[Congressional Record Volume 143, Number 64 (Thursday, May 15, 1997)]
[Senate]
[Pages S4588-S4591]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BUMPERS (for himself, Ms. Landrieu, Mr. Cleland, Mr. 
        Kerry, and Mr. Daschle):
  S. 745. A bill to amend the Internal Revenue Code of 1986 to modify 
the partial exclusion from gross income of gain on certain small 
business stock, to provide a rollover of capital gains on certain small 
business investments, and for other purposes; to the Committee on 
Finance.


        THE SMALL BUSINESS CAPITAL GAINS ENHANCEMENT ACT OF 1997

  Mr. BUMPERS. Mr. President, I rise today to introduce the Small 
Business Capital Gains Enhancement Act of 1997, which will make several 
important improvements to section 1202 of the Internal Revenue Code, a 
measure I authored in 1993 to provide an incentive for investment in 
entrepreneurial efforts. Section 1202 provides a 50 percent exclusion 
for capital gains from qualified small business stock held at least 5 
years.
  The purpose of section 1202 is clear. Because small businesses are 
inherently riskier than large businesses,

[[Page S4589]]

most investors are reluctant to invest in the smaller enterprises. 
This, obviously, tends to create a dearth of capital for entrepreneurs. 
But maintaining a healthy investment environment for small businesses 
is extremely important for the well-being of our economy. Most new jobs 
come from small businesses, not large ones. From 1991-95, businesses 
with fewer than 500 employees created 22 million new jobs, while 
businesses of greater than 500 employees cut 3 million jobs. And it was 
because of this dynamic small business impact on our economy that 
Congress passed section 1202 with great bipartisan support in both 
chambers: we wanted to create a capital formation incentive for small 
business.
  Now, for two reasons, it has become crucial that we make certain 
improvements to section 1202. First, section 1202 is not adequate. The 
small business incentive I originally proposed in 1993 was considerably 
more extensive than section 1202. After years of discussions among 
entrepreneurs and tax experts regarding what would be helpful and 
workable, we had determined that the incentive should, for example, 
include companies of up to $100 million in assets, allow corporate 
investors, and not be subject to the alternative minimum tax. But 
because of budget concerns during the Omnibus Reconciliation Act of 
1993, the proposal was scaled back to include only companies of $50 
million or less, allow no corporate investors, and subject 50 percent 
of the benefit to the alternative minimum tax. The bill my cosponsors 
and I are introducing today will expand section 1202 to provide the 
kind of incentive originally envisioned and more.
  The second reason that today's legislation is crucial is to preserve 
the incentive in the face of other impending capital gains cuts which 
would effectively nullify it. As we all know, it appears that we are 
headed toward an across-the-board capital gains cut following the 
recent budget agreement between the Clinton administration and 
Republican congressional leaders. Ironically, an across-the-board cut 
could obliterate the small business incentive if the latter is not 
adjusted accordingly.

  Here is how that would happen. Under the GOP capital gains proposal 
in S. 2, the top regular capital gains rate will be 19.8 percent, while 
the top rate for small business capital gains will remain at 14 
percent. In other words, an investor could buy stock in, say, 
Microsoft, hold that stock 1 year, sell the stock, and, if a gain were 
realized, pay a maximum tax of 19.8 percent. Alternatively, the 
investor could make that investment in, say, a new biotech firm, hold 
that stock 5 years, sell the stock, and, if a gain were realized, pay a 
maximum tax of 14 percent. The logical choice would be clear: the 
investor would choose the big business over the small business. After 
all, who would choose a risky 5-year small business investment over a 
1-year Microsoft investment for a tax differential of only 5.8 percent? 
Clearly, a major across-the-board tax cut without a corresponding 
increase in the exclusion for small business investments will 
obliterate section 1202's effectiveness. Small business will be left 
without a viable capital gains incentive.
  Not only would the situation described above nullify the small 
business incentive for the future, it would be unfair to those who have 
already made small business investments based on section 1202--those 
who accepted the risk of investing in a small business stock for the 
promise of preferential capital gains treatment. We would be saying, 
``Thanks for taking a risk with your small business investment, but 
we've decided to change the rules. We're gonna give you about the same 
tax rate we give other people for their less-risky Fortune 500 
investments.'' As a matter of fairness to those who have already 
invested in a small business based on section 1202, we must maintain a 
substantial difference between small business and big business capital 
gains taxes. This bill will make that adjustment by increasing the 
exclusion for small business capital gains from 50 percent to 75 
percent.
  Here is a list of all the improvements our legislation would make to 
section 1202. Increase the small business deduction from 50 percent to 
75 percent; increase the asset limit for ``qualified small businesses'' 
from $50 to $100 million; make the incentive available to corporate 
investors; exempt the incentive from alternative minimum tax 
calculations; change the working capital spend-down period (intended to 
prevent abuse through inactivity) from 2 years to 5 years to allow 
companies to raise adequate capital before beginning to spend it; 
increase the per-taxpayer benefit limit to $20 million or 10 times 
investment. Presently, the limit is $10 million or 10 times investment; 
and allow the tax-deferred rollover of capital gains from one qualified 
small business to another.

