6 property owned by such corporation, and

7 "(C) the value of property leased to the

8 corporation (as determined under regulations

9 prescribed by the Secretary),

10 does not exceed $5,000,000, and

11 "(4) more than 20 percent of the total voting

12 power, and 20 percent of the total value, of the

13 stock of such corporation is owned directly by indi-
14, viduals or estates or indirectly by individuals

15 through partnerships or trusts.

16 The determination under paragraph (3) shall be made as

17 of the time of issuance of the stock in question but shall

18 include amounts received for such stock.

19 "(e) Dispositions of Stock. —

20 "(1) Basis reduction. — For purposes of this

21 title, the basis of any enterprise zone stock shall be

22 reduced by the amount of the deduction allowed

23 under this section with respect to such stock.

24 "(2) Deduction recaptured as ordinary

25 income. — For purposes of section 1245 —

•S 102 IS



836



61

1 "(A) any stock the basis of which is re-

2 duced under paragraph (1) (and any other

3 property the basis of which is determined in

4 whole or in part by reference to the adjusted

5 basis of such stock) shall be treated as section

6 1245 property, and

7 "(B) any reduction under paragraph (1)

8 shall be treated as a deduction allowed for de-

9 preciation.

10 If an exchange of any stock described in paragraph

11 (1) qualifies under section 354(a), 355(a), or

12 356(a), the amount of gain recognized under section

13 1245 by reason of this paragraph shall not exceed

14 the amount of gain recognized in the exchange (de-

15 termined without regard to this paragraph).

16 "(3) Certain events treated as disposi-

17 TIONS. — For purposes of determining the amount

18 treated as ordinary income under section 1245 by

19 reason of paragraph (2), paragraph (3) of section

20 1245(b) (relating to certain tax-fi-ee transactions)

21 shall not apply.

22 "(4) Interest charged if disposition

23 WITfflN 5 YEARS OF PURCHASE. —

24 "(A) In GENERAL.— If—



•S 102 IS



837

62

1 "(i) a taxpayer disposes of any enter-

2 prise zone stock with respect to which a

3 deduction was allowed under subsection (a)

4 (or any other property the basis of which

5 is determined in whole or in part by ref-

6 erence to the adjusted basis of such stock)

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

8 ning on the date such stock was purchased

9 by the taxpayer, and

10 "(ii) section 1245(a) applies to such

11 disposition by reason of paragraph (2),

12 then the tax imposed by this chapter for the

13 taxable year in which such disposition occurs

14 r. shall be increased by the amount determined

15 under subparagraph (B).

16. "(B) Additional amount. — For purposes

17 of subparagraph (A), the additional amount

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

19 mined at the rate applicable under section

20 6621(a)(2)) that would accrue—

21 "(i) during the period beginning on

22 the date the stock was purchased by the

23 taxpayer and ending on the date of such

24 disposition by the taxpayer,



•S 102 IS



838



63

1 "(ii) on an amount equal to the aggro-

2 gate decrease in tax of the taxpayer result-

3 ing from the deduction allowed under this

4 subsection (a) with respect to such stock.

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

6 under subparagraph (A) shall not be treated as

7 a tax imposed by this chapter for purposes of —

8 "(i) determining the amount of any

9 credit allowable under this chapter, and

10 "(ii) determining the amount of the

11 tax imposed by section 55.

12 "(f) Disqualification. —

13 ' "(1) Issuer ceases to qualify. — If, during

14 the 10-year period beginning on the date enterprise

15 zone stock was purchased by the taxpayer, the issuer

16 of such stock ceases to be a qualified enterprise zone

17 issuer (determined without regard to subsection

18 (d)(3)), then notwithstanding any pro\ision of this

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

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

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

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

23 erence to the adjusted basis of .such stock) during

24 the taxable year during which such cessation occurs



•S 102 IS



839

64

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

2 taxable year.

3 "(2) Cessation op enterprise zone status

4 not to cause recapture. — ^A corporation shall

5 not fail to be treated as a qualified enterprise zone

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

7 of the termination or revocation of a tax enterprise

8 zone designation.

9 ''(g) Other Special Rules. —

10 "(1) Application of limits to partner-

1 1 ships and s corporations. — In the case of a part-

12 nership or an S corporation, the limitations under

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

14 holder level and shall not apply at the partnership

15 or corporation level.

16 "(2) Deduction not allowed to estates

17 and trusts. — Estates and trusts shall not be treat-

18 ed as individuals for purposes of this section.

