of residential census tracts

Such term shall not include any census tract described in clause (i) or (ii) of subparagraph (A) if no portion of such census tract is zoned by the District of Columbia for non-residential development as of June 30, 2003. (C)

Exclusion of residential blocks

Such term shall not include any residential block (as determined by the Deputy Mayor for Planning and Economic Development of the District of Columbia). (3)

Special rule for application of enterprise zone business definition

For purposes of this subchapter and for purposes of applying subchapter U with respect to the DC Development Target Area, section 1397C shall be applied without regard to subsections (b)(6), (c)(5), and (d)(2)(B) thereof. (4)

Time for which designation applicable

(A)

In general

The designation made by paragraph (1) shall apply for the period beginning on January 1, 2006, and ending on December 31, 2009. (B)

Coordination with DC enterprise community designated under subchapter U

With respect to the portions of the census tracts referred to in paragraph (2)(A)(i) which are in the modified DC area— (i)section 1400(f)(2) shall not apply, and (ii)the designation under subchapter U of such portions shall terminate on December 31, 2009. (b)

Establishment of DC Employment Target Area

(1)

In general

For purposes of this title— (A)the DC high unemployment area is hereby designated as the DC Employment Target Area, and (B)except as otherwise provided in this subchapter, the DC Employment Target Area shall be treated as an empowerment zone designated under subchapter U for purposes of sections 51 and 1396 (and for purposes of applying this subchapter and subchapter U with respect to such sections). (2)

DC high unemployment area

For purposes of this section, the term DC high unemployment area means the census tracts— (A)which are located in the District of Columbia, and (B)for which the unemployment rate is not less than 10 percent as determined on the basis of the 2000 census. (3)

Special rule for application of employment credit

With respect to the DC Employment Target Area, section 1396(d)(1)(A) (relating to empowerment zone employment credit) shall be applied by substituting the District of Columbia for an empowerment zone. (c)

Definitions

For purposes of this subchapter— (1)

DC Development Target Area

The term DC Development Target Area means the DC Development Target Area designated by subsection (a). (2)

DC Employment Target Area

The term DC Employment Target Area means the DC Employment Target Area designated by subsection (b). (d)

Time for which designations applicable

(1)

In general

The designations made by subsections (a) and (b) shall apply for the period beginning on January 1, 2006, and ending on December 31, 2009. (2)

Coordination with DC enterprise community designated under subchapter U

With respect to the portions of the census tracts referred to in subsection (a)(2)(A)(i) which are in the modified DC area— (A)section 1400(f)(2) shall not apply, and (B)the designation under subchapter U of such portions shall terminate on December 31, 2009.

(b)

Conforming amendments

(1)Section 1202(a)(2)(D) and section 1397B(b)(1) of such Code are each amended by striking The District of Columbia Enterprise Zone and inserting The DC Development Target Area (as defined in section 1400) and the DC Zone (as defined in section 1400, as in effect on December 31, 2005). (2)The heading of subchapter W of chapter 1 of such Code is amended by striking

Enterprise Zone

and inserting

Target Areas

. (3)The item relating to section 1400 in the table of sections for subchapter W of chapter 1 of such Code is amended to read as follows:

Sec. 1400. Establishment of DC Target Areas.

(c)

Effective date

The amendments made by this section shall take effect on January 1, 2006.

Repeal of special rules related to tax-exempt enterprise zone facility bonds

(a)

In general

Section 1400A of the Internal Revenue Code of 1986 (relating to tax-exempt economic development bonds) is hereby repealed. (b)

Conforming amendments

(1)Subparagraph (B) of section 1394(f)(3) of such Code is amended by striking (other than the District of Columbia Enterprise Zone). (2)The table of sections for subchapter W of chapter 1 of such Code is amended by striking the item relating to section 1400A. (c)

Effective date

The amendments made by this section shall apply to obligations issued after December 31, 2005.