  Although we have not yet received a Joint Tax Committee revenue 
estimate on this measure, it would appear from previous estimates to 
cost under $500 million over 5 years and under $1 billion over 10 
years. Compared to the cost of an across-the-board capital gains tax 
cut and other major tax cuts being considered by this Congress, this is 
a pittance.
  Mr. President, section 1202 is the major, if not the only, capital 
formation incentive for small business in the entire Tax Code. It would 
be a tragedy and a slap in the face of America's entrepreneurs if we 
fail to maintain this measure in viable form. The bill we are 
introducing today will do that, and I urge my colleagues to support it.
  Mr. President, I ask unanimous consent that the bill be printed in 
the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 745

       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 ``Small Business Capital Gains 
     Enhancement Act of 1997''.

     SEC. 2. MODIFICATIONS TO EXCLUSION OF GAIN ON CERTAIN SMALL 
                   BUSINESS STOCK.

       (a) Increased Exclusion.--
       (1) In general.--Subsection (a) of section 1202 of the 
     Internal Revenue Code of 1986 (relating to 50-percent 
     exclusion for gain from certain small business stock) is 
     amended--
       (A) by striking ``50 percent'' and inserting ``75 
     percent'', and
       (B) by striking ``50-percent'' in the heading and inserting 
     ``75-percent''.
       (2) Conforming amendments.--
       (A) The heading for section 1202 of such Code is amended by 
     striking ``50-percent'' and inserting ``75-percent''.
       (B) The table of sections for part I of subchapter P of 
     chapter 1 of such Code is amended by striking ``50-percent'' 
     in the item relating to section 1202 and inserting ``75-
     percent''.
       (b) Exclusion Available to Corporations.--
       (1) In general.--Subsection (a) of section 1202 of the 
     Internal Revenue Code of 1986, as amended by subsection (a), 
     is amended by striking ``other than a corporation''.
       (2) Technical amendment.--Subsection (c) of section 1202 of 
     such Code is amended by adding at the end the following new 
     paragraph:
       ``(4) Stock held among members of controlled group not 
     eligible.--Stock shall not be treated as qualified small 
     business stock if such stock was at any time held by any 
     member of the parent-subsidiary controlled group (as defined 
     in subsection (d)(3)) which includes the qualified small 
     business.''
       (c) Repeal of Minimum Tax Preference.--
       (1) In general.--Section 57(a) of the Internal Revenue Code 
     of 1986 (relating to items of tax preference) is amended by 
     striking paragraph (7).
       (2) Technical amendment.--Section 53(d)(1)(B)(ii)(II) of 
     such Code is amended by striking ``, (5), and (7)'' and 
     inserting ``and (5)''.
       (d) Stock of Larger Businesses Eligible for Exclusion.--
       (1) Section 1202(d)(1) of the Internal Revenue Code of 1986 
     (relating to qualified small business) is amended by striking 
     ``$50,000,000'' each place it appears and inserting 
     ``$100,000,000''.
       (2) Section 1202(d) of such Code is amended by adding at 
     the end the following new paragraph:
       ``(4) Inflation adjustment of asset limitation.--In the 
     case of stock issued in any calendar year after 1997, the 
     $100,000,000 amount contained in paragraph (1) shall be 
     increased by an amount equal to--
       ``(A) such dollar amount, multiplied by
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 1996' 
     for `calendar year 1992' in subparagraph (B) thereof.