19 "SEC. 1397. 50 PERCENT EXCLUSION FOR GAIN FROM NEW

20 ZONE INVESTMENTS.

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

22 gross income shall not include 50 percent of any quahfied

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

24 fied zone asset held for more than 5 years.



•S 102 IS



840

65

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

2 section —

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

4 asset' means —

5 "(A) any qualified zone stock,

6 "(B) any qualified zone business property,

7 and

8 "(G) any qualified zone partnership inter-

9 est.

10 "(2) Qualified zone stock. —

11 "(A) In general. — Except as provided in

12 subparagraph (B), the term 'qualified zone

13 stock' means any stock in a domestic corpora-

14 tion if —

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

16 payer on original issue fi-om the eorpora-

17 tion solely in exchange for cash,

18 "(ii) as of the time such stock was is-

19 sued> such corporation was an enterprise

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

21 poration, such corporation was being orga-

22 nized for purposes of being an enterprise

23 zone business), and

•24 "(iii) during substantial!;/ all of the

25 taxpayer's holding period for such stock.



841



66

1 such corporation qualified as an enterprise

2 zone business.

3 "(B) Exclusion of stock for which

4 DEDUCTION UNDER SECTION 1396 ALLOWED. —

5 The term 'quahfied zone stock' shall not include

6 any stock the basis of which is reduced under

7 section 1396(e)(1).

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

9 zone stock' shall not include any stock acquired

10 from a corporation which made a substantial

11 stock redemption or distribution (without a

12 bona fide business purpose therefor) in an at-

13 tempt to avoid the purposes of this section.

14 "(3) Qualified zone business property. —

15 "(A) In general. — The term, 'qualified

16 zone business property' means tangible property

17 il-
ls "(i) such property was acquired by

19 the taxpayer by purchase (as defined in

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

21 the designation of the tax enterprise zone

22 took effect,

23 ; ."(ii) the original use of such property

24 in a tax enterprise zone commences witii

25 the taxpayer, and

•S 102 IS



842



67

1 "(iii) during substantially all of the

2 taxpayer's holding period for such prop-

3 erty, substantially all of the use of such

4 property was in a tax enterprise zone and

5 in an enterprise zone business of the tax-

6 payer.

7 "(B) Special rule for substantlvl im-

8 PROVEMENTS. — The requirements of clauses (i)

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

10 satisfied with respect to —

11 "(i) property which is substantially

12 improved by the taxpayer, and

13 "(ii) any land on which such property

14 is located.

15 For purposes of the preceding sentence, prop-

16 erty shall be treated as substantially improved

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

18 beginning after the date on which the designa-

19 tion of the tax enterprise zone took effect, addi-

20 tions to basis with respect to such property in

21 the hands of the taxpayer exceed the greater of

22 (i) an amount equal to the adjusted basis at the

23 beginning of such 24-month period in the hands

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



•S 102 IS



843



68

1 "(C) Limitation on land. — The term

2 'qualified zone business property' shall not in-

3 elude land which is not an integral part of a

4 qualified business (as defined in section

5 1397C(c)).

6 "(4) Qualified zone partnership inter-

7 EST. — The term 'qualified zone partnership interest'

8 means any interest in a partnership if —

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

10 payer from the partnership solely in exchange

1 1 for cash,

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

13 quired, such partnership was an enterprise zone

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

15 such partnership was being organized for pur-

16 poses of being an enterprise zone business), and

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

18 payer's holding period for such interest, such

19 partnership qualified as an enterprise zone

20 business.

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

22 apply for purposes of this paragraph.

23 "(5) Treatment of subsequent pur-

24 chasers. — The term 'qualified zone asset' includes

25 any property which would be a qualified zone asset

.a in« IS



844



69

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

.2 the hands of the taxpayer if such property was a

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

4 "(6) 10-YEAR SAFE HARBOR. — If any property

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

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

7 year period beginning on the date the taxpayer ac-

8 quired such property, such property shall continue to

9 be treated as meeting the requirements of such

10 paragraph; except that the amount of gain to which

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

12 such property shall not exceed the amount which

13 would be quaUfied capital gain had such property

14 been sold on the date of such cessation.

15 "(7) Treatment of zone terminations. —

16 The termination of any designation of an area as a

17 tax enterprise zone shall be disregarded for purposes

18 of determining whether any property is a qualified

19 zone asset.

