25 tion 368—



1237



19

1 "(A) such stock shall be treated as ac-

2 quired by the taxpayer at original issue, and

3 "(B) such stock shall be treated as having

4 been held during the period such option, war-

5 rant, or debt was held, or such security was

6 outstanding.

7 "(2) Issue price for convertible debt or

8 security. — For purposes of section 1302(b)(1) and

9 notwithstanding section 1302(b)(2), in the case of a

10 debt instrument converted to stock, or stock issued

11 in exchange for securities in a transaction described

12 in section 368, such stock shall be treated as issued

13 for an amount equal to the sum of —

14 "(A) the principal amount of the debt or

15 security as of the time of the conversion or ex-

16 change, and

17 "(B) accrued but unpaid interest on such

18 loan or security.

19 "(3) Applicable option or warrant. — For

20 purposes of this subsection, the term 'applicable op-

21 tion or warrant' means an option or warrant

22 which —

23 "(A) was i^ued in exchange for the per-

24 formance of services for the corporation issuing

25 it, and

•HR 1636 IH



1238



20

1 "(B) is nontransferrable.

2 "(e) Certain Tax-Free and Other Trans-

3 FERS. — For purposes of this part —

4 "(1) In general. — In the ease of a transfer of

5 stock to which this subsection appHes, the transferee

6 shall be treated as —

7 "(A) having acquired such stock in the

8 same manner as the transferor, and

9 "(B) having held such stock during any

10 continuous period immediately preceding the

1 1 transfer during which it was held (or treated as

12 held under this subsection) by the transferor.

13 "(2) Transfers to which subsection ap-

14 PLIES. — This subsection shall apply to any

15 transfer —

16 "(A) by gift,

17 "(B) at death,

18 "(C) to the extent that the basis of the

19 property in the hands of the transferee is deter-

20 mined by reference to the basis of the property

21 in the hands of the transferor by reason of sec-

22 tion 334(b), 723, or 732, or

23 "(D) of qualified small business stock for

24 other qualified small business stock in a trans-



•HR 1636 IH



1239



21

1 1 action described in section 351 or a reorganiza-

2 tion described in section 368.

3 "(3) Incorporations and reorganizations

4 involving nonqualified stock. —

5 "(A) In general. — In the case of a trans-

6 action described in section 351 or a reorganiza-

7 tion described in section 368, if a qualified

8 small business stock is transferred for other

9 stock which is not qu'alified small business

10 stock, such transfer shall be treated as a trans-

11 fer to which this subsection applies solely with

12 respect to the person receiving such other stock.

13 "(B) Limitation. — This part shall apply

14 to the sale or exchange of stock treated as

15 qualified small business stock by reason of sub-

16 paragraph (A) only to the extent of the gain (if

17 any) which would have been recognized at the

18 time of the transfer described in subparagraph

19 (A) if section 351 or 368 had not applied at

20 such time.

21 "(C) SuccESsrvT: application. — For pur-

22 poses of this paragraph, stock treated as quali-

23 fied small business stock under subparagraph

24 (A) shall be so treated for subsequent trans-

25 actions or reorganizations, except that the limi-

•HR 1636 IH .



1240



22

1 tation of subparagraph (B) shall be applied as

2 of the time of the first transfer to which sub-

3 paragraph (A) applied.

4 "(D) Control test. — Except in the case

5 of a transaction described in section 368, this

6 paragraph shall apply only if, immediately after

7 the transaction, the corporation issuing the

8 stock owns directly or indirectly stock rep-

9 resenting control (within the meaning of section

10 368(c)) of the corporation whose stock was

1 1 transferred.

12 *'(f) Stock Exchanged for Property. — For pur-

13 poses of this part, in the case where the taxpayer transfers

14 property (other than money or stock) to a corporation in

15 exchange for stock in such corporation —

16 "(1) such stock shall be treated as having been

17 acquired by the taxpayer on the date of such ex-

18 change, and

19 "(2) the basis of such stock in the hands of the

20 taxpayer shall be treated as equal to the fair market

21 value of the property exchanged.

