68th OREGON LEGISLATIVE ASSEMBLY--1995 Regular Session
LC 1110
SENATE AMENDMENTS TO
SENATE BILL 323
By COMMITTEE ON GOVERNMENT FINANCE AND TAX POLICY
March 2
On page 1 of the printed bill, delete lines 4 through 30 and
delete pages 2 through 5 and insert:
' { + SECTION 1. + } { + Sections 2 to 9 of this Act are
added to and made a part of ORS chapter 316. + }
' { + SECTION 2. + } { + As used in this 1995 Act:
' (1) 'Capital asset' means an asset defined as a capital asset
under section 1221 of the Internal Revenue Code, except that it
includes property, used in the taxpayer's trade or business, of a
character that is subject to the allowance for depreciation
provided in section 167 of the Internal Revenue Code, or real
property used in the taxpayer's trade or business.
' (2) 'Commercial domicile' means commercial domicile as
defined under ORS 314.610.
' (3) 'Expansion share' means a unit of ownership of a business
that meets all of the following criteria:
' (a) The unit has unlimited voting rights and the right to
receive a share of the net assets of the business upon
dissolution, or may at the option of the holder of the share be
converted into shares with these characteristics.
' (b) The unit is issued directly to the taxpayer, or to a
partnership, limited liability company or S corporation of which
the taxpayer is, at the time the unit is issued, a partner,
member or shareholder.
' (c) The business has less than $5 million in revenues during
the 12 full months immediately preceding the date of the first
equity investment in the business by the taxpayer.
' (d) The business has a net equity, adjusted by adding back
all dividends or distributions made by the business, that is
equal to or less than the sum of all previous equity investments.
' (e) No unit of ownership of the business is publicly traded.
' (f) The unit is issued in exchange for money or property to
be used in the operations of the business. A unit, the proceeds
received by the business of which are used by the business to
reacquire an ownership interest or other security of the
business, shall not constitute an expansion share.
' (4) 'Gain' or 'deferred gain' means gain as determined for
federal income tax purposes with the modifications contained in
this chapter.
' (5) 'Qualified business interest' means an ownership interest
in a business conducting a qualified business activity.
' (6) 'Internal Revenue Code' means the federal Internal
Revenue Code as amended and in effect on December 31, 1994.
' (7) 'Qualified business activity' means a business that is
owned by an individual, partnership, limited liability company, S
corporation or C corporation, the activity of which meets all of
the following criteria:
' (a) The activity is an activity listed in the Standard
Industrial Classification Manual, 1987 (SIC), as published by the
Office of Management and Budget, Executive Office of the
President, as being any of the following:
' (A) Agriculture, forestry or fishing (Division A).
' (B) Mining (Division B).
' (C) Construction (Division C).
' (D) Manufacturing (Division D).
' (E) Transportation, communications, electric, gas or sanitary
service (Division E).
' (F) Wholesale trade (Division F).
' (G) Retail trade (Division G).
' (H) Personal services (Major Group 72, Division I).
' (I) Business services (Major Group 73, Division I).
' (J) Automotive repair, services or parking (Major Group 75,
Division I).
' (K) Miscellaneous repair services (Major Group 76, Division
I).
' (L) Engineering, accounting, research, management or related
services (Major Group 87, Division I).
' (b)(A) The business generates income from investment property
only as an incidental effect of the management of a working
capital pool aggregated and directed toward investing in
qualified business interests or qualified business assets. For
purposes of sections 2 to 9 of this 1995 Act, ownership interests
in entities controlled by the business or directly involved in
the support of the qualified business activity of the business do
not constitute investment property.
' (B) The Department of Revenue may further define what
constitutes an incidental holding of investment property for
purposes of sections 2 to 9 of this 1995 Act.
' (c) The commercial domicile of the business is in this state.
' (d) The majority of full-time equivalent employees employed
by the business and the largest percentage, by dollar value, of
independent contractors under contract to the business are
located in this state.
' (8) 'Qualified business asset' means a capital asset held for
use in this state in a qualified business activity.
' (9) 'Related party' means an individual who is a member of
the taxpayer's family, as that term is defined in section 267
(c)(4) of the Internal Revenue Code.