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

21 For purposes of this section —

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

23 otherwise provided in this subsection, the term

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

25 gain.

•S 102 IS



845



70

1 "(2) Certain gain on real property not

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

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

4 nary income under section 1250 if section 1250 ap-

5 plied to all depreciation rather than the additional

6 depreciation.

7 "(3) Gain attributable to periods after

8 termination op zone designation not quali-

9 FlED. — The term 'qualified capital gain' shall not in-

10 elude any gain attributable to periods after the ter-

11 raination of any designation of an area as a tax en-

12 terprise zone.

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

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

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

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

17 entity which was an enterprise zone business during

18 substantially all of the period the taxpayer held such

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

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

21 gain is attributable to amounts which would be

22 qualified capital gain on qualified zone assets (deter-

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

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

25 than 5 years and throughout the period the taxpayer



«C 1/W> TC



846



71

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

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

3 ing sentence.

4 "(2) Income inclusions. —

5 "(A) In general. — ^Any amount included

6 in income by reason of holding an interest in a

7 pass-thru entity (other than an entity which

8 was an enterprise zone business during substan-

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

10 terest to which such inclusion relates) shall be

11 treated as gain described in subsection (a) if

12 such amount meets the requirements of sub-

13 paragraph (B).

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

15 the requirements of this subparagraph if —

16 "(i) such amount is attributable to

17 qualified capital gain recognized on the

18 sale or exchange by the pass- thru entity of

19 property which is a qualified zone asset in

20 the hands of such entity and which was

21 held by such entity for the period required

22 under subsection (a), and

23 "(ii) such amount is includible in the

24 gross income of the taxpayer by reason of

25 the holding of an interest in such entity

•S 102 18



847



72

1 which was held by the taxpayer on the date

2 on which such pass-thru entity acquired

3 such asset and at all times thereafter be-

4 fore the disposition of such asset by such

5 pass-thru entity.

6 "(C) Limitation based on interest

7 originally held by taxpayer. — Subpara-

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

9 extent such amount exceeds the amount to

10 which subparagraph (A) would have applied if

11 such amount were determined by reference to

12 the interest the taxpayer held in the pass- thru

13 entity on the date the qualified zone asset was

14 acquired.

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

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

17 "(A) any partnership,

18 "(B) any S corporation.

19 "(C) any regulated investment company,

20 and

21 "(D) any common trust fund.

22 "(e) Sales and Exchanges of Interests in

23 Partnerships and S Corporations Which are

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

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

•S 102 IS



848



73

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

2 during substantially all of the period the taxpayer held

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

4 shall be determined without regard to —

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

6 an integral part of any qualified business (as defined

7 in section 1397C(b)), and

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

9 ignation of an area as a tax enterprise zone.

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

1 1 For purposes of this section —

12 *'(1) In general. — In the case of a transfer of

13 a qualified zone asset to which this subsection ap-

14 plies, the transferee shall be treated as —

15 "(A) having acquired such asset in the

16 same manner as the transferor, and

17 "(B) having held such asset during any

18 continuous period immediately preceding the

19 transfer during which it was held (or treated as

20 held under this subsection) by the transferor.

21 "(2) Transfers to which subsection ap-

22 PLIES. — This subsection shall apply to any

23 transfer —

24 "(A) by gift,

25 "(B) at death, or

•S 102 IS



849



74

1 "(C) from a partnership to a partner

2 thereof of a quahfied zone asset with respect to

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

4 met at the time of the transfer (without regard

5 to the 5-year holding requirement).

6 "(3) Certain rules imade applicable. —

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

8 apply for purposes of this section.

9 "(g) Certain Businesses -Treated as Not

10 Qualified Businesses. — For purposes of this section

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

12 the meaning given such term by section 1397C except

13 that, in applying section 13970 for such purposes, the

14 term "qualified business' shall not include any trade or

15 business oi" producing property of a character subject to

16 the allowance for depletion under section 611.

17 "SEC. i397A. NONPJECOGNITION OF GAIN FROM NEW ZONE

18 INVESTMENTS.

19 "(a) Genep^Uj Rule. — ^At the election of an individ-

20 aal., qualified capital gain (within the meaning of section

21 1397) from the sale or exchange of a qualified zone asset

22 shall be recognized only to the extent that —

«

23 I "(1) the amount realized from such sale or ex-

24 change, exceeds



•S 102 IS



850



75

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

2 under this subsection) of any qualified zone asset

3 purchased directly by the taxpayer during the rein-

4 vestment period.