Zero percent capital gains rate on certain DC assets

(a)

In general

Section 1400B of the Internal Revenue Code of 1986 (relating to zero percent capital gains rate) is amended to read as follows:

1400B.

Zero percent capital gains rate on certain DC assets

(a)

Exclusion

Gross income shall not include qualified capital gain from the sale or exchange of any expanded DC Zone asset held for more than 5 years. (b)

Expanded DC Zone asset

For purposes of this section— (1)

In general

The term expanded DC Zone asset means— (A)any expanded DC Zone business stock, (B)any expanded DC Zone partnership interest, and (C)any expanded DC Zone business property. (2)

Expanded DC Zone business stock

(A)

In general

The term expanded DC Zone business stock means any stock in a domestic corporation which is originally issued after December 31, 1997, if— (i)such stock is acquired by the taxpayer, before January 1, 2010, at its original issue (directly or through an underwriter) solely in exchange for cash, (ii)as of the time such stock was issued, such corporation was an expanded DC Zone business (or, in the case of a new corporation, such corporation was being organized for purposes of being an expanded DC Zone business), and (iii)during substantially all of the taxpayer’s holding period for such stock, such corporation qualified as an expanded DC Zone business. (B)

Redemptions

A rule similar to the rule of section 1202(c)(3) shall apply for purposes of this paragraph. (3)

Expanded DC Zone partnership interest

The term expanded DC Zone partnership interest means any capital or profits interest in a domestic partnership which is originally issued after December 31, 1997, if— (A)such interest is acquired by the taxpayer, before January 1, 2010, from the partnership solely in exchange for cash, (B)as of the time such interest was acquired, such partnership was an expanded DC Zone business (or, in the case of a new partnership, such partnership was being organized for purposes of being an expanded DC Zone business), and (C)during substantially all of the taxpayer’s holding period for such interest, such partnership qualified as an expanded DC Zone business.

A rule similar to the rule of paragraph (2)(B) shall apply for purposes of this paragraph.

(4)

Expanded DC Zone business property

(A)

In general

The term expanded DC 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 December 31, 1997, and before January 1, 2010, (ii)the original use of such property in the expanded DC 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 an expanded DC Zone business of the taxpayer. (B)

Special rule for buildings which are substantially improved

(i)

In general

The requirements of clauses (i) and (ii) of subparagraph (A) shall be treated as met with respect to— (I)property which is substantially improved by the taxpayer before January 1, 2010, and (II)any land on which such property is located. (ii)

Substantial improvement

For purposes of clause (i), property shall be treated as substantially improved by the taxpayer only if, during any 24-month period beginning after December 31, 1997, 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 of such property at the beginning of such 24-month period in the hands of the taxpayer, or (II)$5,000. (5)

Treatment of development area terminations

Except as provided in subsection (d), the termination of the designation of the DC Zone or the DC Development Target Area shall be disregarded for purposes of determining whether any property is an expanded DC Zone asset. (6)

Treatment of subsequent purchasers, etc

The term expanded DC Zone asset includes any property which would be an expanded DC Zone asset but for paragraph (2)(A)(i), (3)(A), or (4)(A)(i) or (ii) in the hands of the taxpayer if such property was an expanded DC Zone asset in the hands of a prior holder. (7)

5-year safe harbor

If any property ceases to be an expanded DC Zone asset by reason of paragraph (2)(A)(iii), (3)(C), or (4)(A)(iii) after the 5-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. (c)

Expanded DC Zone business

For purposes of this section, the term expanded DC Zone business means any enterprise zone business (as defined in section 1397C), determined— (1)after the application of section 1400D(d), (2)by substituting 80 percent for 50 percent in subsections (b)(2) and (c)(1) of section 1397C, (3)by treating no area other than the expanded DC Zone as an empowerment zone or enterprise community, and (4)in the case of periods beginning after December 31, 2005, without regard to subparagraph (B) of section 1397C(d)(2). (d)

Expanded DC Zone

For purposes of this section— (1)