22 "(g) Pass-Thru Entities. — For purposes of this

23 part, any gain or loss of a pass-thru entity which is treated

24 for purposes of this subtitle as a gain or loss of any person

25 holding an interest in such entity shall retain its character

«R 16S« IH



1241



23

1 as qualified small business or seed capital gain or loss in

2 the hands of such person.

3 "(h) Indexing. — In the case of any stock issued in

4 a calendar year after 1992, the $5,000,000 and

5 $100,000,000 amounts in section 1301(c)(3) (B)(i) and

6 subsection (b)(1) of this section shall be increased by an

7 amount equal to —

8 "(1) such dollar amount, multiplied by

9 "(2) the cost-of-living adjustment determined

10 under section 1(f)(3) for such calendar year by sub-

11 stituting '1991' for '1987' in subparagraph (B)

12 thereof.".

13 (b) Maximum 14 Percent Tax Rate. —

14 (1) Individuals. — Section 1(h) of such Code

15 (relating to maximum capital gains rate) is amended

16 to read as follows:

17 "(h) Maximum Capital Gains Rate. —

18 "(1) In general. — If a taxpayer has a net

19 capital gain for any taxable year, then the tax im-

20 posed by this section shall not exceed the sum of —

21 "(A) a tax computed at the rate and in the

22 same manner as if this subsection had not been

23 enacted on the greater of —

24 "(i) taxable income reduced by the

25 amount of the net capital gain, or



1242



24

1 "(ii) the amount of taxable income

2 taxed at a rate below 28 percent, plus

3 "(B) a tax of 28 percent of the amount of

4 taxable income in excess of the amount deter-

5 mined under subparagraph (A).

6 "(2) Special rule where taxpayer has

7 qualified small business net capital or seed

8 capital gain. —

9 "(A) In general. — If a taxpayer has

10 qualified small business net capital gain or seed

11 capital gain for any taxable year, then the tax

12 imposed by this section shall not exceed the

13 lesser of —

14 "(i) the amount determined under

15 paragraph (1), or

16 "(ii) the sum of —

17 "(I) the amount determined

18 under paragraph (1) without taking

19 into account qualified small business

20 net capital gain and seed capital gain

21 for purposes of subparagraphs (A)

22 and (B) thereof, plus

23 "(II) 14 percent of the qualified

24 small business net capital gain and

25 seed capital gain.

•HR 16^ IH



1243



25

1 "(B) Definitions. — For purposes of this

2 paragraph, the terms 'quahfied small business

3 net capital gain' and 'seed capital gain' have

4 the meanings given such terms by section 1301

5 (b) and (c), respectively.".

6 (2) Corporations. — Section 1201(a) of such

7 Code (relating to alternative tax for corporations) is

8 amended —

9 (A) by inserting "or the corporation has a

10 qualified small business net capital gain or seed

11 capital gain" before ", then", and

12 (B) by striking paragraph (2) and insert-

13 ing:

14 "(2) a tax equal to the sum of —

15 "(A) 34 percent of the sum of the net cap-

16 ital gain, reduced by qualified small business

17 net capital gain and seed capital gain, plus

18 "(B) 17 percent of the qualified small

19 business net capital gain and seed capital

20 gain.".

21 (c) Treatment as Preference Item for Mini-

22 MUM Tax. — Section 57(a) of such Code (relating to items

23 of tax preference under the alternative minimum tax) is

24 amended by adding at the end thereof the following new



25 paragraph:



•HR 1636 IH



1244



26

1 "(8) Capital gains on sale of certain

2 SMALL BUSINESS STOCK. — ^An amount equal to the

3 deduction for the taxable year determined under sec-

4 tion 1301(a)(1).".

5 (d) Losses on Small Business Stock. — Section

6 1244(c)(3)(A) of such Code (defining small business cor-

7 poration) is amended by striking "$1,000,000" and insert-

8 ing "$5,000,000 (adjusted at the same time and manner

9 as under section 1302(g))".