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

6 section —

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

8 asset' has the meaning given such term by section

9 1397.

10 "(2) Time for testing. —

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

12 change of property, the determination of wheth-

13 er such property is a qualified zone asset shall

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

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

16 chase of property, the determination of whether

17 such property is a qualified zone asset shall be

18 made as of the time of such purchase.

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

20 section —

21 "(1) Reinvestment period. — The term 'rein-

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

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

24 of such sale or exchange.



•S lOS 18



851



76

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

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

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

4 IFY. —

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

6 riod beginning on the date any quahfied zone re-

7 placement asset was purchased by the taxpayer,

8 such asset ceases to be a quahfied zone asset, not-

9 withstanding any provision of this subtitle other

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

11 disposing of such asset during the taxable year dur-

12 ing which such cessation occurs at its fair market

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

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

15 amount of gain recognized pursuant to paragraph

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

17 lesser of —

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

19 recognized under subsection (a) by the reason

20 of the purchase of such asset, or

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

22 referred to in paragraph (1) over the adjusted

23 basis of such asset.

24 "(3) Cessation op enterprise zone status

25 NOT TO cause recapture. — ^An asset shall not fail

•S 102 IS



852



77

1 to be treated as a qualified zone asset for purposes

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

3 of a tax enterprise zone designation.

4 "(4) Qualified zone replacement asset. —

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

6 zone replacement asset' means any qualified zone

7 asset the purchase of which resulted in the non-

8 recognition of gain under subsection (a) with respect

9 to any other property.

10 "(e) Basis of Qualified Zone Replacement

1 1 Asset. — If gain from the sale or exchange of any property

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

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

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

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

16 "(f) Coordination With Installment Method

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

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

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

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

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

22 an election under this section applies, then —

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

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

25 pire before the expiration of 3 years ft:om the date

{. • : . ■
•S 102 IS



853



78

1 the Seeretan,' is notified by the taxpayer (in such

2 manner as the SecretarA* may by re^ilations pre-

3 scribe) of —

4 "(A) the taxpayei-'s cost of purchasing any

5 quahfied zone replacement asset,

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

7 chase a quahfied zone replacement asset -within

8 the reinvestment period, or

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

10 in the reinvestment period,. and

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

12 expiration of such 3-3'ear period notwithstanding the

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

14 erwise prevent such assessment.

15 "SEC. 1397B. ADDITIONAL INCENTIVES.

16 "(a) Increase in Expensing Under Section

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

18 179(b)(1) shall be applied by substituting '$20,000' for

19 '$10,000'.

20 "(b) Ordinary Loss Treatment for Certain

21 Property. —

22 "(1) In general. — Loss on any quahfied zone

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

24 than 2 years (5 years in the case of real property)

25 shall be treated as an ordinary loss.



854



79

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

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

3 erty which is section 1250 property (as defined in

4 section 1250(c)).

5 "(3) Special rules. —

6 "(A) Certain rules made applica-

7 BLE. — For purposes of this subsection, rules

8 similar to the following rules shall apply:

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

10 section 1244(d).

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

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

13 "(B) Coordination with section

14 1231. — Losses treated as ordinary losses by rea-

15 son of this subsection shall not be taken into

16 account in applying section 1231.

17 "SEC. 1397C. ENTERPRISE ZONE BUSINESS DEFINED.

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

19 term 'enterprise zone business' means —

20 "(1) any qualified business entity, and

21 "(2) any qualified proprietorship.

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

23 of this section, the term 'qualified business entity' means,

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

25 nership if for such year —

•S 102 IS



855



80

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

2 is the active conduct of a qualified business within

3 a tax enterprise zone, and

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

5 come of such entity is derived from the active con-

6 duct of such business,

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

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

9 within a tax enterprise zone,

10 "(3) substantially all of the intangible property

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

12 the active conduct of any such business,

13 "(4) substantiaUy all of the services performed

14 for such entity by its employees are performed in a

15 tax enterprise zone,

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

17 of a tax enterprise zone,

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

19 a^regate unadjusted bases of the property of such

20 entity is attributable to collectibles (as defined in

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

22 held primarily for sale to customers in the ordinary

23 course of such business, and

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

25 aggregate unadjusted bases of the property of such

•S 102 TS



856



81

1 entity is attributable to nonqualified financial prop-

2 erty.

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

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

5 with respect to any taxable year, any qualified business

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