' (10) 'Qualified investment fund' means a partnership, limited
liability company or S corporation formed solely for the purpose
of acquiring qualified business interests or qualified business
assets.
' (11) 'Investment property' means property that has the
capacity to produce gross income from:
' (a) Interest, annuities or royalties not derived in the
ordinary course of a trade or business; or
' (b) Dividends, except that investment property does not
include expansion shares. + }
' { + SECTION 3. + } { + (1) In addition to any other
modifications to federal taxable income made for purposes of this
chapter, and upon the filing by the taxpayer of a declaration
described under section 5 (1) of this 1995 Act, a taxpayer who
has income for federal income tax purposes, from gain on the sale
or other disposition of a capital asset may defer recognition of
all or part of the gain in determining the taxes imposed under
this chapter by reinvesting the proceeds of the sale or other
disposition in a qualified business interest, qualified
investment fund or qualified business asset.
SA to SB 323 Page 2
' (2) For purposes of sections 2 to 9 of this 1995 Act, gain
shall be considered to be reinvested in a qualified business
interest, qualified investment fund or qualified business asset
in the same proportion that the proceeds from the sale or other
disposition of the capital asset (net of federal income taxes
paid or owing as a result of the sale or other disposition) are
reinvested.
' (3) Gain resulting from the sale or other disposition of a
qualified business interest, interest in a qualified investment
fund or a qualified business asset with respect to which gain was
previously deferred under this section as the result of a prior
sale or disposition may continue to be deferred:
' (a) Only to the extent that an amount equal to the total of
all gain deferred under this section is reinvested in one or more
qualified business interests or qualified business assets; and
' (b) Only if a new declaration described under section 5 (1)
of this 1995 Act is filed with the department.
' (4) Gain resulting from the sale or other disposition of a
qualified business interest, interest in a qualified investment
fund or a qualified business asset that the taxpayer may not
continue to defer under subsection (1) of this section shall be
added to federal taxable income in the manner provided under
section 7 (2) of this 1995 Act.
' (5) The Department of Revenue may by rule further refine the
method by which a taxpayer determines whether a transaction
constitutes the sale or disposition of a qualified business
interest, interest in a qualified investment fund or a qualified
business asset with respect to which gain has been deferred. + }
' { + SECTION 4. + } { + The following types of gain or
income may not be deferred under sections 2 to 9 of this 1995
Act:
' (1) Gain from the sale or other disposition of property
received in lieu of salary, wages or other compensation for
services performed by the taxpayer, to the extent of the fair
market value of the property at the time of receipt by the
taxpayer.
' (2) Gain or income from the sale of inventory, except gain
derived from the bulk sale of inventory not in the ordinary
course of a trade or business.
' (3) Gain from the sale of property that is not held for the
production of income.
' (4) Gain from investment property.
' (5) Gain that is treated or characterized as ordinary income
under any provision of the Internal Revenue Code.
' (6) Gain, to the extent the gain is not recognized under
sections 1044 and 1202 of the Internal Revenue Code,
notwithstanding that the gain is derived from the sale of
expansion shares. + }
' { + SECTION 5. + } { + (1) A declaration shall accompany
the income tax return of a taxpayer seeking to defer gain under
sections 2 to 9 of this 1995 Act. The declaration shall state the
source and the amount of the gain to be deferred and shall
declare the intent of the taxpayer to reinvest the gain in a
qualified business interest, qualified investment fund or a
qualified business asset within 12 months of the date of sale or
other disposition from which the gain is derived.
' (2) A taxpayer who has filed a declaration of intent to
reinvest shall, with the income tax return for the tax year of
reinvestment, file a statement that the reinvestment has
SA to SB 323 Page 3
occurred. The statement shall be on such form as the Department
of Revenue may prescribe and shall:
' (a) Identify the qualified business interest, interest in a
qualified investment fund or qualified business asset acquired;
' (b) State the basis for qualification as a qualified business
interest, qualified investment fund or qualified business asset;
and
' (c) Give the purchase price or other consideration given for
the qualified business interest, interest in the qualified
investment fund or qualified business asset acquired.