10 (e) Conforming Amendments. —

11 (1) Section 62(a) of such Code is amended by

12 adding after paragraph (13) the following new para-

13 graph:

14 "(14) Long-term capital gains. — The de-

15 duction allowed by section 1301.".

16 (2) Subparagraph (B) of section 170(e)(1) of

17 such Code is amended by inserting "(or, in the case

18 of qualified small business stock under section 1301,

19 50 percent of the amount)" after "the amount".

20 (3) Section 172(d)(2) of such Code is amended

21 to read as follows:

22 "(2) Capital gains and losses of tax-
.23 payers other than corporations. — In the case
24 of a taxpayer other than a corporation —



•HR 16M IH



1245



27

1 "(A) the amount deductible on account of

2 losses from sales or exchanges of capital assets

3 shall not exceed the amount includible on ac-

4 count of gains from sales or exchanges of cap-

5 ital assets; and

6 "(B) the deduction for long-term capital

7 gains provided by section 1301 shall not be al-

8 lowed.".

9 (4) Subparagraph (B) of section 172(d)(4) of

10 such Code is amended by inserting ", (2)(B)," after

11 "paragraph (1)".

12 (5)(A) Section 220 of such Code is amended to

13 read as follows:

14 "SEC. 220. CROSS REFERENCES.

15 "(1) For deduction for long-term capital gains

16 in the case of sale of qualified small business stock,

17 see section 1301.

18 "(2) For deductions in respect of a decedent,

19 see section 691.".

20 (B) The table of sections for part VII of sub-

21 chapter B of chapter 1 of such Code is amended by

22 striking out "reference" in the item relating to sec-

23 tion 220 and inserting "references".

24 (6) Paragraph (4) of section 642(c) of such

25 Code is amended to read as follows:

•HR 1636 IH . ^



1246



28

1 "(4) Adjustments. — To the extent that the

2 amount otherwise allowable as a deduction under

3 this subsection consists of gain from the sale or ex-

4 change of qualified small business stock held for

5 more than 5 years, proper ac^ustment shall be made

6 for any deduction allowable to the estate or trust

7 under section 1301 (relating to deduction for excess

8 of capital gains over capital losses). In the case of

9 a trust, the deduction allowed by this subsection

10 shall be subject to section 681 (relating to unrelated

11 business income).".

12 (7) Paragraph (3) of section 643(a) of such

13 Code is amended by adding at the end thereof the

14 following new sentence: 'The deduction under sec-

15 tion 1301 (relating to deduction for gain on quali-

16 fied small business stock) shall not be taken into ac-

17 count.".

18 (8) Paragraph (4) of section 691(c) of such

19 Code is amended by striking out "1(h), 1201, and

20 1211" and inserting in lieu thereof "1(h), 1201,

21 1211, and 1301, and for purposes of section

22 57(a)(8)".

23 (9) Clause (iii) of section 852(b)(3)(D) of such

24 Code is amended by striking out "66 percent" and



•HR 16M IH



1247



29

1 inserting "the rate differential portion (within the

2 meaning of section 904(b)(3)(E))".

3 (10) The second sentence of paragraph (2) of

4 section 871(a) of such Code is amended by inserting

5 "such gains and losses shall be determined without

6 regard to section 1301 (relating to deduction for

7 qualified small business net capital gains) and" after

8 "except that".

9 (11) Section 1402(i)(l) of such Code is amend-

10 ed to read as follows:

11 "(1) In general. — In determining the net

12 earnings from self-employment of any options dealer

13 or commodities dealer —

14 "(A) notwithstanding subsection (a)(3)(A),

15 there shall not be excluded any gain or loss (in

16 the normal course of the taxpayer's activity of

17 dealing in or trading section 1256 contracts)

18 from section 1256 contracts or property related

19 to such contracts, and

20 "(B) the deduction provided by section

21 1301 shall not apply.".

22 (12) Section 1445(e)(1) of such Code is amend-

23 ed by striking out "34 percent (or, to the extent pro-

24 vided in regulations, 28 percent)" and inserting "34

25 percent (or, to the extent provided in regulations,



.m> -laoa TtM



1248



30

1 the alternative tax rate determined under section

2 904(b)(3)(E)(iii))".

