[Congressional Record Volume 147, Number 92 (Thursday, June 28, 2001)]
[Senate]
[Pages S7105-S7107]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LIEBERMAN (for himself and Mr. Hatch):
  S. 1134. A bill to amend the Internal Revenue Code of 1986 to modify 
the rules applicable to qualified small business stock; to the 
Committee on Finance.
  Mr. LIEBERMAN. Mr. President, I rise today to introduce legislation 
to provide an incentive for capital formation for entrepreneurs.
  This incentive is tailor-made to form capital for entrepreneurial 
firms so they can spur economic growth, create high wage jobs, and 
ensure American competitiveness into the 21st Century. It focuses on 
equity investments as this is the only form of capital most 
entrepreneurial firms secure to fund research and development; most 
such firms are unable to secure debt capital.
  Because this incentive applies to founders stock and employee stock 
options, and not just stock offered to outside investors, it provides a 
powerful

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incentive for the human infrastructure and culture that drives and 
grows our nation's entrepreneurial firms.
  This legislation could not be more timely given the drought we see in 
equity capital for entrepreneurs. Nationwide we saw 850 Initial Public 
Offerings of stock, IPOs, in 1996, 610 in 1997, 362 in 1998, 501 in 
1999, and 379 in 2000. So far in 2001 we have seen only 50. The total 
value of these offerings was $47 billion in 1996, $39 billion in 1997, 
$37 billion in 1998, $53 billion in 1999, and $54 billion in 2000. So 
far in 2001, it's only $20 billion. Entrepreneurs are starved for 
capital and this incentive is tailor made to provide an incentive to 
investors to provide it to them.
  The details of our proposal are straight forward. They call for a 100 
percent exclusion, a zero capital gains rate, for new, direct, long-
term investments in the stock of a small corporation. ``New'' means 
that the stock must be offered after the effective date of the bill and 
does not apply to sale of previously acquired equity shares. ``Direct'' 
means the stock must have been acquired from the firm and not in 
secondary markets, so it includes founders stock, stock options, 
venture capital placements, IPOs, and subsequent public stock 
offerings. ``Long-term'' means the stock must be held for three years. 
``Stock'' includes any type of stock, including convertible preferred 
shares. ``Small corporation'' means a corporation with $300 million or 
less in capitalization (not valuation, but paid-in capital). The 
incentive applies to both individual and corporate taxpayers. And the 
excluded gains are not a preference item for the Alternative Minimum 
Tax.
  I am pleased that Senator Hatch has agreed to serve as the lead 
cosponsor of the legislation. He and I worked closely together from 
1995 through 1997 to restore the capital gains incentive. There were 
many Members involved with that effort, but Senator Hatch and I were 
pleased to be the leaders of the legislative coalition that proved to 
be so effective. Our work now on this venture capital gains legislation 
is a continuation of that long and successful partnership.
  I am pleased that Representatives Jennifer Dunn and Robert Matsui are 
introducing the same bill in the other body.
  I have long championed this approach to capital gains incentives. 
Most recently, this proposal was included as Section 4 of S. 798, the 
Productivity, Opportunity, and Prosperity Act of 2001. The first 
proposal on this subject was introduced on April 7, 1987 in the 100th 
Congress by Senator Dale Bumpers as S. 932. I was an early supporter of 
this proposal and I cosponsored a version of this proposal introduced 
in 1991 by Senator Bumpers as S.1932. A version of that bill was 
enacted as part of the 1993 tax bill, Section 1202, but it was laden 
with technical requirements that limited its effectiveness. In the 
104th Congress sent amendments to strengthen Section 1202 to President 
Clinton in the tax bill vetoed he vetoed in 1996. In the 105th Congress 
these amendments were included in all of the key capital gains, 
including S. 2 (Roth), S. 20 (Daschle), S. 66 (Hatch-Lieberman), S. 501 
(Mack), and S. 745 (Bumpers). These amendments were sent to the 
conference on that bill but did not emerge from it. A broad-based 
capital gains incentive, which I supported, was enacted into law and a 
rollover provision was enacted with regard to Section 1202 stock. In 
the 106th Congress, amendments to strengthen Section 1202 were 
introduced in the House by Representatives Jennifer Dunn and Bob 
Matsui, H.R. 2331. Then I introduced the incentive as part of S. 798 
and we are today introducing it again as a stand-alone bill.
  Today I am pleased to cosponsor S. 818, the capital gains proposal 
introduced by Senator Hatch and Torricelli and others. That proposal 
calls for a reduction in the current 20 percent capital gains tax rate 
for a broad class of investments, simplifies the capital gains tax, and 
provides special benefits to low income taxpayers. This bill and the 
bill we introduce today are complementary and should both be enacted.
  I recognize that the Joint Committee on Taxation, which determines 
the ``cost'' of all tax proposals, will determine that our proposal 
today, and S. 818, will lose revenue. I believe this finding to be 
short-sighted given the dramatic effect that these incentives will have 
on entrepreneurs and therefore on economic growth, but there is no way 
to appeal these determinations. There is no revenue remaining available 
under the budget resolution to tap to finance these proposals. 
Accordingly, I fully accept the obligation to find a way to pay for 
these and other tax proposals, an offset, so that we do not adversely 
affect the deficit.
  The reasons for setting a special capital gains rate for venture 
capital are compelling. Entrepreneurial firms are the ones which can 
dramatically change our whole health care system, clean up our 
environment, link us in international telecommunication networks, and 
increase our capacity to understand our world. The firms are founded by 
dreamers, adventurers, and risk-takers who embody the best we have to 
offer in our free-enterprise economy.
  Entrepreneurship drives growth and small, emerging companies need 
capital investment to innovate, create jobs, and create wealth. 
According to the National Commission on Entrepreneurship, a small 
subset of entrepreneurial firms that comprise only 5-15 percent of all 
U.S. businesses created about two-thirds of new jobs between 1993-96. 
Although venture capital is critical to the transition from a fledgling 
company to a growth company, only a small share of it is associated 
with small and new firms. In addition, we are currently experiencing a 
venture capital slow down that makes it even more difficult for small 
and new firms to attract capital. According to the National Venture 
Capital Association, NCVA, investment in the fourth quarter of last 
year slowed by more than 30 percent from the previous quarter.