     If any amount as adjusted under the preceding sentence is not 
     a multiple of $1,000,000, such amount shall be rounded to the 
     next lower multiple of $1,000,000.''
       (e) Per-Issuer Limitation.--Section 1202(b)(1)(A) of the 
     Internal Revenue Code of 1986 (relating to per-issuer 
     limitation on taxpayer's gain) is amended by striking 
     ``$10,000,000'' and inserting ``$20,000,000''.
       (f) Other Modifications.--

[[Page S4590]]

       (1) Working capital limitation.--Section 1202(e)(6) of the 
     Internal Revenue Code of 1986 (relating to working capital) 
     is amended by striking ``2 years'' each place it appears and 
     inserting ``5 years''.
       (2) Redemption rules.--Section 1203(c)(3) of such Code 
     (relating to certain purchases by corporation of its own 
     stock) is amended by adding at the end the following new 
     subparagraph:
       ``(D) Waiver where business purpose.--A purchase of stock 
     by the issuing corporation shall be disregarded for purposes 
     of subparagraph (B) if the issuing corporation establishes 
     that there was a business purpose for such purchase and one 
     of the principal purposes of the purchase was not to avoid 
     the limitation of this section.''
       (g) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to stock issued 
     after the date of the enactment of this Act.
       (2) Special rule.--The amendments made by subsection (c), 
     (e), and (f) shall apply to stock issued after August 10, 
     1993.

     SEC. 3. ROLLOVER OF CAPITAL GAINS ON CERTAIN SMALL BUSINESS 
                   INVESTMENTS.

       (a) In General.--Part III of subchapter O of chapter 1 of 
     the Internal Revenue Code of 1986 (relating to common 
     nontaxable exchanges) is amended by adding at the end the 
     following new section:

     ``SEC. 1045. ROLLOVER OF GAIN ON SMALL BUSINESS INVESTMENTS.

       ``(a) Nonrecognition of Gain.--In the case of the sale of 
     any eligible small business investment with respect to which 
     the taxpayer elects the application of this section, gain 
     from such sale shall be recognized only to the extent that 
     the amount realized on such sale exceeds--
       ``(1) the cost of any other eligible small business 
     investment purchased by the taxpayer during the 6-month 
     period beginning on the date of such sale, reduced by
       ``(2) any portion of such cost previously taken into 
     account under this section.

     This section shall not apply to any gain which is treated as 
     ordinary income for purposes of this subtitle.
       ``(b) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Purchase.--The term `purchase' has the meaning given 
     such term by section 1043(b)(4).
       ``(2) Eligible small business investment.--Except as 
     otherwise provided in this section, the term `eligible small 
     business investment' means any stock in a domestic 
     corporation, and any partnership interest in a domestic 
     partnership, which is originally issued after December 31, 
     1996, if--
       ``(A) as of the date of issuance, such corporation or 
     partnership is a qualified small business entity,
       ``(B) such stock or partnership interest 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 or partnership 
     interest), and
       ``(C) the taxpayer has held such stock or interest at least 
     6 months as of the time of the sale described in subsection 
     (a).

     A rule similar to the rule of section 1202(c)(3) shall apply 
     for purposes of this section.
       ``(3) Active business requirement.--Stock in a corporation, 
     and a partnership interest in a partnership, shall not be 
     treated as an eligible small business investment unless, 
     during substantially all of the taxpayer's holding period for 
     such stock or partnership interest, such corporation or 
     partnership meets the active business requirements of 
     subsection (c). A rule similar to the rule of section 
     1202(c)(2)(B) shall apply for purposes of this section.
       ``(4) Qualified small business entity.--
       ``(A) In general.--The term `qualified small business 
     entity' means any domestic corporation or partnership if--
       ``(i) such entity (and any predecessor thereof) had 
     aggregate gross assets (as defined in section 1202(d)(2)) of 
     less than $25,000,000 at all times before the issuance of the 
     interest described in paragraph (2), and
       ``(ii) the aggregate gross assets (as so defined) of the 
     entity immediately after the issuance (determined by taking 
     into account amounts received in the issuance) are less than 
     $25,000,000.
       ``(B) Aggregation rules.--Rules similar to the rules of 
     section 1202(d)(3) shall apply for purposes of this 
     paragraph.
       ``(c) Active Business Requirement.--
       ``(1) In general.--For purposes of subsection (b)(3), the 
     requirements of this subsection are met by a qualified small 
     business entity for any period if--
       ``(A) the entity is engaged in the active conduct of a 
     trade or business, and
       ``(B) at least 80 percent (by value) of the assets of such 
     entity are used in the active conduct of a qualified trade or 
     business (within the meaning of section 1202(e)(3)).