3 (f) Effective Date. —

4 (1) In general. — The amendments made by

5 this section shall apply to stock issued after Decem-

6 ber 31, 1993.

7 (2) Application of tax incentive to cur-

8 rent stock holdings of investors. —

9 (A) In general. — If—

10 (i) a taxpayer holds any stock on any

11 date on or after the date determined under

12 paragraph (1) which, at the time it was is-

13 sued, would be treated as qualified small

14 business stock (as defined in section

15 1302(a) of the Internal Revenue Code of

16 1986) without regard to the time it was is-

17 sued, and

18 (ii) the value of such stock on such

19 date exceeds its adjusted basis,

20 the taxpayer may elect to treat such stock as

21 having been sold on such date for an amount

22 equal to its value on such date (and as having

23 been reacquired on such date for an amount

24 equal to such value). The gain from such sale

25 shall be treated as received or accrued (and the

•pt 1686 IH



1249

31

1 holding p)eriod of the reacquired stock shall be

2 treated as beginning) on such date. For pur-

3 poses of applying section 1301 of such Code,

4 such stock shall be treated after such reacquisi-

5 tion as acquired in the same manner and at the

6 same time as the original acquisition and the

7 requirement of section 1302(a)(1) that the

8 stock must have been issued after December

9 31, 1993, shall not apply.

10 (B) Election. — ^An election under sub-

11 paragraph (A) with respect to any stock shall

12 be made in such manner as the Secretary mav

13 prescribe. Such an election, once made with re-
i4 spect to any stock, shall be irrevocable.

15 TITLE III— SOCIAL SECURITY

16 EARNINGS TEST

17 SEC. 301. RETIREMENT TEST EXEMPT AMOUNT INCREASED.

18 (a) In General.— Section 203(f)(8)(D) of the Social

19 Security Act (42 U.S.C. 403(f)(8)(D)) is amended to read

20 as follows:

21 "(D) Notwithstanding any other provision of this

22 subsection, the exempt amount which is applicable to an

23 individual who has attained retirement age (as defined in

24 section 216(1)) before the close of the taxable year involved

25 shall be —

•mi 1636 IH



1250

32

1 "(i) $925 for each month of any taxable year

2 ending after 1992 and before 1994,

3 "(ii) $1,020 for each month of any taxable year

4 ending after 1993 and before 1995,

5 "(iii) $1,130 for each month of any taxable

6 year ending after 1994 and before 1996,

7 "(iv) $1,450 for each month of any taxable year

8 ending after 1995 and before 1997,

9 "(v) $1,750 for each month of any taxable year

10 ending after 1996 and before 1998,

11 "(vi) $2,250 for each month of any taxable year

12 ending after 1997 and before 1999,

13 "(vii) $2,670 for each month of any taxable

14 year ending after 1998 and before 2000,

15 "(viii) $3,500 for each month of any taxable

16 year ending after 1999 and before 2001, and

17 "(ix) $4,250 for each month of any taxable year

18 ending after 2000 and before 2002.".

19 (b) Conforming Amendment. — Section

20 203(f)(8)(B)(ii)(II) of such Act (42 U.S.C.

21 403(f)(8)(B)(ii)(II)) is amended by striking "for the cal-

22 endar year before the most recent calendar year in which

23 an increase in the exempt amount was enacted or a deter-

24 mination resulting in such an increase was made under

25 subparagraph (A)" and inserting "for the second calendar

•HR 1636 IH



1251



33

1 year before the calendar year in which the determination

2 under subparagraph (A) is made".

3 (c) Effective Date. — The amendments made by

4 this section shall apply to taxable years ending after De-

5 cemberSl, 1992.

