ticularly those within the nominated area (including a commitment from these private entities to provide technical, financial or other assistance to, and jobs or job training for, employers, employees and residents of the area); and (5) mechanisms to increase the equity ownership of residents and employees within the rural enterprise zone.

Tax incentives for rural enterprise zones

Employer wage tax credit

The bill would provide a 10-percent tax credit to employers in rural enterprise zones for certain wages paid to qualified employees who perform at least 50 percent of their services for the employer during the taxable year in a zone. The 10-percent credit would apply to (1) the amount of qualified wages paid by an employer in a rural enterprise zone during a taxable year that exceeds the qualified wages paid (with certain inflation adjustments) during the 12month period that preceded the date on which the zone was designated, and (2) wages paid employees during any portion of the taxable year during which the employer is training or retraining such employees. Qualified wages for purposes of this credit generally would follow the definition of wages currently applicable for FUTA tax purposes, with certain adjustments. One such modification would be the exclusion from the wage base of any Federally funded payments the employer received or accrued for on-the-job training. Special rules also would be provided for agricultural and railway labor.

A taxpayer's deduction otherwise allowed for wages paid would be reduced by the amount of wage credit allowable for the taxable year. In addition, the credit would be subject to the present-law general business credit limitations of section 38.

Investment tax credit

S. 686 would provide a 10-percent credit for the taxpayer's basis in zone personal property and new zone construction property acquired and first placed in service during a taxable year in which the area qualifies as a rural enterprise zone. For purposes of this credit, zone personal property would include property used or located in an active trade or business within a rural enterprise zone, and which is either three-year, five-year, seven-year, 10-year, 15year, or 20-year property under section 168(e). New zone construction property would consist of depreciable real property located in a rural enterprise zone and used by the taxpayer predominantly in the active conduct of a trade or business within the zone. If acquired by the taxpayer, the first use of the property must commence with the taxpayer during the period the area is a rural enterprise zone. Otherwise the construction, reconstruction, or rehabilitation of the property by the taxpayer must be completed during the period that the area is a rural enterprise zone. For purposes of this credit, the ownership of rental real estate would constitute an active trade or business.

Increase in research credit for research conducted in rural enterprise zones

The bill would provide a 40-percent credit rate (in lieu of the present-law 20-percent credit rate) 38 for qualified research expenditures that exceed a taxpayer's base amount with respect to research conducted in a rural enterprise zone.

Deferral of capital gain reinvested in zone property

The bill would allow taxpayers to defer the recognition of longterm capital gain from the sale or exchange of any property up to nine taxable years after the year in which the sale or exchange occurs if the amount realized from the sale or exchange is used to purchase qualified zone property within two years after the close of the taxable year of the sale or exchange.

For this purpose, qualified zone property would be defined as (1) any tangible property if substantially all of the use of such property occurs in a rural enterprise zone and in the active conduct of a trade or business by the taxpayer in the zone, (2) certain depreciable real property located in a zone and used in an active trade or business, and (3) any stock in a corporation or a partnership interest if two conditions are satisfied. First, at the time that the stock or partnership interest is issued, substantially all of the activities of the corporation or partnership must involve (or, in the case of a new corporation or partnership, will involve) the active conduct of one or more trades or businesses in a rural enterprise zone. Second, the stock or partnership interest must be issued by the corporation or partnership for money or other property (other than stock or securities).

If a taxpayer disposes of qualified zone property (or the property otherwise ceases to be qualified zone property) before five years after the date that the property is purchased, then (1) the amount of gain that was deferred under this provision would be taken into account for the taxable year in which the disposition (or cessation) occurs, and (2) interest would be payable by the taxpayer on the amount of deferred tax for the period of deferral.

The capital gain deferral would not be a preference for purposes of the alternative minimum tax.

2. Description of S. 383 (Indian Economic Development Act of

1991) 39

Designation of Indian enterprise zones

Under S. 383, the Secretary of Housing and Urban Development would be authorized to designate up to 12 Indian enterprise zones between 1992 and 1995. No more than five Indian enterprise zones could be designated in 1992 and no more than nine Indian enterprise zones could be designated in 1992 and 1993. All designated areas would be selected from areas nominated by the governing body of Indian tribes. Designation of an area as an Indian enterprise zone generally would be effective for 25 years.

To be eligible for designation as an Indian enterprise zone, a nominated area would be required to have all of the following characteristics: (1) a population of at least 75 Indian residents; (2) a condition of widespread poverty, unemployment, and general distress; (3) with respect to size, the area (a) does not exceed 200 square miles, (b) consists of not more than five noncontiguous parcels, (c) is accessible to a labor force of Indian employees, and (d) is located entirely within one Indian reservation; (4) an unemployment rate for the reservation within which the area is located of at least 1.5 times the national unemployment rate; and (5) a poverty rate for the reservation within which the area is located of at least 20 per

cent.

