11 is determined in whole or in part by ref-

12 erence to the adjusted basis of such stock)

13 before the end of the 5-year period begin-

14 ning on the date such stock was purchased

15 by the taxpayer, and

16 "(ii) section r245(a) applies to such

17 disposition by reason of paragraph (2),

18 ' then the tax imposed by this chapter for the

19 taxable year in which such disposition occurs

20 shall be increased by the amount determined

21 under subparagraph (B).

22 "(B) Additional amount. — For purposes

23 of subparagraph (A), the additional amount

24 shall be equal to the amount of interest (deter-



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1 mined at the rate applicable under section

2 6621(a)(2)) that would accrue—

3 "(i) during the period beginning on

4 the date the stock was purchased by the

5 taxpayer and ending on the date of such

6 disposition by the taxpayer,

7 "(ii) on an amount equal to the aggre-

8 gate decrease in tax of the taxpayer result-

9 ing from the deduction allowed under this

10 subsection (a) with respect to such stock.

11 "(C) Special rule. — ^Any increase in tax

12 under subparagraph (A) shall not be treated as

13 a tax imposed by this chapter for purposes of —

14 "(i) determining the amount of any

15 credit allowable under this chapter, and

16 "(ii) determining the amount of the

17 tax imposed by section 55.

18 "(f) Disqualification. —

19 "(1) Issuer ceases to QUALiFi'. — If, during

20 the 10-year period beginning on the date enterprise

21 zone stock was purchased by the taxpayer, the issuer

22 of such stock ceases to be a qualified enterprise zone

23 issuer (determined vnthout regard to subsection

24 (d)(3)), then notwithstanding any provision of this

25 subtitle other than paragraph (2), the taxpayer shall

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1 be treated for purposes of subsection (e) as dispos-

2 ing of such stock (and any other property the basis

3 of which is determined in whole or in part by ref-

4 erence to the adjusted basis of such stock) during

5 the taxable year during which such cessation occurs

6 at its fair market value as of the 1st day of such

7 taxable year.

8 "(2) Cessation of enterprise zone status

9 NOT to cause recapture.— a corporation shall

10 not fail to be treated as a qualified enterprise zone

11 issuer for purposes of paragraph (1) solely by reason

12 of the termination or revocation of a tax enterprise

13 zone designation.

14 *'(g) Other Special Rules. —

15 "(1) Application of limits to partner-

16 ships and s corporations.— In the case of a part-

17 nership or an S corporation, the limitations under

18 subsection (b) shall apply at the partner and share-

19 holder level and shall not apply at the partnership

20 or corporation level.

21 "(2) Deduction not ai^low^d to estates

22 and trusts.— Estates and trusts shall not be treat-
2.3 ed as individuals for purjioses of this section.



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1 •^EC. 1397. 50 PERCENT EXCLUSION FOR GAIN FROM NEW

2 ZONE INVESTMENTS.

3 "(a) General Rule. — In the case of an individual,

4 gross income shall not include 50 percent of any qualified

5 capital gain recognized on the sale or exchange of a quali-

6 fied zone asset held for more than 5 vears.

7 "(b) Qualified Zone Asset. — For purposes of this

8 section —

9 "(1) In general. — The term 'quahfied zone

10 asset' means —

11 "(A) any qualified zone stock,

12 "(B) any qualified zone business property,

13 and

14 "(C) any qualified zone partnership int«r-

15 est.

16 "(2) Qualified zone stock. —

17 "(A) In GENERAL. — Except as pro\ided in

18 subparagraph (B), the term 'qualified zone

19 stock' means any stock in a domestic corpora-

20 tion if—

21 "(i) such stock is acquired by the tax-

22 payer on original issue from the corpora-

23 tion solely in exchange for cash,

24 "(ii) as of the time such stock'^fSTI'^s-

25 sued, such corporation was an enterprise

26 zone business (or, in the case of a new cor-



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1 poration. such corporation was being orga-

2 nized for purposes of being an enterprise

3 zone business), and

4 "(iii) during substantially all of the

5 taxpayer's holding period for such stock,

6 such coq^oration qualified as an enterprise

7 zone business.

8 "(B) Exci.rsioN of sto(^k for which

9 DEDIH'TION INDP^R SECTION 1396 ALLOWED. —

10 The term 'qualified zone stock' shall not include

11 any stock the basis of which is reduced under

12 section 1396(e)(1).

13 "(C) Redemptions. — The term 'qualified

14 zone stock' shall not include any stock acquired

15 from a corporation which made a substantial

16 stock redemption or distribution (without a

17 bona fide business puqMxse therefor) in an at-

18 tempt to avoi(l the jnirposes of this section.