  The primary goal of the Productivity, Opportunity, and Prosperity Act 
and this venture capital incentive is to protect, stimulate and expand 
economic growth. Government's role is not to create jobs but to help 
create the environment in which the private sector will create jobs. 
This legislation helps to create the right context for private sector 
growth by providing incentives for investment in training, technology, 
and small entrepreneurial firms. These investments are critical to 
economic growth and the creation of jobs and wealth.
  The Productivity, Opportunity, and Prosperity Act of 2001, including 
this venture capital proposal, is a tax plan with a purpose. And that 
purpose is, above all else, to stimulate private sector economic 
growth, to raise the tide that lifts the lot of all Americans. In the 
spirit of the ``New Economy,'' where the fundamentals of our economy 
have changed through entrepreneurship and innovation, this package 
includes business tax incentives that will spur the real drivers of 
growth: innovation, investment, a skilled workforce, and productivity.
  Ten years from now we will be judged by the economic policy decisions 
we make today. People will ask, did we fully understand the awesome 
changes taking place in our economy and in our society? Did we give our 
industry and workers the environment and the tools they need to seize 
the opportunities that an innovation economy offers? I believe that a 
true Prosperity Agenda is within our grasp. Never before has America 
been in a stronger position, economically, socially, or politically, to 
shape our future. But it will take strong and focused leadership. I am 
confident that if we in the public sector in Washington work in 
partnership with the private sector throughout our country, we can 
truly say of America's future that the best is yet to come. I believe 
that the Productivity, Opportunity, and Prosperity Act and this venture 
capital incentive are an important step toward that future.
  Mr. President, I ask unanimous consent that the text of the bill and 
section analysis be printed in the Record.
  There being no objection the material was ordered to be printed in 
the Record as follows:

                                S. 1134

       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 ``Venture Capital Gains and 
     Growth Act of 2001''.

     SEC. 2. MODIFICATIONS APPLICABLE TO QUALIFIED SMALL BUSINESS 
                   STOCK.