6 SEC. 302. REDUCTION FACTOR WITH RESPECT TO CERTAIN

7 EARNINGS LOWERED TO 25 PERCENT.

8 (a) In General.— Section 203(f)(3) of the Social

9 Security Act (42 U.S.C. 403(f)(3)) is amended by striking

10 "33V3 percent" and all that follows through "paragraph

11 (8)" and inserting "equal to the sum of (A) 25 percent

12 of so much of his earnings for such year in excess of the

13 product of the applicable exempt amount as determined

14 under paragraph (8) as does not exceed $5,000, and (B)

15 33 V3 percent of so much of such earnings in excess of

16 such product as exceeds $5,000,".

17 (b) Effective Date. — The amendment made by

18 subsection (a) shall apply to taxable years beginning after

19 December 31, 1997.



1252
34

1 TITLE IV— URBAN TAX ENTER-

2 PRISE ZONES AND RURAL DE-

3 VELOPMENT INVESTMENT

4 ZONES

5 SEC. 401. STATEMENT OF PURPOSE.

6 It is the purpose of this title to estabhsh a demonstra-

7 tion program of pro\iciing incentives for the creation of

8 tax enterprise zones in order —

9 (1) to revitaUze economically and physically dis-

10 tressed areas, primarily by encouraging the forma-

1 1 tion of new businesses and the retention and expan-

12 sion of existing businesses,

13 (2) to promote meaningful employment for tax

14 enterprise zone residents, and

15 (3) to encourage individuals to reside in the tax

16 enterprise zones in which they are employed.

17 Subtitle A — Designation and Tax

18 Incentives

19 SEC. 411. DESIGNATION AND TREATMENT OF URBAN TAX

20 ENTERPRISE ZONES AND RURAL DEVELOP-

21 MENT INVESTMENT ZONES.

22 (a) In General. — Chapter 1 of the Internal Reve-

23 nue Code of 1986 (relating to normal taxes and surtaxes)

24 is amended by inserting after subchapter T the following

25 new subchapter:

•HR 1636 IH



1253



35

1 ''Subchapter U — Designation and Treatment

2 of Tax Enterprise Zones

"Part I. Designation of tax enterprise zones.
"Part II. Incentives for tax enterprise zones.

3 *TART I— DESIGNATION OF TAX ENTERPRISE

4 ZONES

"Sec. 1391. Designation procedure.

"Sec. 1392. Eligibility and selection criteria.

"Sec. 1393. Definitions and special rules.

5 "SEC. 1391. DESIGNATION PROCEDURE.

6 "(a) In General. — For purposes of this title, the

7 term 'tax enterprise zone' means any area which is, under

8 this part —

9 "(1) nominated by 1 or more local governments

10 and the State in which it is located for designation

11 as a tax enterprise zone, and

12 "(2) designated by—

13 "(A) the Secretary of Housing and Urban

14 Development in the case of an urban tax enter-

15 prise zone, or

16 "(B) the Secretary of Agriculture, in con-

17 sultation with the Secretary of Commerce, in

18 the case of a rural development investment

19 zone.

20 "(b) Number of Designations. —

21 "(1) Aggregate limit. — The appropriate Sec-

22 retaries may designate in the aggregate 50 nomi-

•HR 1636 IH



1254

36

1 nated areas as tax enterprise zones under this sec-

2 tion, subject to the availability of eligible nominated

3 areas. Not more than 25 urban tax enterprise zones

4 may be designated and not more than 25 rural de-

5 velopment investment zones may be designated.

6 Such designations may be made only during cal-

7 endar years after 1992 and before 1998.

8 **(2) Annual limits. —

9 "(A) Urban tax enterprise zones. —

10 The number of urban tax enterprise zones des-

11 ignated under paragraph (1) —

12 "(i) before 1995 shall not exceed 8,

13 "(ii) before 1996 shall not exceed 15,

14 and

15 "(iii) before 1997 shall not exceed 21.

16 "(B) Rural development investment

17 ZONES. — The number of rural development in-

18 vestment zones designated under paragraph

19 (D-

20 "(i) before 1995 shall not exceed 8,

21 "(ii) before 1996 shall not exceed 15,

22 and

23 "(iii) before 1997 shall not exceed 21.

