[Congressional Bills 118th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3906 Introduced in House (IH)]

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118th CONGRESS
  1st Session
                                H. R. 3906

 To amend the Internal Revenue Code of 1986 to establish special rules 
         for capital gains invested in rural opportunity zones.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                              June 7, 2023

Mr. Ferguson (for himself, Mrs. Miller of West Virginia, Mr. Feenstra, 
 and Mr. Kustoff) 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 establish special rules 
         for capital gains invested in rural opportunity zones.

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Rural Opportunity Zone and 
Investment Act''.

SEC. 2. ESTABLISHMENT OF SPECIAL RULES FOR CAPITAL GAINS INVESTED IN 
              RURAL OPPORTUNITY ZONES.

    (a) In General.--Subchapter Z of chapter 1 of the Internal Revenue 
Code of 1986 is amended by adding at the end the following new section:

``SEC. 1400Z-3. SPECIAL RULES FOR CAPITAL GAINS INVESTED IN RURAL 
              OPPORTUNITY ZONES.

    ``(a) In General.--
            ``(1) Treatment of gains.--In the case of capital gain from 
        the sale to, or exchange with, an unrelated person of any 
        property held by the taxpayer, at the election of the 
        taxpayer--
                    ``(A) gross income for the taxable year shall not 
                include so much of such gain as does not exceed the 
                aggregate amount invested by the taxpayer in a 
                qualified rural opportunity fund during the 180-day 
                period beginning on the date of such sale or exchange,
                    ``(B) the amount of gain excluded by subparagraph 
                (A) shall be included in gross income as provided by 
                subsection (b), and
                    ``(C) subsection (c) shall apply.
            ``(2) Election.--No election may be made under paragraph 
        (1)--
                    ``(A) with respect to a sale or exchange if an 
                election previously made with respect to such sale or 
                exchange is in effect, or
                    ``(B) with respect to any sale or exchange after 
                December 31, 2032.
    ``(b) Deferral of Gain Invested in Qualified Rural Opportunity Zone 
Property.--
            ``(1) Year of inclusion.--Gain to which subsection 
        (a)(1)(B) applies shall be included in income in the taxable 
        year which includes the earlier of--
                    ``(A) the date on which such investment is sold or 
                exchanged, or
                    ``(B) December 31, 2032.
            ``(2) Amount includible.--
                    ``(A) In general.--The amount of gain included in 
                gross income under subsection (a)(1)(A) shall be the 
                excess of--
                            ``(i) the lesser of the amount of gain 
                        excluded under paragraph (1) or the fair market 
                        value of the investment as determined as of the 
                        date described in paragraph (1), over
                            ``(ii) the taxpayer's basis in the 
                        investment.
                    ``(B) Determination of basis qualified rural 
                opportunity zone property.--
                            ``(i) In general.--Except as otherwise 
                        provided in this clause or subsection (c), the 
                        taxpayer's basis in the investment shall be 
                        zero.
                            ``(ii) Increase for gain recognized under 
                        subsection (a)(1)(b).--The basis in the 
                        investment shall be increased by the amount of 
                        gain recognized by reason of subsection 
                        (a)(1)(B) with respect to such property.
                            ``(iii) Investments held for 5 years.--In 
                        the case of any investment held for at least 5 
                        years, the basis of such investment shall be 
                        increased by an amount equal to 10 percent of 
                        the amount of gain deferred by reason of 
                        subsection (a)(1)(A).
                            ``(iv) Investments held for 7 years.--In 
                        the case of any investment held by the taxpayer 
                        for at least 7 years, in addition to any 
                        adjustment made under clause (iii), the basis 
                        of such property shall be increased by an 
                        amount equal to 5 percent of the amount of gain 
                        deferred by reason of subsection (a)(1)(A).
    ``(c) Special Rule for Investments Held for at Least 10 Years.--In 
the case of any investment held by the taxpayer for at least 10 years 
and with respect to which the taxpayer makes an election under this 
subsection, the basis of such property shall be equal to the fair 
market value of such investment on the date that the investment is sold 
or exchanged.
    ``(d) Qualified Rural Opportunity Fund.--For purposes of this 
section--
            ``(1) In general.--The term `qualified rural opportunity 
        fund' means any investment vehicle which is organized as a 
        corporation or a partnership for the purpose of investing in 
        qualified rural opportunity zone property (other than another 
        qualified rural opportunity fund) that holds at least 90 
        percent of its assets in qualified rural opportunity zone 
        property, determined by the average of the percentage of 
        qualified rural opportunity zone property held in the fund as 
        measured--
                    ``(A) on the last day of the first 6-month period 
                of the taxable year of the fund, and
                    ``(B) on the last day of the taxable year of the 
                fund.
            ``(2) Qualified rural opportunity zone property.--
                    ``(A) In general.--The term `qualified rural 
                opportunity zone property' means property which is--