19 "(3) QrALIFIED Z(A'E HFSINESS PROPERTY'. —

20 "(A) In (iENEiiAL.— The term 'qualified

21 zone business property' means tangible property

22 if—

23 "(i) such i)roperty was acquired bv

24 the taxjiayer by purchase (as defined in

25 section 179(d)(2)) after the date on which

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1 the desi^iation of the tax enterprise zone

2 took effect,

3 "(ii) the original use of such property

4 in a tax enterprise zone commences with

5 the taxpayer, and

6 "(iii) during substantially all of the

7 taxpayer's holding period for such prop-

8 erty, substantially all of the use of such

9 property was in a tax enterprise zone and

10 in an enterprise zone business of the tax-

1 1 payer.

12 "(B) Special rule for substantial im-

13 PRO\^MENTS.— The requirements of clauses (i)

14 and (ii) of subparagraph (A) shall be treated as

15 satisfied \nth respect to —

16 "(i) property which is substantially

17 improved by the taximyer, and

18 "(ii) any land on which such property

19 is located.

20 For purposes of the preceding sentence, prop-

21 erty shall be treated as substantially improved

22 by the taxpayer if, during any 24-month period

23 beginning after the date on which the designa-

24 tion of the tax enterprise zone took effect' addi-

25 tions to basis A\ith respect to such property in

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1 the hands of the taxpayer exceed the greater of

2 (i) an amount equal to the ac^usted basis at the

3 beginning of such 24-month period in the hands

4 of the taxpayer, or (ii) $5,000.

5 "(C) Limitation on land. — The term

6 'quahfied zone business property* shall not in-

7 elude land which is not an integral part of a

8 qualified business (as defined in section

9 1397C(c)).

10 "(4) Qualified zone partnership inter-

11 est. — The term 'qualified zone partnership interest'

12 means any interest in a partnership if —

13 "(A) such interest is acquired by the tax-

14 payer from the partnership solely in exchange

15 for cash,

16 "(B) as of the time such interest was ac-

17 quired, such partnership was an enterprise zone

18 business (or, in the case of a new partnership,

19 such partnership was being organized for pur-

20 poses of being an enterprise zone business), and

21 "(C) during substantially all of the tax-

22 payer's holding period for such interest, such

23 partnership qualified as an enterprise zone

24 business.



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1 A rule similar to the rule of paragraph (2)(C) shall

2 apply for purposes of this paragraph.

3 "(5) Treatment of subsequent puRt

4 CHASERS. — The term 'quaUfied zone asset' includes

5 any proj)erty which would be a qualified zone asset

6 but for paragraph (2)(A)(i), (3)(A)(ii), or (4)(A) in

7 the hands of the taxpayer if such property was a

8 qualified zone asset in the hands of any prior holder.

9 "(6) 10-YEAR SAFE HARBOR. — If any property

10 ceases to be a qualified zone asset by reason of para-

11 graph (2)(A)(iii), (3KA)(iii), or (4)(C) after the 10-

12 year period beginning on the date the taxpayer ac-

13 quired such property, such property shall continue to

14 be treated as meeting the requirements of such

15 paragraph; except that the amount of gain to which

16 subsection (a) applies on any sale or exchange of

17 such property shall not exceed the amount which

18 would be quaUfied capital gain had such property

19 been sold on the date of such cessation.

20 "(7) Treatment of zone terminations. —

21 The termination of any designation of an area as a

22 tax enterprise zone shall be disregarded for purposes

23 of determining whether any property is aqi

24 zone asset.



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1 "(c) Other Definitions and Special Rules. —

2 For purposes of this section —

3 "(1) Qualified capital gain. — Except as

4 otherwise provided in this subsection, the term

5 'quaUfied capital gain' means any long-term capital

6 gain.

7 "(2) Certain gain on real property not

8 QUALIFIED. — The term 'qualified capital gain' shall

9 not include any gain which would be treated as ordi-

10 nary income under section 1250 if section 1250 ap-

11 plied to all depreciation rather than the additional

12 depreciation.

13 "(3) Gain attributable to periods after

14 termination of zone designation not quali-

15 fied. — The term 'qualified capital gain' shall not in-

16 elude any gain attributable to periods after the ter-

17 mination of any designation of an area as a tax en-

18 terprise zone.