24 "(3) Advance designations permitted.—

25 For purposes of this subchapter, a designation dur-

•HR 1636 IH



1255

37

1 ing any calendar year shall be treated as made on

2 January 1 of the following calendar year if the ap-

3 propriate Secretary, in making such designation,

4 specifies that such designation is effective as of such

5 January 1.

6 "(c) Limitations on Designations. — The appro-

7 priate Secretary may not make any designation under sub-

8 section (a) unless —

9 "(1) the local governments and the State in

10 which the nominated area is located have the

1 1 authority —

12 "(A) to nominate the area for designation

13 as a tax enterprise zone, and

14 "(B) to provide assurances satisfactory to

15 the appropriate Secretary that the commit-

16 ments under section 1392(c) will be fulfilled,

17 "(2) a nomination of the area is submitted

18 within a reasonable time before the calendar year for

19 which designation as a tax enterprise zone is sought

20 (or, if later, a reasonable time after the date of the

21 enactment of this subchapter),

22 "(3) the appropriate Secretary determines that

23 any information furnished is reasonal?!^. .accurate,

24 and



•HR 16M IH



1256

38

1 "(4) the State and local governments certify

2 that no portion of the area nominated is already in-

3 eluded in a tax enterprise zone or in an area other-

4 wise nominated to be a tax enterprise zone.

5 "(d) Period for Which Designation Is In Ef-

6 FECT. —

7 "(1) In GENERAL. — ^Any designation of an area

8 as a tax enterprise zone shall remain in effect during

9 the period beginning on the date of the designation

10 and ending on the earliest of —

11 "(A) December 31 of the 15th calendar

12 year following the calendar year in which such

13 date occurs,

14 "(B) the termination date designated by

15 the State and local governments as provided for

16 in their nomination, or

17 "(C) the date the appropriate Secretary re-

18 vokes the designation under paragraph (2).

19 "(2) Revocation of designation. —

20 "(A) In GENERAL. — The appropriate Sec-

21 retary shall revoke the designation of an area

22 as a tax enterprise zone if such Secretary deter-

23 mines that the local government or the State in

24 which it is located —



•HR 16M IH



1257

39

1 "(i) has modified the boundaries of

2 the area, or

3 "(ii) is not complying substantially

4 with the State and local commitments pur-

5 suant to section 1392(c).

6 "(B) Applicable procedures. — ^A des-

7 ignation may be revoked by the appropriate

8 Secretary under subparagraph (A) only after a

9 hearing on the record involving officials of the

10 State or local government involved.

1 1 "SEC. 1392. EUGIBnJTY AND SELECTION CRITERIA.

12 "(a) In General. — -The appropriate Secretary may

13 make a designation of any nominated area under section

14 1391 only on the basis of the eligibility and selection cri-

15 teria set forth in this section.

16 "(b) Eligibility Criteria. —

17 "(1) Urban tax enterprise zones. — ^A nom-

18 inated area which is not a rural area shall be eligible

19 for designation under section 1391 only if it meets

20 the following criteria:

21 "(A) Population. — The nominated area

22 has a population (as determined by the most re-

23 cent census data available) of not less than

24 4,000.



1258

40

1 "(B) Distress. — The nominated area is

2 one of pervasive poverty, unemployment, and

3 general distress.

4 "(C) Size. — The nominated area —

5 "(i) does not exceed 20 square miles,

6 "(ii) has aboundary which is continu-

7 ous, or consists of not more than 3 non-

8 contiguous parcels within the same metro-

9 politan area,

10 "(iii) is located entirely within 1

11 State, and

12 "(iv) does not include any portion of

13 a central business district (as such term is

14 used for purposes of the most recent Cen-

15 sus of Retail Trade).

16 "(D) Unemployment rate. — The unem-

17 ployment rate (as determined by the appro-

18 priate available data) is not less than 1.5 times

19 the national unemployment rate.

20 "(E) Poverty rate. — The poverty rate

21 (as determined by the most recent census data

22 available) for not less than 90 percent of the

23 population census tracts (or where not tracted,