       (a) Repeal of Minimum Tax Preference.--

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       (1) In general.--Subsection (a) of section 57 of the 
     Internal Revenue Code of 1986 (relating to items of tax 
     preference) is amended by striking paragraph (7).
       (2) Technical amendment.--Subclause (II) of section 
     53(d)(1)(B)(ii) of such Code is amended by striking ``, (5), 
     and (7)'' and inserting ``and (5)''.
       (b) Increase in Rollover Period for Qualified Small 
     Business Stock.--Subsections (a)(1) and (b)(3) of section 
     1045 of the Internal Revenue Code of 1986 (relating to 
     rollover of gain from qualified small business stock to 
     another qualified small business stock) are each amended by 
     striking ``60-day'' and inserting ``180-day''.
       (c) Reduction in Holding Period.--
       (1) In general.--Subsection (a) of section 1202 of the 
     Internal Revenue Code of 1986 (relating to partial exclusion 
     for gains from certain small business stock) is amended by 
     striking ``5 years'' and inserting ``3 years''.
       (2) Conforming amendment.--Subsections (g)(2)(A) and 
     (j)(1)(A) of section 1202 of such Code are each amended by 
     striking ``5 years'' and inserting ``3 years''.
       (d) Repeal of Per-Issuer Limitation.--Section 1202(b) of 
     the Internal Revenue Code of 1986 (relating to per-issuer 
     limitations on taxpayer's eligible gain) is repealed.
       (e) Qualified Trade or Business.--Section 1202(e)(3) of the 
     Internal Revenue Code of 1986 (relating to qualified trade or 
     business) is amended by inserting ``, and is anticipated to 
     continue to be,'' before ``the reputation'' in subparagraph 
     (A).
       (f) Other Modifications.--
       (1) Repeal of working capital limitation.--Section 
     1202(e)(6) of the Internal Revenue Code of 1986 (relating to 
     working capital) is amended--
       (A) in subparagraph (B), by striking ``2 years'' and 
     inserting ``5 years''; and
       (B) by striking the last sentence.
       (2) Exception from redemption rules where business 
     purpose.--Section 1202(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 limitations of this section.''.
       (g) 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 by striking ``50 percent'' and inserting ``100 
     percent''.
       (2) Conforming amendments.--
       (A) Subparagraph (A) of section 1(h)(5) of such Code is 
     amended to read as follows:
       ``(A) collectibles gain, over''.
       (B) Section 1(h) of such Code is amended by striking 
     paragraph (8).
       (C) Paragraph (9) of section 1(h) of such Code is amended 
     by striking ``, gain described in paragraph (7)(A)(i), and 
     section 1202 gain'' and inserting ``and gain described in 
     paragraph (7)(A)(i)''.
       (D) Section 1(h) of such Code is amended by redesignating 
     paragraphs (9) (as amended by subparagraph (C)), (10), (11), 
     and (12) as paragraphs (8), (9), (10), and (11), 
     respectively.
       (E) The heading for section 1202 of such Code is amended by 
     striking ``PARTIAL'' and inserting ``100-PERCENT''.
       (F) The table of sections for part I of subchapter P of 
     chapter 1 of such Code is amended by striking ``Partial'' in 
     the item relating to section 1202 and inserting ``100-
     percent''.
       (h) Exclusion Available to Corporations.--
       (1) In general.--Subsection (a) of section 1202 of the 
     Internal Revenue Code of 1986 (relating to partial exclusion 
     for gains from certain small business stock) 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 of a member of a parent-subsidiary 
     controlled group (as defined in subsection (d)(3)) shall not 
     be treated as qualified small business stock while held by 
     another member of such group.''.
       (i) Stock of Larger Businesses Eligible for Exclusion.--
       (1) In general.--Paragraph (1) of section 1202(d) of the 
     Internal Revenue Code of 1986 (defining qualified small 
     business) is amended by striking ``$50,000,000'' each place 
     it appears and inserting ``$300,000,000''.
       (2) Inflation adjustment.--Section 1202(d) of such Code 
     (defining qualified small business) is amended by adding at 
     the end the following:
       ``(4) Inflation adjustment of asset limitation.--In the 
     case of stock issued in any calendar year after 2002, the 
     $300,000,000 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 2001' 
     for `calendar year 1992' in subparagraph (B) thereof.
     If any amount as adjusted under the preceding sentence is not 
     a multiple of $10,000, such amount  shall be rounded to the 
     nearest multiple of $10,000.''.
       (j) Effective Date.--The amendments made by this section 
     shall apply to stock issued after the date of the enactment 
     of this Act.
                                  ____


             Description of Venture Capital Gains Incentive

       Section 1202 enacted in 1993:
       50% capital gains exclusion for new investments--not sale 
     of previously acquired assets--new investments made after 
     effective date, August 1993.
       Only if investments made directly in stock--not secondary 
     trading, founders stock, stock options, venture capital, 
     public offerings, common, preferred, convertible preferred.
       Only if made in stock of a ``small corporation''--defined 
     as a corporation with $50 million or less in capitalization--
     ceiling not indexed for inflation.
       Only if investment held for five years.
       Only if investment made by an individual taxpayer--not by a 
     corporate taxpayer.
       50% of the excluded gains not covered by the Alternative 
     Minimum Tax (AMT).
       Limit on benefits per taxpayer of ``10 times basis or $10 
     million, whichever is greater''.
       Technical problems--redemption of stock, ``spending speed-
     up'' provision.
       Section 1045 enacted in 1997:
       Permits investors in Section 1202 stock to roll over their 
     investments in a new Section 1202 investment without 
     ``realizing'' gains and paying taxes within 60 days.
       Nine proposed amendments to Section 1202 and Section 1045:
       (1) Sets a zero capital gains rate, compared to the 20 
     percent rate for other capital gains investments.
       Only new investments--same.
       Only if direct investments--same.
       Only if investment in stock--same.
       (2) Apply to corporate taxpayers--now only applies to 
     individual taxpayers.
       (3) Define ``small corporation'' as one with $300 million 
     in capitalization and index for inflation--up from $50 
     million with no indexing.
       (4) 100 percent exemption from AMT--now 50 percent 
     exemption.
       (5) Increase the time permitted to roll over a Section 1202 
     investment into another Section 1202 investment to 180 days.
       (6) Only if investment held for three years--reduction from 
     five years.
       (7) Delete ``10 times or $10 million'' limitation.
       (8) Extend coverage of Section 1202 to additional 
     corporations.
       (9) Fix technical problems--modify redemption of stock, 
     ``spending speed-up'' provision.
                                 ______