19 "(d) Treatment of Pass-Thru Entities. —

20 "(1) Sales and exchanges. — Gain on the

21 sale or exchange of an interest in a pass-thru entity

22 held by the taxpayer (other than an interest in an

23 entitj'' which was an enterprise zone business during

24 substantially all of the period the taxpayer held such

25 interest) for more than 5 years shall be treated as

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1 gain described in subsection (a) to the extent such

2 gain is attributable to amounts which would be

3 qualified capital gain on qualified zone assets (deter-

4 mined as if such assets had been sold on the date

5 of the sale or exchange) held by such entity for more

6 than 5 years and throughout the period the taxpayer

7 held such interest. A rule similar to the rule of para-

8 graph (2)(C) shall apply for purposes of the preced-

9 ing sentence.

10 "(2) Income inclusions. —

11 "(A) In general. — ^Any amount mcluded

12 in income by reason of holding an interest in a

13 pass-thru entity (other than an entity which

14 was an enterprise zone business during substan-

15 tially all of the period the taxpayer held the in-

16 terest to which such inclusion relates) shall be

17 treated as gain described in subsection (a) if

18 such amount meets the requirements of sub-

19 paragraph (B).

20 "(B) Requirements. — ^An amount meets

21 the requirements of this subparagraph if —

22 "(i) such amount is attributable to

23 qualified capital gain recognized on the

24 sale or exchange by the pass-thru entity of

25 property which is a qualified zone asset in

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1 the hands of such entity and which was

2 held by such entity for the period required

3 under subsection (a), and

4 "(ii) such amount is includible in the

5 gross income of the taxpayer by reason of

6 the holding of an interest in such entity

7 which was held by the taxpayer on the date

8 on which such pass-thru entity acquired

9 such asset and at all times thereafter be-

10 fore the disposition of such asset by such

11 pass-thru entity.

12 "(C) Levhtation based on interest

13 ORIGINALLY HELD BY TAXPAYER. — Subpara-

14 graph (A) shall not apply to any amount to the

15 extent such amount exceeds the amount to

16 which subparagraph (A) would have applied if

17 such amount were determined by reference to

18 the interest the taxpayer held in the pass-thru

19 entity on the date the qualified zone asset was

20 acquired.

21 "(3) Pass-thru entity. — For purposes of this

22 subsection, the term 'pass-thru entity' means —

23 "(A) any partnership,

24 "(B) any S corporation.



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1 "(C) any regulated investment company,

2 and

3 "(D) any common trust fund.

4 "(e) Sales and Exchanges of Interests in

5 Partnerships and S Corporations Which are

6 Qualified Zone Businesses. — In the case of the sale

7 or exchange of an interest in a partnership, or of stock

8 in an S corporation, which was an enterprise zone business

9 during substantially all of the period the taxpayer held

10 such interest or stock, the amount of qualified capital gain

1 1 shall be determined without regard to —

12 "(1) any intangible, and any land, which is not

13 an integral part of any qualified business (as defined

14 in section 1397C(b)), and

15 "(2) gain attributable to periods before the des-

16 ignation of an area as a tax enterprise zone.

17 "(f) Certain Tax-Free and Other Transfers. —

18 For purposes of this section —

19 "(1) In general. — In the case of a transfer of

20 a qualified zone asset to which this subsection ap-

21 pUes, the transferee shall be treated as —

22 "(A) having acquired such asset in the

23 same manner as the transferor, and

24 "(B) having held such asset during any

25 continuous period immediately preceding the

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1 transfer during which it was held (or treated as

2 held under this subsection) by the transferor.

3 "(2) Transfers to which subsection ap-

4 PLIES. — This subsection shall apply to any

5 transfer —

6 "(A) by gift,

7 "(B) at death, or

8 "(C) from a partnership to a partner

9 thereof of a qualified zone asset with respect to

10 which the requirements of subsection (d)(2) are

1 1 met at the time of the transfer (without regard

12 to the 5-year holding requirement).

13 "(3) Certain rules made applicable. —

14 Rules similar to the rules of section 1244(d)(2) shall

15 apply for purposes of this section.

16 "(g) Certain Businesses Treated as Not

17 Qualified Businesses. — For purposes of this section

18 and section 1397A, the term 'enterprise zone business' has

19 the meaning given such term by section 1397C except

20 that, in applying section 1397C for such purposes, the

21 term 'qualified business' shall not include any trade or

22 business of producing property of a character subject to

23 the allowance for depletion under section 611.