                            ``(i) qualified rural opportunity zone 
                        stock,
                            ``(ii) qualified rural opportunity zone 
                        partnership interest, or
                            ``(iii) qualified rural opportunity zone 
                        business property.
                    ``(B) Qualified rural opportunity zone stock.--
                            ``(i) In general.--Except as provided in 
                        clause (ii), the term `qualified rural 
                        opportunity zone stock' means any stock in a 
                        domestic corporation if--
                                    ``(I) such stock is acquired by the 
                                qualified rural opportunity fund after 
                                December 31, 2023, at its original 
                                issue (directly or through an 
                                underwriter) from the corporation 
                                solely in exchange for cash,
                                    ``(II) as of the time such stock 
                                was issued, such corporation was a 
                                qualified rural opportunity zone 
                                business (or, in the case of a new 
                                corporation, such corporation was being 
                                organized for purposes of being a 
                                qualified rural opportunity zone 
                                business), and
                                    ``(III) during substantially all of 
                                the qualified rural opportunity fund's 
                                holding period for such stock, such 
                                corporation qualified as a qualified 
                                rural opportunity zone business.
                            ``(ii) Redemptions.--A rule similar to the 
                        rule of section 1202(c)(3) shall apply for 
                        purposes of this paragraph.
                    ``(C) Qualified rural opportunity zone partnership 
                interest.--The term `qualified rural opportunity zone 
                partnership interest' means any capital or profits 
                interest in a domestic partnership if--
                            ``(i) such interest is acquired by the 
                        qualified rural opportunity fund after December 
                        31, 2023, from the partnership solely in 
                        exchange for cash,
                            ``(ii) as of the time such interest was 
                        acquired, such partnership was a qualified 
                        rural opportunity zone business (or, in the 
                        case of a new partnership, such partnership was 
                        being organized for purposes of being a 
                        qualified rural opportunity zone business), and
                            ``(iii) during substantially all of the 
                        qualified rural opportunity fund's holding 
                        period for such interest, such partnership 
                        qualified as a qualified rural opportunity zone 
                        business.
                    ``(D) Qualified rural opportunity zone business 
                property.--
                            ``(i) In general.--The term `qualified 
                        rural opportunity zone business property' means 
                        tangible property used in a trade or business 
                        of the qualified rural opportunity fund if--
                                    ``(I) such property was acquired by 
                                the qualified rural opportunity fund by 
                                purchase (as defined in section 
                                179(d)(2)) after December 31, 2023,
                                    ``(II) the original use of such 
                                property in the qualified rural 
                                opportunity zone commences with the 
                                qualified rural opportunity fund or the 
                                qualified rural opportunity fund 
                                substantially improves the property, 
                                and
                                    ``(III) during substantially all of 
                                the qualified rural opportunity fund's 
                                holding period for such property, 
                                substantially all of the use of such 
                                property was in a qualified rural 
                                opportunity zone.
                            ``(ii) Substantial improvement.--For 
                        purposes of subparagraph (A)(ii), property 
                        shall be treated as substantially improved by 
                        the qualified rural opportunity fund only if, 
                        during any 30-month period beginning after the 
                        date of acquisition of such property, additions 
                        to basis with respect to such property in the 
                        hands of the qualified rural opportunity fund 
                        exceed an amount equal to the adjusted basis of 
                        such property at the beginning of such 30-month 
                        period in the hands of the qualified rural 
                        opportunity fund.
                            ``(iii) Related party.--For purposes of 
                        subparagraph (A)(i), the related person rule of 
                        section 179(d)(2) shall be applied pursuant to 
                        subsection (e)(2) in lieu of the application of 
                        such rule in section 179(d)(2)(A).
            ``(3) Qualified rural opportunity zone business.--
                    ``(A) In general.--The term `qualified rural 
                opportunity zone business' means a trade or business--
                            ``(i) in which substantially all of the 
