owned by individuals (directly or through partnerships or trusts) or by estates; and (4) the corporation satisfies the enterprise zone business requirements.

A corporation would satisfy the enterprise zone business requirements for any taxable year if: (1) at least 80 percent of the gross income of the corporation for the taxable year is derived from the active conduct of a trade or business within a tax enterprise zone; (2) substantially all of the use of the tangible property of the corporation (whether owned by the corporation or leased by the corporation) during the taxable year occurs within a tax enterprise zone; (3) substantially all of the services performed for the corporation by employees of the corporation during the taxable year are performed in a tax enterprise zone; (4) less than 10 percent of the average of the aggregate unadjusted bases of the property owned by the corporation during the taxable year is attributable to securities (as defined in section 165(g)(2)); and (5) no more than an insubstantial portion of the property owned by the corporation during the taxable year constitutes collectibles that are not held primarily for sale to customers in the ordinary course of an active trade or busi

ness.

For purposes of determining whether a corporation satisfies these requirements, leasing real property that is located within a tax enterprise zone to (or otherwise holding real property for use by) persons that are not related to the corporation would be treated as the active conduct of a trade or business. In addition, a corporation would be treated as failing to satisfy the enterprise zone business requirements for any taxable year if either: (1) more than 50 percent of the property or services acquired by the corporation during any taxable year is acquired from persons that are related to the corporation and that are not qualified issuers; or (2) more than 50 percent of the gross income of the corporation for the taxable year is derived from property or services provided to certain persons that are related to the corporation and that are not qualified issuers.

Qualified enterprise zone property would be defined as tangible property (whether real or personal) to which section 168 of the Code applies, but only if the original use of the property commences with the qualified issuer and substantially all of the use of the property is in the tax enterprise zone.

Special "recapture" rules would apply if, at any time after the acquisition of the enterprise zone stock, the stock is disposed of, or, if, at any time during the 10-year period beginning on the date of the acquisition of the enterprise zone stock, either (1) the issuer of the enterprise zone stock ceases to satisfy the definition of a qualified issuer; 34 or (2) the amount paid for the enterprise zone stock ceases to be invested by the qualified issuer in qualified enterprise zone property. First, the amount realized on the disposition of the enterprise zone stock would be required to be recognized notwithstanding any other provision of the Code and would be treated as ordinary income to the extent that the amount realized does not exceed the amount allowed as a deduction. Second, if enterprise zone stock is disposed of within five years after the date of acquisition of the stock, the taxpayer would be required to pay interest on the amount of tax that would otherwise have been due if a deduction had not been allowed for the purchase of the enterprise zone stock.

The basis of enterprise zone stock would be reduced by the amount of the deduction allowed under this provision. In addition, the deduction for the purchase of enterprise stock would be an adjustment that is required to be taken into account by individuals in computing alternative minimum taxable income (i.e., the deduction would be added to taxable income in determining alternative minimum taxable income).

Additional first-year depreciation allowance

An additional depreciation allowance equal to 25 percent of the adjusted basis of certain qualified zone property would be allowed for the taxable year that the property is placed in service. The additional depreciation, however, would be allowed only with respect to the adjusted basis of qualified zone property for which the taxpayer has received an additional first-year depreciation allowance from the tax enterprise zone allocating official (whose functions are described below). In addition, the adjusted basis of any qualified zone property with respect to which the additional first-year depreciation allowance is allowed would be reduced by the amount of such allowance before computing the amount otherwise allowable as a depreciation deduction with respect to the property for the taxable year that the property is placed in service and for any subsequent taxable year.

For this purpose, qualified zone property would be defined as any tangible property to which section 168 of the Code applies (other than property that is required to be taken into account under the alternative depreciation system of section 168(g)) but only if: (1) the property is section 1245 property (generally tangible personal property and certain real property other than buildings and structural components of buildings); (2) the original use of the property commences with the taxpayer in a tax enterprise zone; and (3) substantially all of the use of the property is in a tax enterprise zone and in the active conduct of a trade or business by the taxpayer in a tax enterprise zone.

The additional depreciation allowance would be taken into account for regular tax purposes and for purposes of the alternative minimum tax (i.e., it would not be a preference for AMT purposes). Overall limitation on zone tax incentives

In general

Each tax enterprise zone would be subject to an annual overall limitation on the amount of tax incentives that can be provided with respect to that zone. Urban tax enterprise zones generally would have an annual limitation of $13 million, and rural development investment zones generally would have an annual limitation of $5 million. However, this annual limitation would be increased with respect to a zone by up to an additional 10 percent (i.e., an additional $1.3 million for an urban tax enterprise zone, and an additional $.5 million for a rural development investment zone) if certain expenditures are made to promote development in the zone (e.g., for public improvements or additional police protection) and certain incentives are provided (e.g., property or sales tax abatements) by the local governments and State in which the zone is located.