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1 •«EC. 1397A. NONRECOGNinON OF GAIN FROM NEW ZONE

2 INVESTMENTS.

3 "(a) General Rule. — ^At the election of an individ-

4 ual, qualified capital gain (within the meaning of section

5 1397) from the sale or exchange of a qualified zone asset

6 shaU be recognized only to the extent that —

7 "(1) the amount realized fi'om such sale or ex-

8 change, exceeds

9 "(2) the cost (not heretofore taken into account

10 under this subsection) of any qualified zone asset

11 purchased directly by the taxpayer during the rein-

12 vestment period.

13 "(b) Qualified Zone Asset. — For purposes of this

14 section —

15 "(1) In general. — The term 'qualified zone

16 asset' has the meaning given such term by section

17 1397.

18 "(2) Time for testing. —

19 "(A) Sales. — In the case of a sale or ex-

20 change of property, the determination of wheth-

21 er such property is a qualified zone asset shall

22 be made as of the time of the sale or exchange.

23 "(B) Purchases. — In the case of a pur-

24 chase of property, the determination of whether

25 such property is a qualified zone asset shall be

26 made as of the time of such purchase.

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1 "(c) Other Definitions. — For purposes of this

2 section —

3 "(1) Reinvestment period. — The term *rein-

4 vestment period' means, with respect to any sale or

5 exchange, the 6-month period beginning on the date

6 of such sale or exchange.

7 "(2) Purchase. — The term 'purchase' has the

8 meaning given to such term by section 179(d)(2).

9 "(d) Business or Property Ceases To Qual-

10 IFY. —

11 "(1) In general. — If, during the 10-year pe-

12 riod beginning on the date any qualified zone re-

13 placement asset was purchased by the taxpayer,

14 such asset ceases to be a qualified zone asset, not-

15 withstanding any provision of this subtitle other

16 than paragraph (3), the taxpayer shall be treated as

17 disposing of such asset during the taxable year dur-

18 ing which such cessation occurs at its fair market

19 value as of the 1st day of such taxable year.

20 "(2) Limitation on gain recognized. — The

21 amount of gain recognized pursuant to paragraph

22 (1) with respect to any asset shall not exceed the

23 lesser of —



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1 "(A) the amount of gain which was not

2 recognized under subsection (a) by the reason

3 of the purchase of such asset, or

4 "(B) the excess of the fair market value

5 referred to in paragraph (1) over the adjusted

6 basis of such asset.

7 "(3) Cessation of enterprise zone status

8 not to cause recapture. — ^An asset shall not fail

9 to be treated as a qualified zone asset for purposes

10 of paragraph (1) solely by reason of the termination

11 of a tax enterprise zone designation.

12 "(4) Qualified zone replacement asset. —

13 For purposes of paragraph (1), the term 'qualified

14 zone replacement asset' means any qualified zone

15 asset the purchase of which resulted in the non-
16 recognition of gain under subsection (a) with respect

17 to any other property.

18 "(e) Basis of Qualified Zone Replacement

19 Asset.— If gain from the sale or exchange of any property

20 is not recognized by reason of subsection (a), such gain

21 shall be applied to reduce (in the order acquired) the basis

22 of any qualified zone replacement asset (as defined in sub-

23 section (d)(4)) purchased during the reinvestment period.

24 "(f) Coordination With Installment Method

25 Reporting. — This section shall not apply to any gain

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1 from any installment sale (as defined in section 453(b))

2 if section 453(a) applies to such sale.

3 "(g) Statute of Limitations. — If any gain is real-

4 ized by the taxpayer on any sale or exchange to which

5 an election under this section applies, then —

6 "(1) the statutory period for the assessment of

7 any deficiency with respect to such gain shall not ex-

8 pire before the expiration of 3 years fix)m the date

9 the Secretary is notified by the taxpayer (in such

10 manner as the Secretary may by regulations pre-

11 scribe) of —

12 "(A) the taxpayer's cost of purchasing any

13 qualified zone replacement asset,

14 "(B) the taxpayer's intention not to pur-

15 chase a qualified zone replacement asset within

16 the reinvestment period, or

17 "(C) a failure to make such purchase with-

18 in the reinvestment period, and

19 "(2) such deficiency may be assessed before the

20 expiration of such 3 -year period notwithstanding the

21 provisions of any law or rule of law which would oth-

22 erwise prevent such assessment.

23 *«EC. 1397B. ADDITIONAL INCENTIVES.

24 "(a) Increase in Expensing Under Section

25 179. — In the case of an enterprise zone business, section

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1 179(b)(1) shall be applied by substituting '$20,000' for

2 '$10,000'.

