[Congressional Bills 118th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3906 Introduced in House (IH)]
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118th CONGRESS
1st Session
H. R. 3906
To amend the Internal Revenue Code of 1986 to establish special rules
for capital gains invested in rural opportunity zones.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
June 7, 2023
Mr. Ferguson (for himself, Mrs. Miller of West Virginia, Mr. Feenstra,
and Mr. Kustoff) introduced the following bill; which was referred to
the Committee on Ways and Means
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to establish special rules
for capital gains invested in rural opportunity zones.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Rural Opportunity Zone and
Investment Act''.
SEC. 2. ESTABLISHMENT OF SPECIAL RULES FOR CAPITAL GAINS INVESTED IN
RURAL OPPORTUNITY ZONES.
(a) In General.--Subchapter Z of chapter 1 of the Internal Revenue
Code of 1986 is amended by adding at the end the following new section:
``SEC. 1400Z-3. SPECIAL RULES FOR CAPITAL GAINS INVESTED IN RURAL
OPPORTUNITY ZONES.
``(a) In General.--
``(1) Treatment of gains.--In the case of capital gain from
the sale to, or exchange with, an unrelated person of any
property held by the taxpayer, at the election of the
taxpayer--
``(A) gross income for the taxable year shall not
include so much of such gain as does not exceed the
aggregate amount invested by the taxpayer in a
qualified rural opportunity fund during the 180-day
period beginning on the date of such sale or exchange,
``(B) the amount of gain excluded by subparagraph
(A) shall be included in gross income as provided by
subsection (b), and
``(C) subsection (c) shall apply.
``(2) Election.--No election may be made under paragraph
(1)--
``(A) with respect to a sale or exchange if an
election previously made with respect to such sale or
exchange is in effect, or
``(B) with respect to any sale or exchange after
December 31, 2032.
``(b) Deferral of Gain Invested in Qualified Rural Opportunity Zone
Property.--
``(1) Year of inclusion.--Gain to which subsection
(a)(1)(B) applies shall be included in income in the taxable
year which includes the earlier of--
``(A) the date on which such investment is sold or
exchanged, or
``(B) December 31, 2032.
``(2) Amount includible.--
``(A) In general.--The amount of gain included in
gross income under subsection (a)(1)(A) shall be the
excess of--
``(i) the lesser of the amount of gain
excluded under paragraph (1) or the fair market
value of the investment as determined as of the
date described in paragraph (1), over
``(ii) the taxpayer's basis in the
investment.
``(B) Determination of basis qualified rural
opportunity zone property.--
``(i) In general.--Except as otherwise
provided in this clause or subsection (c), the
taxpayer's basis in the investment shall be
zero.
``(ii) Increase for gain recognized under
subsection (a)(1)(b).--The basis in the
investment shall be increased by the amount of
gain recognized by reason of subsection
(a)(1)(B) with respect to such property.
``(iii) Investments held for 5 years.--In
the case of any investment held for at least 5
years, the basis of such investment shall be
increased by an amount equal to 10 percent of
the amount of gain deferred by reason of
subsection (a)(1)(A).
``(iv) Investments held for 7 years.--In
the case of any investment held by the taxpayer
for at least 7 years, in addition to any
adjustment made under clause (iii), the basis
of such property shall be increased by an
amount equal to 5 percent of the amount of gain
deferred by reason of subsection (a)(1)(A).
``(c) Special Rule for Investments Held for at Least 10 Years.--In
the case of any investment held by the taxpayer for at least 10 years
and with respect to which the taxpayer makes an election under this
subsection, the basis of such property shall be equal to the fair
market value of such investment on the date that the investment is sold
or exchanged.
``(d) Qualified Rural Opportunity Fund.--For purposes of this
section--
``(1) In general.--The term `qualified rural opportunity
fund' means any investment vehicle which is organized as a
corporation or a partnership for the purpose of investing in
qualified rural opportunity zone property (other than another
qualified rural opportunity fund) that holds at least 90
percent of its assets in qualified rural opportunity zone
property, determined by the average of the percentage of
qualified rural opportunity zone property held in the fund as
measured--
``(A) on the last day of the first 6-month period
of the taxable year of the fund, and
``(B) on the last day of the taxable year of the
fund.
``(2) Qualified rural opportunity zone property.--
``(A) In general.--The term `qualified rural
opportunity zone property' means property which is--
``(i) qualified rural opportunity zone
stock,
``(ii) qualified rural opportunity zone
partnership interest, or
``(iii) qualified rural opportunity zone
business property.
``(B) Qualified rural opportunity zone stock.--
``(i) In general.--Except as provided in
clause (ii), the term `qualified rural
opportunity zone stock' means any stock in a
domestic corporation if--
``(I) such stock is acquired by the
qualified rural opportunity fund after
December 31, 2023, at its original
issue (directly or through an
underwriter) from the corporation
solely in exchange for cash,
``(II) as of the time such stock
was issued, such corporation was a
qualified rural opportunity zone
business (or, in the case of a new
corporation, such corporation was being
organized for purposes of being a
qualified rural opportunity zone
business), and
``(III) during substantially all of
the qualified rural opportunity fund's
holding period for such stock, such
corporation qualified as a qualified
rural opportunity zone business.
``(ii) Redemptions.--A rule similar to the
rule of section 1202(c)(3) shall apply for
purposes of this paragraph.
``(C) Qualified rural opportunity zone partnership
interest.--The term `qualified rural opportunity zone
partnership interest' means any capital or profits
interest in a domestic partnership if--
``(i) such interest is acquired by the
qualified rural opportunity fund after December
31, 2023, from the partnership solely in
exchange for cash,
``(ii) as of the time such interest was
acquired, such partnership was a qualified
rural opportunity zone business (or, in the
case of a new partnership, such partnership was
being organized for purposes of being a
qualified rural opportunity zone business), and
``(iii) during substantially all of the
qualified rural opportunity fund's holding
period for such interest, such partnership
qualified as a qualified rural opportunity zone
business.
