[Congressional Record Volume 153, Number 67 (Wednesday, April 25, 2007)]
[Senate]
[Pages S5099-S5100]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KERRY (for himself and Ms. Snowe):
  S. 1214. A bill to amend the Internal Revenue Code of 1986 to modify 
the partial exclusion for gain from certain small business stocks; to 
the Committee on Finance.
  Mr. KERRY. Mr. President, this week we are celebrating National Small 
Business Week to recognize the contributions made by small businesses, 
which are the engine of our economic growth. During 2005, more than 25 
billion small businesses in the United States contributed $918 billion 
to the economy.
  Many of our most successful corporations started as small businesses, 
including AOL, Apple Computer, Compac Computer, Datastream, Evergreen 
Solar, Intel Corporations, and Sun Microsystems. As you can see from 
this partial list, many of these companies played an integral role in 
making the Internet a reality.
  Today, Senator Snowe and I are introducing the Invest in Small 
Business Act of 2007, to encourage private investment in small 
businesses by making changes to the existing partial exclusion for gain 
from certain small business stock.
  We are at an integral juncture in developing technology to address 
global climate change. I believe that small business will repeat the 
role it played at the vanguard of the computer revolution by leading 
the Nation in developing the technologies to substantially reduce 
carbon emissions. Small businesses already are at the forefront of 
these industries, and we need to do everything we can to encourage 
investment in small businesses.
  Back in 1993, I worked with Senator Bumpers to provide a partial 
exclusion for gain from the sale of small business stock. This 
provision would provide a 50 percent exclusion for gain for individuals 
from the sale of certain small business stock that is held for five 
years. Since the enactment of this provision, the capital gains rate 
has been lowered twice without any changes to the exclusion. Due to the 
lower capital rates, this provision no longer provides a strong 
incentive for investment in small businesses.
  The Invest in Small Business Act makes several changes to the 
existing provision. This legislation increases the exclusion amount 
from 50 percent

[[Page S5100]]

to 75 percent and decreases the holding period from five years to four 
years. This bill would allow corporations to benefit from the provision 
as long as they own less than 25 percent of the small business 
corporation stock.
  Currently, the exclusion is treated as a preference item for 
calculating the alternative minimum tax (AMT). The Invest in Small 
Business Act of 2007 would repeal the exclusion as an AMT preference 
item. Under current law, the nonexcluded amount of gain is taxed at 28 
percent. This legislation would tax the nonexcluded portion at the 
lower capital gains rate of 15 or 5 percent.
  The Invest in Small Business Act of 2007 will provide an effective 
tax rate of 3.75 percent for the gain from the sale of certain small 
businesses. This lower capital gains rate will encourage investment in 
small businesses. In addition, the changes made by the Invest in Small 
Business Act of 2007 will make more taxpayers eligible for this 
provision.
  As we celebrate the success of entrepreneurs this week, it is an 
appropriate time to encourage new investment. The Invest in Small 
Business Act of 2007 strengthens an existing tax incentive to provide 
an appropriate incentive to encourage innovation and entrepreneurship.
  I ask unanimous consent that the text of the bill and a summary of 
the bill be printed in the Record
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 1214

       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 ``Invest in Small Business Act 
     of 2007''.

     SEC. 2. INCREASED EXCLUSION AND OTHER MODIFICATIONS 
                   APPLICABLE TO QUALIFIED SMALL BUSINESS STOCK.

