Exclusion from gross income of qualified capital distribution from tax-favored accounts

(a)

In general

Part III of subchapter B of chapter 1 of the Internal Revenue Code is amended by inserting before section 140 the following new section:

139F.

Qualified capital distributions

(a)

In general

Gross income shall not include any qualified capital distribution from a tax-favored account. (b)

Definitions

For purposes of this section— (1)

Qualified capital distribution

(A)

In general

The term qualified capital distribution means any distribution to an individual from a tax-favored account of such individual to the extent such distribution is used to acquire an eligible interest in an entity in connection with beginning an active trade or business. (B)

Eligible interest

For purposes of this paragraph, the term eligible interest means, with respect to any entity, an ownership interest in such entity of at least 40 percent of the total combined voting power of all classes of interests entitled to vote, or at least 40 percent of the total value of all ownership interests in the entity. (C)

Sole proprietorships

Any capital contribution to a sole proprietorship shall be treated as meeting the requirements of subparagraphs (A) and (B) if such requirements would be met if such proprietorship were a corporation. (D)

Beginning of trade or business

Rules similar to the rules of section 195(c)(2) shall apply for purposes of this paragraph. (2)

Tax-favored account

The term tax-favored account means any of the following: (A)An eligible retirement plan (as defined in section 402(c)(8)(B)). (B)A health savings account described in section 223. (C)A Roth IRA. (D)A qualified tuition program described in section 529. (c)

Amount distributed must be repaid

(1)

In general

Any individual who receives a qualified capital distribution may make one or more contributions in an aggregate amount not to exceed the amount of such distribution to a tax-favored account of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16), 223(f)(5),or 529(c)(3)(C), as the case may be. (2)

Treatment of repayments of distributions from eligible retirement plans other than IRAs

For purposes of this title, if a contribution is made pursuant to paragraph (1) with respect to a qualified capital distribution from an eligible retirement plan other than an individual retirement plan, then the taxpayer shall, to the extent of the amount of the contribution, be treated as having received the qualified capital distribution in an eligible rollover distribution (as defined in section 402(c)(4)) and as having transferred the amount to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution. (3)

Treatment of repayments for distributions from IRAs

For purposes of this title, if a contribution is made pursuant to paragraph (1) with respect to a qualified capital distribution from an individual retirement plan, then, to the extent of the amount of the contribution, the qualified capital distribution shall be treated as a distribution described in section 408(d)(3) and as having been transferred to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution. (4)

Other tax-favored accounts

For purposes of this title, if a contribution is made pursuant to paragraph (1) with respect to a qualified capital distribution— (A)from a health savings account described in section 223, or (B)from a qualified tuition program described in section 529,

then, to the extent of the amount of the contribution, the qualified capital distribution shall be treated as a distribution described in section 529(c)(3)(C) or 223(f)(5), as the case may be, and as having been transferred to such account or program, as the case may be, within 60 days of the distribution.

(d)

Denial of double benefit

The basis in any ownership interest with respect to the acquisition of which an amount was excluded from gross income under subsection (a) shall be reduced by an amount equal to the amount so excluded. The Secretary may prescribe such regulations as may be necessary to carry out the purposes of this subsection in the case of capital contributions to sole proprietorships.

(b)

Conforming amendments

(1)Paragraph (2) of section 72(t) of such Code is amended by adding at the end the following new subparagraph:

(H)

Qualified capital distributions

Any distribution excludable from gross income under section 139F (relating to qualified capital distributions).

(2)Subsection (a) of section 1016 of such Code is amended by striking and at the end of paragraph (35), by striking the period at the end of paragraph (36) and inserting , and, and by adding at the end the following new paragraph:

(37)to the extent provided in section 139F(d).

(c)

Clerical amendment

The table of sections for part III of subchapter B of chapter 1 of such Code is amended by inserting before the item relating to section 140 the following new section:

Sec. 139F. Qualified capital distributions.

(d)

Effective date

The amendments made by this section shall apply to distributions made after the date of the enactment of this Act.