``(D) Qualified rural opportunity zone business
property.--
``(i) In general.--The term `qualified
rural opportunity zone business property' means
tangible property used in a trade or business
of the qualified rural opportunity fund if--
``(I) such property was acquired by
the qualified rural opportunity fund by
purchase (as defined in section
179(d)(2)) after December 31, 2023,
``(II) the original use of such
property in the qualified rural
opportunity zone commences with the
qualified rural opportunity fund or the
qualified rural opportunity fund
substantially improves the property,
and
``(III) during substantially all of
the qualified rural opportunity fund's
holding period for such property,
substantially all of the use of such
property was in a qualified rural
opportunity zone.
``(ii) Substantial improvement.--For
purposes of subparagraph (A)(ii), property
shall be treated as substantially improved by
the qualified rural opportunity fund only if,
during any 30-month period beginning after the
date of acquisition of such property, additions
to basis with respect to such property in the
hands of the qualified rural opportunity fund
exceed an amount equal to the adjusted basis of
such property at the beginning of such 30-month
period in the hands of the qualified rural
opportunity fund.
``(iii) Related party.--For purposes of
subparagraph (A)(i), the related person rule of
section 179(d)(2) shall be applied pursuant to
subsection (e)(2) in lieu of the application of
such rule in section 179(d)(2)(A).
``(3) Qualified rural opportunity zone business.--
``(A) In general.--The term `qualified rural
opportunity zone business' means a trade or business--
``(i) in which substantially all of the
tangible property owned or leased by the
taxpayer is qualified rural opportunity zone
business property (determined by substituting
`qualified rural opportunity zone business' for
`qualified rural opportunity fund' each place
it appears in paragraph (2)(D)),
``(ii) which satisfies the requirements of
paragraphs (2), (4), and (8) of section
1397C(b), and
``(iii) which is not described in section
144(c)(6)(B).
``(B) Special rule.--For purposes of subparagraph
(A), tangible property that ceases to be a qualified
rural opportunity zone business property shall continue
to be treated as a qualified rural opportunity zone
business property for the lesser of--
``(i) 5 years after the date on which such
tangible property ceases to be so qualified, or
``(ii) the date on which such tangible
property is no longer held by the qualified
rural opportunity zone business.
``(4) Qualified rural opportunity zone.--
``(A) In general.--The term `qualified rural
opportunity zone' means any population census tract
which--
``(i) is located in a rural county, and
``(ii) is in persistent poverty (as
determined by the Bureau of the Census as of
the date of the enactment of this Act).
``(B) Rural county.--The term `rural county' means
any county if more than 50 percent of the census blocks
which comprise such county are rural blocks (as
determined by the Bureau of the Census as of the date
of the enactment of this Act). A rule similar to
section 143(k)(2)(D) shall apply for purposes of the
preceding sentence.
``(e) Applicable Rules.--
``(1) Treatment of investments with mixed funds.--In the
case of any investment in a qualified rural opportunity fund
only a portion of which consists of investments of gain to
which an election under subsection (a) is in effect--
``(A) such investment shall be treated as 2
separate investments, consisting of--
``(i) one investment that only includes
amounts to which the election under subsection
(a) applies, and
``(ii) a separate investment consisting of
other amounts, and
``(B) subsections (a), (b), and (c) shall only
apply to the investment described in subparagraph
(A)(i).
``(2) Related persons.--For purposes of this section,
persons are related to each other if such persons are described
in section 267(b) or 707(b)(1), determined by substituting `20
percent' for `50 percent' each place it occurs in such
sections.
``(3) Decedents.--In the case of a decedent, amounts
recognized under this section shall, if not properly includible
in the gross income of the decedent, be includible in gross
income as provided by section 691.
``(4) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section, including--
``(A) rules for the certification of qualified
rural opportunity funds for the purposes of this
section,
``(B) rules to ensure a qualified rural opportunity
fund has a reasonable period of time to reinvest the
return of capital from investments in qualified rural
opportunity zone stock and qualified rural opportunity
zone partnership interests, and to reinvest proceeds
received from the sale or disposition of qualified
rural opportunity zone property, and
``(C) rules to prevent abuse.
``(f) Failure of Qualified Rural Opportunity Fund To Maintain
Investment Standard.--
``(1) In general.--If a qualified rural opportunity fund
fails to meet the 90-percent requirement of subsection (d)(1),
the qualified rural opportunity fund shall pay a penalty for
each month it fails to meet the requirement in an amount equal
to the product of--
``(A) the excess of--
``(i) the amount equal to 90 percent of its
aggregate assets, over
``(ii) the aggregate amount of qualified
rural opportunity zone property held by the
fund, multiplied by
``(B) the underpayment rate established under
section 6621(a)(2) for such month.
``(2) Special rule for partnerships.--In the case that the
qualified rural opportunity fund is a partnership, the penalty
imposed by paragraph (1) shall be taken into account
proportionately as part of the distributive share of each
partner of the partnership.
``(3) Reasonable cause exception.--No penalty shall be
imposed under this subsection with respect to any failure if it
is shown that such failure is due to reasonable cause.''.
(b) Clerical Amendment.--The table of sections for subchapter Z of
chapter 1 of such Code is amended by adding at the end the following
new item:
``Sec. 1400Z-3. Special rules for capital gains invested in rural
opportunity zones.''.
(c) Effective Date.--The amendments made by this section shall
apply to amounts invested after the date of the enactment of this
section.
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