       (a) Increased Exclusion.--
       (1) In general.--Paragraph (1) of section 1202(a) of the 
     Internal Revenue Code of 1986 (relating partial exclusion for 
     gain from certain small business stock) is amended to read as 
     follows:
       ``(1) In general.--Gross income shall not include 75 
     percent of any gain from the sale or exchange of qualified 
     small business stock held for more than 4 years.''.
       (2) Empowerment zone businesses.--Subparagraph (A) of 
     section 1202(a)(2) of such Code is amended--
       (A) by striking ``60 percent'' and inserting ``100 
     percent'', and
       (B) by striking ``50 percent'' and inserting ``75 
     percent''.
       (3) Rule relating to stock held among members of controlled 
     group.--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 25-percent controlled 
     group not eligible.--
       ``(A) In general.--Stock of a member of a 25-percent 
     controlled group shall not be treated as qualified small 
     business stock while held by another member of such group.
       ``(B) 25-percent controlled group.--For purposes of 
     subparagraph (A), the term `25-percent controlled group' 
     means any controlled group of corporations as defined in 
     section 1563(a)(1), except that--
       ``(i) `more than 25 percent' shall be substituted for `at 
     least 80 percent' each place it appears in section 
     1563(a)(1), and
       ``(ii) section 1563(a)(4) shall not apply.''.
       (4) Conforming amendments.--Subsections (b)(2), (g)(2)(A), 
     and (j)(1)(A) of section 1202 of such Code are each amended 
     by striking ``5 years'' and inserting ``4 years''.
       (b) Repeal of Minimum Tax Preference.--
       (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)''.
       (c) Repeal of 28 Percent Capital Gains Rate on Qualified 
     Small Business Stock.--
       (1) In general.--Subparagraph (A) of section 1(h)(4) of the 
     Internal Revenue Code of 1986 is amended to read as follows:
       ``(A) collectibles gain, over''.
       (2) Conforming amendments.--
       (A) Section 1(h) of such Code is amended by striking 
     paragraph (7).
       (B)(i) Section 1(h) of such Code is amended by 
     redesignating paragraphs (8), (9), (10), (11), (12), and (13) 
     as paragraphs (7), (8), (9), (10), (11), and (12), 
     respectively.
       (ii) Sections 163(d)(4)(B), 854(b)(5), 857(c)(2)(D) of such 
     Code are each amended by striking ``section 1(h)(11)(B)'' and 
     inserting ``section 1(h)(10)(B)''.
       (iii) The following sections of such Code are each amended 
     by striking ``section 1(h)(11)'' and inserting ``section 
     1(h)(10)'':
       (I) Section 301(f)(4).
       (II) Section 306(a)(1)(D).
       (III) Section 584(c).
       (IV) Section702(a)(5).
       (V) Section 854(a).
       (VI) Section 854(b)(2).
       (iv) The heading of section 857(c)(2) is amended by 
     striking ``1(h)(11)'' and inserting ``1(h)(10)''.
       (d) Increase Aggregate Asset Limitation for Qualified Small 
     Businesses.--
       (1) In general.--Paragraph (1) of section 1202(d) 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) Inflation adjustment.--Section 1202(d) of such Code is 
     amended by adding at the end the following new paragraph:
       ``(4) Inflation adjustment.--
       ``(A) In general.--In the case of any taxable year 
     beginning in a calendar year after 2007, each of the 
     $100,000,000 dollar amounts in paragraph (1) shall be 
     increased by an amount equal to--
       ``(i) such dollar amount, multiplied by
       ``(ii) 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 2006' 
     for `calendar year 1992' in subparagraph (B) thereof.
       ``(B) Rounding.--If any amount as adjusted under 
     subparagraph (A) is not a multiple of $1,000, such amount 
     shall be rounded to the next lowest multiple of $100.''.
       (e) Effective Date.--
       (1) In general.--The amendments made by this section apply 
     to stock issued after December 31, 2007.
       (2) Special rule for stock issued before december 31, 
     2007.--The amendments made by subsections (a), (b), and (c) 
     shall apply to sales or exchanges--
       (A) made after December 31, 2007,
       (B) of stock issued before such date,
       (C) by a taxpayer other than a corporation.
                                  ____


          Summary of the Invest in Small Business Act of 2007

       The Omnibus Budget Reconciliation Act of 1993 included a 
     provision to encourage investment in small businesses. This 
     provision created section 1202 of the tax code which provides 
     a 50 percent exclusion for the gain from the sale of certain 
     small business stock held for more than five years. The 
     amount of gain eligible for the exclusion is limited to the 
     greater of 10 times the taxpayer's basis in the stock, or $10 
     million gain from stock in that small business corporation. 
     This provision is limited to individual investments and not 
     the investments of a corporation. At the date of the issuance 
     of the stock, the gross assets of the corporation cannot 
     exceed $50 million. At least 80 percent of the assets of the 
     corporation are used for the active conduct of business. For 
     purposes of calculating the alternative minimum tax (AMT), 
     seven percent of the excluded amount is added back into the 
     AMT calculation. The nonexcluded portion of section 1202 gain 
     is taxed at the lesser of ordinary income rates or 28 
     percent, instead of the lower capital gains rates for 
     individuals. Since the enactment of this provision, the 
     capital gains rate has been lowered twice. No corresponding 
     changes were made to section 1202.
       The Invest in Small Business Act of 2007 makes the 
     following changes to section 1202 to encourage more 
     investment in small businesses.
       Increases the exclusion from 50 percent to 75 percent.
       Decreases the holding period from five to four years.
       Repeals the capital gains exclusions as an AMT preference.
       Taxes the nonexcluded portion of section 1202 gains at the 
     regular capital gains rate, which is currently 15 percent or 
     5 percent for individual taxpayers.
       Allows corporations the benefits of section 1202, but to be 
     eligible, a corporation cannot hold more than 25 percent of 
     the stock of a qualified small business.
       Provides a 100 percent exclusion for gain from the sale of 
     small business stock of corporations located in an 
     empowerment zone.
       Increases the asset limitation from $50 million to $100 
     million.
       Below are calculations based on $100 of gain calculated 
     under current law and under the Invest in Small Business Act 
     of 2007. Under the present law, calculations for the 
     remaining $50 would be taxed at 28 percent and result in a 
     tax of $14 for a regular taxpayer and $14.98 of tax for an 
     AMT taxpayer. (This calculation is based on a taxpayer paying 
     the 28 percent AMT rate.)


                              Present Law

Regular Tax Calculation:
Gain...............................................................$100
Exclusion...........................................................-50
Regular Tax Rate.................................................. 0.28
                                                             __________