3 "(b) Ordinary Loss Treatment for Certain

4 Property. —

5 "(1) In general. — Loss on any qualified zone

6 asset (as defined in section 1397(b)) held for more

7 than 2 years (5 years in the case of real property)
: 8 shall be treated as an ordinary loss.

9 "(2) Real property. — For purposes of para-

10 graph (1), the term 'real property' means any prop-

11 erty which is section 1250 property (as defined in

12 section 1250(c)).

13 "(3) Special rules. —

14 "(A) Certain rules made applica-

15 BLE. — For purposes of this subsection, rules

16 similar to the following rules shall apply:

17 "(i) Paragraphs (1), (2), and (3) of

18 section 1244(d).

19 "(ii) Subsections (b)(6), (c)(3), (d),

20 (e), and (f) of section 1397.

21 "(B) Coordination with section

22 1231. — Losses treated as ordinary losses by rea-

23 son of this subsection shall not be taken into
'24 account in applying section 1231.



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1 '^EC. 1397C. ENTERPRISE ZONE BUSINESS DEFINED.

2 "(a) In General. — For purposes of this subpart, the

3 term 'enterprise zone business' means —

4 "(1) any qualified business entity, and

5 "(2) any quahfied proprietorship.

6 "(b) Qualified Business Entity. — For purposes

7 of this section, the term 'quahfied business entity* means,

8 with respect to any taxable year, any corporation or part-

9 nership if for such year —

10 "(1)(A) every trade or business of such entity

11 is the active conduct of a qualified business within

12 a tax enterprise zone, and

13 "(B) at least 80 percent of the total gross in-

14 come of such entity is derived fi-om the active con-

15 duct of such business,

16 "(2) substantially all of the use of the tangible

17 property of such entity (whether owned or leased) is

18 within a tax enterprise zone,

19 "(3) substantially all of the intangible property

20 of such entity is used in, and exclusively related to,

21 the active conduct of any such business,

22 "(4) substantially all of the services performed

23 for such entity by its employees are performed in a

24 tax enterprise zone,

25 "(5) at least Va of its employees are residents

26 of a tax enterprise zone,

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1 "(6) less than 5 percent of the average of the

2 aggregate unadjusted bases of the property of such

3 entity is attributable to collectibles (as defined in

4 section 408(m)(2)) other than collectibles that are

5 held primarily for sale to customers in the ordinary

6 course of such business, and

7 "(7) less than 5 percent of the average of the

8 a^regate unadjusted bases of the property of such

9 entity is attributable to nonqualified financial prop-

10 erty.

11 "(c) Qualified Proprietorship. — For purposes of

12 this section, the term 'qualified proprietorship' means,

13 with respect to any taxable year, any qualified business

14 carried on by an individual as a proprietorship if for such

15 year—

16 "(1) at least 80 percent of the total gross in-

17 come of such individual from such business is de-

18 rived from the active conduct of such business in a

19 tax enterprise zone,

20 "(2) substantially all of the use of the tangible

21 property of such individual in such business (wheth-

22 er owned or leased) is within a tax enterprise zone,

23 "(3) substantially all of the intangible property

24 of such business is used in, and exclusively related

25 to, the active conduct of such business,



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1 "(4) substantially all of the services performed

2 for such individual in such business by employees of
/3 such business are performed in a tax enterprise

4 zone,

5 "(5) at least Va of such employees are residents

6 of a tax enterprise zone,

7 "(6) less than 5 percent of the average of the

8 aggregate unadjusted bases of the property of such

9 individual which is used in such business is attrib-

10 utable to collectibles (as defined in section

11 408(m)(2)) other than collectibles that are held pri-

12 marily for sale to customers in the ordinary course

13 of such business, and

14 "(7) less than 5 percent of the average of the

15 aggregate unadjusted bases of the property of such

16 individual which is used in such business is attrib-

17 utable to nonqualified financial property.

18 For purposes of this subsection, the term 'employee' in-

19 eludes the proprietor.

20 "(d) Qualified Business.— For purposes of this

21 section —

22 "(1) In general.— Except as otherwise pro-

23 vided in this subsection, the term 'qualified business'

24 means anv trade or business.



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1 "(2) Rental of real property. — The rental

2 to others of real property located in a tax enterprise

3 zone shall be treated as a quahfied business if and

4 only if —

5 "(A) in the case of real property which is

6 not residential rental property (as defined in

7 section 168(e)(2)), the lessee is an enterprise

8 zone business, or

9 "(B) in the case of residential rental prop-

10 erty (as so defined) —

11 "(i) such property was originally

12 placed in service after the date the tax en-

13 terprise zone was designated, or

14 "(ii) such property is rehabilitated