Allocation of tax incentives

With respect to each tax enterprise zone, the local governments and the State in which the zone is located would be required to designate a government official (the "allocating official") with responsibility for making allocations of employment wage credits, deductible enterprise zone stock amounts, and additional first-year depreciation allowance amounts. Enterprise zone tax incentives would be available to a taxpayer only if the allocating official provides a specific allocation to that taxpayer. For instance, a wage credit could be claimed by a small employer only up to the amount for which that employer has received an allocation for that taxable year. Similarly, the allocating official would be required to specify the particular stock purchases for which the deduction provided for by the bill may be claimed, as well as the specific property for which the additional first-year depreciation allowance may be claimed.

The allocating official for each tax enterprise zone could make total allocations for each calendar year up to an amount which corresponds with the overall zone limitation on tax incentives for that year. Total allocations made in a year could be for one or more of the three tax incentives provided in the bill, depending on the combination of incentives determined by the allocating official to be appropriate for the particular enterprise zone during that year. To the extent the allocating official allocates less than the total amount of allowable tax incentives for any year, unused allocations could be carried forward to the following year (except that total unused allocations carried forward from previous years may not exceed 70 percent of the otherwise applicable zone limitation). Allocations of tax incentives made by the allocating official would be counted towards the annual overall zone limitation in the following manner: for each allocated dollar of employment wage credit, the zone limitation would be reduced by 67 cents; for each allocated dollar of deduction for enterprise zone stock, the zone limitation would be reduced by 35 cents; and for each allocated dollar of adjusted basis of property with respect to which the additional firstyear depreciation is allowed, the zone limitation would be reduced by 1.5 cents. 35

Studies

The Secretary of the Treasury and Comptroller General each would be directed to submit an interim report by July 1, 1996, and a final report by July 1, 2001, to the House Committee on Ways and Means and the Senate Committee on Finance, analyzing the effectiveness of the tax enterprise zones.

Effective date

Tax enterprise zone designations could be made only during calendar years 1993 through 1995. Designations generally would remain in effect for 15 years.

C. Other Proposals

Among other proposals to promote the economic development of certain geographic areas, S. 686 and S. 383 would establish enterprise zones in certain rural areas and Indian reservations.

1. Description of S. 686 (Rural Business Revitalization Act of

1991) 36

Designation of rural enterprise zones

The Secretary of the Treasury (after consultation with the Secretary of Agriculture, Secretary of Commerce, Secretary of Labor, and the Administrator of the Small Business Administration) would be authorized to designate an area as a rural enterprise zone if such area was nominated as such by one or more local governments and the State in which the area was located. 37 The bill would not impose a limit on the number of areas that could be designated as rural enterprise zones. Zone designations generally would be effective for 15 years.

A nominated area would be eligible to be designated as a rural enterprise zone only if the area met the following requirements: (1) the area is a county or political subdivision with an aggregate population of 50,000 or less (or the Secretary of the Treasury determines that the area is a rural area); (2) the boundary of the area is continuous; and (3) general economic distress exists within the area as shown by at least one of the following factors: (a) evidence of high rates of poverty or unemployment, reduced incomes, or the number of jobs in the area has dropped from year-to-year; (b) the area is located within the jurisdiction of a local government that the Secretary of the Treasury finds is experiencing a high number of farm or small business bankruptcies, loss of private investment in the business sector, or other factors determined to be relevant in assessing the comparative degree of economic deterioration in the rural area; or (c) during the period after 1974 and before nomination, there are five years during which the population of the area (as determined from the most recent Department of Commerce estimates) decreased by at least two percent from the prior year.

An area could not be designated as a rural enterprise zone unless the local government and the State in which it was located agreed that, during any period that the area was a rural enterprise zone, they would follow a specified course of action designed to reduce the various burdens borne by employers or employees in the area.

This course of action could be implemented by the State and local governments and private nongovernmental entities, and could be funded from the proceeds of any Federal program. The course of action could include, but would not be limited to: (1) a reduction of tax rates or fees applying within the area; (2) an increase in the level or efficiency of local services within the area; (3) elimination, reduction, or simplification of governmental requirements applying within the area; (4) program involvement by private entities, organizations, neighborhood associations and community groups, par