The Secretary of Housing and Urban Development would select among nominated areas on the basis of specific selection criteria including: (1) the willingness of the tribal government to make efforts to attract business to the zone; (2) the level of private enterprise commitment; (3) the effectiveness and enforceability of tribal commitments; and (4) the economic and social conditions and potential for the nominated zone.

Tax incentives for Indian enterprise zones

Employer wage credit

The bill would provide a 10-percent income tax credit to employers in Indian enterprise zones for wages paid to qualified zone employees and for certain health insurance costs paid or incurred with respect to qualified zone employees. 40 A qualified zone employee would be defined as an employee who (1) receives annual wages from the employer of $30,000 or less, (2) resides on or near the reservation within which the Indian enterprise zone is located, and (3) performs substantially all services for the employer trade or business within the Indian enterprise zone.

The wage credit would not be available for wages paid to an employee beyond seven years after the date such employee first began work for the employer (whether or not in an Indian enterprise zone). The total wage credit that is claimed by any employer for any taxable year could not exceed the employment credit amount allocated to that employer for the taxable year by the Indian enterprise zone allocating official (whose functions are described below). The employer's deductions for wages es would be reduced by the amount of credit determined for the taxable year. For alternative minimum tax (AMT) purposes, the wage credit would not be allowed to offset tentative minimum tax.41

Deferral of capital gain reinvested in zone property

The bill would allow taxpayers to defer the recognition of longterm capital gain from the sale or exchange of any property up to nine taxable years after the year in which the sale or exchange occurs if the amount realized from the sale or exchange is used to purchase qualified zone property within two years after the close of the taxable year of the sale or exchange. The amount of gain that is deferred for any taxable year could not exceed the capital gain deferral amount allocated to the taxpayer for the taxable year by the Indian enterprise zone allocating official (whose functions are described below).

For this purpose, qualified zone property would be defined as (1) any tangible property if substantially all of the use of such property occurs in an Indian enterprise zone and in the active conduct of a trade or business by the taxpayer in the zone and (2) any stock in a corporation or a partnership interest if two conditions are satisfied. First, at the time that the stock or partnership interest is issued, substantially all of the activities of the corporation or partnership must involve (or, in the case of a new corporation or partnership, will involve) the active conduct of one or more trades or businesses in an Indian enterprise zone. Second, the stock or partnership interest must be issued by the corporation or partnership for money or other property (other than stock or securities).

If a taxpayer disposes of qualified zone property (or the property otherwise ceases to be qualified zone property) before five years after the date that the property is purchased, then (1) the amount of gain that was deferred under this provision would be taken into account for the taxable year in which the disposition (or cessation) occurs, and (2) interest would be payable by the taxpayer on the amount of deferred tax for the period of deferral.

The capital gain deferral would be a preference for purposes of the alternative minimum tax.

Child care facility credit

The bill would provide an income tax credit equal to 25 percent of the cost of acquiring, constructing, or rehabilitating a child care facility that is (1) located in an Indian enterprise zone, (2) operated by a taxpayer for the care of enrollees who reside in the zone, and (3) licensed or accredited to operate as a child care facility. The amount of costs taken into account in determining the credit would be limited to $400,000 per taxpayer. In addition, the amount of the credit for any taxable year could not exceed the child care facility credit amount allocated to the taxpayer for the taxable year by the Indian enterprise zone allocating official (whose functions are described below).

The credit would be recaptured upon the occurrence of certain events. In addition, the basis of any property with respect to which the credit is allowed would be reduced by the full amount of the credit. The credit would be a general business credit and, as such, would not be allowed to offset tentative minimum tax.

Tax payment credit

The bill would provide an income tax credit equal to the lesser of (1) the portion of the income tax of any taxpayer that is attributable to 50 percent of the taxable income that is derived from the active conduct of a trade or business in an Indian enterprise zone, or (2) $8,000 multiplied by the number of full-time Indian employees of such trade or business. The amount of the credit for any taxable year could not exceed the tax payment credit amount allocated to the taxpayer for the taxable year by the Indian enterprise zone allocating official (whose functions are described below). The credit would not be allowed to offset tentative minimum tax.

Overall limitation on zone tax incentives

Each Indian enterprise zone would be subject to an annual limitation on the amount of tax incentives that could be provided with respect to that zone. The annual limitation would equal $10 million plus an amount that is based on the population of the reservation within which the Indian enterprise zone is located.42 In addition, the limitation may be increased by up to an additional 10 percent (i.e., an additional $1 million) 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 tribal government, local government, or State in which the zone is located.

With respect to each Indian enterprise zone, the tribal government would be required to designate a government official (the "allocating official") with responsibility for making allocations of employment credit amounts, capital gain deferral amounts, child care facility credit amounts, and tax payment credit amounts. Enterprise zone tax incentives would be available to a taxpayer only if the allocating official provides a specific allocation to that taxpayer. 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.

Other tax provision

The bill would permanently extend the authority to issue qualified small issue bonds for Indian enterprise zones.

Other non-tax provisions

The bill would require the Foreign Trade Zone Board to consider on a priority basis the processing of any applications that involve