     Such requirements shall not be treated as met for any period 
     if during such period the entity is described in subparagraph 
     (A), (B), (C), or (D) of section 1202(e)(4).
       ``(2) Special rule for certain activities.--For purposes of 
     paragraph (1), if, in connection with any future trade or 
     business, an entity is engaged in--
       ``(A) startup 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 entity 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 the entity has any gross 
     income from such activities at the time of the determination.
       ``(3) Certain rules to apply.--Rules similar to the rules 
     of paragraphs (5), (6), (7), and (8) of section 1202(e) shall 
     apply for purposes of this subsection.
       ``(d) Certain Other Rules To Apply.--Rules similar to the 
     rules of subsections (f), (g), (h), and (j) of section 1202 
     shall apply for purposes of this section, except that a 6-
     month holding period shall be substituted for a 5-year 
     holding period where applicable.
       ``(e) Basis Adjustments.--If gain from any sale is not 
     recognized by reason of subsection (a), such gain shall be 
     applied to reduce (in the order acquired) the basis for 
     determining gain or loss of any eligible small business 
     investment which is purchased by the taxpayer during the 6-
     month period described in subsection (a).
       ``(f) Statute of Limitations.--If any gain is realized by 
     the taxpayer on the sale or exchange of any eligible small 
     business investment and there is in effect an election under 
     subsection (a) with respect to such gain, 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 other eligible 
     small business investments which the taxpayer claims results 
     in nonrecognition of any part of such gain,
       ``(B) the taxpayer's intention not to purchase other 
     eligible small business investments within the 6-month period 
     described in subsection (a), or
       ``(C) a failure to make such purchase within such 6-month 
     period, and
       ``(2) such deficiency may be assessed before the expiration 
     of such 3-year period notwithstanding the provisions of any 
     other law or rule of law which would otherwise prevent such 
     assessment.
       ``(g) 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 splitups, 
     shell corporations, partnerships, or otherwise and 
     regulations to modify the application of section 1202 to the 
     extent necessary to apply such section to a partnership 
     rather than a corporation.''
       (b) Conforming Amendment.--Paragraph (23) of section 
     1016(a) of the Internal Revenue Code of 1986 is amended--
       (1) by striking ``or 1044'' and inserting ``, 1044, or 
     1045'', and
       (2) by striking ``or 1044(d)'' and inserting ``, 1044(d), 
     or 1045(e)''.
       (c) Clerical Amendment.--The table of sections for part III 
     of subchapter O of chapter 1 of the Internal Revenue Code of 
     1986 is amended by adding at the end the following new item:

``Sec. 1045. Rollover of gain on small business investments.''

       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after December 31, 1996.

  Mr. CLELAND. Mr. President, I rise this morning, to join my good 
colleague from Arkansas in support of the Small Business Capital Gains 
Enhancement Act of 1997.
  Today, our country's economy is more robust and is growing faster 
than it has in the last decade and maybe even the last several decades. 
Fostering this growth is crucial to sustain the great and important 
strides that our economy has made in these past years and I believe 
that this legislation will go a long way to improving incentives for 
investment in small businesses. Cutting the capital gains tax in this 
targeted fashion is something that small businesses have time and again 
asked for because they know, as we all do, that investing in small 
businesses and providing capital for that investment creates growth 
and, more importantly, jobs.
  Small businesses have had a striking impact on Georgia's economy. 
They are vital as job creators, and their diversity and composition 
provide a work force with endless opportunities and are easily the envy 
of the country.
  Mr. President, according to the SBA, 97.6 percent of the business 
firms in Georgia are small businesses. Women-owned businesses have 
increased 62.7 percent since 1987. African American owned firms have 
increased 79.8 percent between 1987 and 1992. Hispanic firms, including 
part-time businesses, grew 184.9 percent in the same period of time. So 
the impact of this legislation is huge. These figures are numbers that 
corporate investors cannot--cannot--

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ignore, but if section 1202 of the Internal Revenue Code doesn't allow 
them to invest in these small businesses, then I believe we are missing 
out on far more than the taxes that we collect as the law is now. We 
must make certain that these investors have every opportunity to become 
involved in the growing of small businesses. These are the ideal 
investors, they recognize that, and so should we, Mr. President.
  I wish to add support to my colleague's comments that across-the-
board cuts, while they may sound wonderful, can in fact have a negative 
impact toward small businesses as they compete with big businesses for 
investment dollars. It is important to maintain the differences between 
small business and big business capital gains taxes. Making adjustment 
in the present law and fine tuning where needed is smarter, in my 
opinion, than the alternatives of wide ranging or all encompassing 
legislative action.

  This is an affordable tax cut and one that puts important capital 
dollars in the coffers of the men and women of this country who are 
creating jobs, creating economic opportunity, and giving hope to the 
country and I believe hope to our great future. I believe many of our 
colleagues will join us in our commitment to the small businesses of 
this country. I thank my friend from the wonderful State of Arkansas 
for his leadership and the opportunity to participate here with him 
this morning. This is a great opportunity that I look forward to 
supporting.
  Mr. President, I yield the floor and any time that may remain.
                                 ______