                        tangible property owned or leased by the 
                        taxpayer is qualified rural opportunity zone 
                        business property (determined by substituting 
                        `qualified rural opportunity zone business' for 
                        `qualified rural opportunity fund' each place 
                        it appears in paragraph (2)(D)),
                            ``(ii) which satisfies the requirements of 
                        paragraphs (2), (4), and (8) of section 
                        1397C(b), and
                            ``(iii) which is not described in section 
                        144(c)(6)(B).
                    ``(B) Special rule.--For purposes of subparagraph 
                (A), tangible property that ceases to be a qualified 
                rural opportunity zone business property shall continue 
                to be treated as a qualified rural opportunity zone 
                business property for the lesser of--
                            ``(i) 5 years after the date on which such 
                        tangible property ceases to be so qualified, or
                            ``(ii) the date on which such tangible 
                        property is no longer held by the qualified 
                        rural opportunity zone business.
            ``(4) Qualified rural opportunity zone.--
                    ``(A) In general.--The term `qualified rural 
                opportunity zone' means any population census tract 
                which--
                            ``(i) is located in a rural county, and
                            ``(ii) is in persistent poverty (as 
                        determined by the Bureau of the Census as of 
                        the date of the enactment of this Act).
                    ``(B) Rural county.--The term `rural county' means 
                any county if more than 50 percent of the census blocks 
                which comprise such county are rural blocks (as 
                determined by the Bureau of the Census as of the date 
                of the enactment of this Act). A rule similar to 
                section 143(k)(2)(D) shall apply for purposes of the 
                preceding sentence.
    ``(e) Applicable Rules.--
            ``(1) Treatment of investments with mixed funds.--In the 
        case of any investment in a qualified rural opportunity fund 
        only a portion of which consists of investments of gain to 
        which an election under subsection (a) is in effect--
                    ``(A) such investment shall be treated as 2 
                separate investments, consisting of--
                            ``(i) one investment that only includes 
                        amounts to which the election under subsection 
                        (a) applies, and
                            ``(ii) a separate investment consisting of 
                        other amounts, and
                    ``(B) subsections (a), (b), and (c) shall only 
                apply to the investment described in subparagraph 
                (A)(i).
            ``(2) Related persons.--For purposes of this section, 
        persons are related to each other if such persons are described 
        in section 267(b) or 707(b)(1), determined by substituting `20 
        percent' for `50 percent' each place it occurs in such 
        sections.
            ``(3) Decedents.--In the case of a decedent, amounts 
        recognized under this section shall, if not properly includible 
        in the gross income of the decedent, be includible in gross 
        income as provided by section 691.
            ``(4) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this section, including--
                    ``(A) rules for the certification of qualified 
                rural opportunity funds for the purposes of this 
                section,
                    ``(B) rules to ensure a qualified rural opportunity 
                fund has a reasonable period of time to reinvest the 
                return of capital from investments in qualified rural 
                opportunity zone stock and qualified rural opportunity 
                zone partnership interests, and to reinvest proceeds 
                received from the sale or disposition of qualified 
                rural opportunity zone property, and
                    ``(C) rules to prevent abuse.
    ``(f) Failure of Qualified Rural Opportunity Fund To Maintain 
Investment Standard.--
            ``(1) In general.--If a qualified rural opportunity fund 
        fails to meet the 90-percent requirement of subsection (d)(1), 
        the qualified rural opportunity fund shall pay a penalty for 
        each month it fails to meet the requirement in an amount equal 
        to the product of--
                    ``(A) the excess of--
                            ``(i) the amount equal to 90 percent of its 
                        aggregate assets, over
                            ``(ii) the aggregate amount of qualified 
                        rural opportunity zone property held by the 
                        fund, multiplied by
                    ``(B) the underpayment rate established under 
                section 6621(a)(2) for such month.
            ``(2) Special rule for partnerships.--In the case that the 
        qualified rural opportunity fund is a partnership, the penalty 
        imposed by paragraph (1) shall be taken into account 
        proportionately as part of the distributive share of each 
        partner of the partnership.
            ``(3) Reasonable cause exception.--No penalty shall be 
        imposed under this subsection with respect to any failure if it 
        is shown that such failure is due to reasonable cause.''.
    (b) Clerical Amendment.--The table of sections for subchapter Z of 
chapter 1 of such Code is amended by adding at the end the following 
new item:

``Sec. 1400Z-3. Special rules for capital gains invested in rural 
                            opportunity zones.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts invested after the date of the enactment of this 
section.
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