In general

The term expanded DC Zone means the DC Zone and DC Development Target Area. (2)

DC Zone

The term DC Zone means— (A)the DC Zone (within the meaning of section 1400, as in effect on December 31, 2005), and (B)all census tracts— (i)which are located in the District of Columbia, and (ii)for which the poverty rate is not less than 10 percent as determined on the basis of the 1990 census. (3)

Application of section to expired portion of DC Zone

In the case of any expanded DC Zone asset (determined without regard to this paragraph) which would not be an expanded DC Zone asset if the expanded DC Zone did not include that portion of the DC Zone which is not part the DC Development Target Area, this section shall be applied— (A)by substituting January 1, 2006 for January 1, 2010 each place it appears in subsection (b), (B)by substituting January 1, 2010 for January 1, 2014 in subsections (e)(2) and (g)(2). (4)

Application of section to newly designated portion of expanded DC Zone

In the case of any expanded DC Zone asset (determined without regard to this paragraph) which would not be an expanded DC Zone asset if the expanded DC Zone did not include that portion of the DC Development Target Area which is not part of the DC Zone, this section shall be applied— (A)by substituting December 31, 2005 for December 31, 1997 each place it appears in subsection (b), and (B)by substituting January 1, 2006 for January 1, 1998 in subsections (e)(2) and (g)(2). (e)

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 gain recognized on the sale or exchange of— (A)a capital asset, or (B)property used in the trade or business (as defined in section 1231(b). (2)

Gain before 1998 or after 2014 not qualified

The term qualified capital gain shall not include any gain attributable to periods before January 1, 1998, or after December 31, 2014. (3)

Certain gain not qualified

The term qualified capital gain shall not include any gain which would be treated as ordinary income under section 1245 or under section 1250 if section 1250 applied to all depreciation rather than the additional depreciation. (4)

Intangibles and land not integral part of expanded DC Zone business

The term qualified capital gain shall not include any gain which is attributable to real property, or an intangible asset, which is not an integral part of an expanded DC Zone business. (5)

Related party transactions

The term qualified capital gain shall not include any gain attributable, directly or indirectly, in whole or in part, to a transaction with a related person. For purposes of this paragraph, persons are related to each other if such persons are described in section 267(b) or 707(b)(1). (f)

Certain other rules to apply

Rules similar to the rules of subsections (g), (h), (i)(2), and (j) of section 1202 shall apply for purposes of this section. (g)

Sales and exchanges of interests in partnerships and S corporations which are DC Development Area 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 expanded DC 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 gain which is attributable to real property, or an intangible asset, which is not an integral part of an expanded DC Zone business, and (2)any gain attributable to periods before January 1, 1998, or after December 31, 2014.

(b)

Clerical amendment

The item relating to section 1400B in the table of sections for subchapter W of chapter 1 of such Code is amended to read as follows:

Sec. 1400B. Zero capital gains rate on certain DC assets

(c)

Effective date

The amendments made by this section shall apply to sales or exchanges after December 31, 2005.

First-time homebuyer credit for District of Columbia

(a)

Extension of credit

Subsection (i) of section 1400C of such Code (relating to first-time homebuyer credit for District of Columbia) is amended by striking January 1, 2006 and inserting January 1, 2010. (b)

Increase in maximum credit

Subsection (a) of section 1400C of such Code is amended by striking $5,000 and inserting $10,000. (c)

Effective date

The amendments made by this section shall apply to property purchased after December 31, 2005, in taxable years ending after such date.

Bonds of District of Columbia exempt from State and local taxes

(a)

In general

Section 485 of the District of Columbia Home Rule Act is amended to read as follows:

485.

Tax exemption

Bonds and notes issued by the Council pursuant to this title and the interest thereon shall be exempt from all taxation (except estate, inheritance, and gift taxes) imposed by the United States, any State or political subdivision thereof, the District, or any possession of the United States.

(b)

Effective date

The amendment made by this section shall apply to bonds and notes issued after the date of the enactment of this Act.