' (3) The statement described in subsection (2) of this section
shall reference the specific declaration of intent to reinvest
that is being fulfilled. + }
' { + SECTION 6. + } { + The basis of the taxpayer in a
qualified business interest, qualified investment fund or
qualified business asset shall not be reduced by the amount of
gain deferred under sections 2 to 9 of this 1995 Act. + }
' { + SECTION 7. + } { + (1) If a taxpayer is granted a
deferral under sections 2 to 9 of this 1995 Act and does not
reinvest the deferred gain in a qualified business interest,
qualified investment fund or qualified business asset, or
reinvests only a portion of the deferred gain in a qualified
business interest, qualified investment fund or qualified
business asset, the amount of the deferred gain to the extent not
so reinvested shall be an adjustment to federal taxable income
when any of the following occur:
' (a) The expiration of 12 months from the date of sale or
other disposition.
' (b) The asset ceases to be a qualified business asset.
' (c) The investment fund ceases to be a qualified investment
fund.
' (d) The business ceases day-to-day operations or ceases to be
a qualified business.
' (e) The current asset value of the qualified business is
reduced 50 percent or more as a result of the withdrawal of:
' (A) Capital assets from the business; or
' (B) Proceeds from the sale or other disposition of capital
assets of the business.
' (2)(a) Except as provided in paragraph (b) of this
subsection, upon the occurrence of an event described in
subsection (1) of this section requiring recognition of deferred
gain, the deferred gain shall be added to federal taxable income
for the tax year in which the event occurs. Except for
adjustments required for purposes of this chapter other than in
sections 2 to 9 of this 1995 Act, no other adjustment to federal
taxable income shall be made as a result of an event requiring
recognition of deferred gain described in subsection (1) of this
section.
' (b) A taxpayer who does not own a controlling interest in a
business with respect to which an event occurs requiring
recognition of gain as described in subsection (1)(b), (c) and
(d) of this section may continue to defer gain by timely filing a
declaration of intent to reinvest as described in section 5 of
this 1995 Act. + }
' { + SECTION 8. + } { + (1) If a taxpayer sells or
otherwise disposes of a qualified business interest or qualified
business asset, the statutory period prescribed in ORS 314.410
for assessing a deficiency attributable to any part of the gain
deferred under sections 2 to 9 of this 1995 Act shall not expire
SA to SB 323 Page 4
prior to the expiration of three years after the latest of the
following dates:
' (a) The date of receipt by the Department of Revenue of the
statement described in section 5 (2) of this 1995 Act.
' (b) The date of receipt by the department of a statement from
the taxpayer declaring an intent not to reinvest.
' (c) The date that is 12 months after the date of sale or
disposition resulting in possible deferred gain.
' (2) Any gain deferred under sections 2 to 9 of this 1995 Act
that is later required to be added to federal taxable income
under sections 2 to 9 of this 1995 Act shall be added to federal
taxable income for the tax year in which the event causing the
addition occurs. Any deficiency attributable to any portion of
deferred gain may be assessed before the expiration of the latest
date described under subsection (1) of this section.
' (3) A taxpayer who files a declaration of intent to reinvest
but fails to reinvest as required by section 3 of this 1995 Act
shall be liable for unpaid taxes on the deferred amount and for
interest at the rate established under ORS 305.220 for
deficiencies from the date that the tax on the deferred gain
would have been due had the declaration not been filed to the
date of payment. + }
' { + SECTION 9. + } { + (1) If, on account of death or
disability of the taxpayer, a related party succeeds to a
qualified business interest, interest in a qualified investment
fund or qualified business asset upon the acquisition of which
gain was deferred under sections 2 to 9 of this 1995 Act, then at
the election of the related party, the death or disability of the
taxpayer shall not result in the addition to federal taxable
income of the deferred gain.
' (2) The related party who succeeds to the qualified business
interest, interest in a qualified investment fund or qualified
business asset may dispose of the interest or asset without
addition of the deferred gain to federal taxable income if the
requirements of reinvestment and other requirements of sections 2
to 9 of this 1995 Act are met.
' (3) If a taxpayer dies, and the death does not result in the
addition of the deferred gain to federal taxable income because
of an election under this section, at the time the deferred gain
is added to federal taxable income, the amount of gain shall be
determined using the basis that the deceased taxpayer had in the
qualified business interest, qualified investment fund or
qualified business asset. + }
' { + SECTION 10. + } { + (1) Sections 2 to 9 of this Act
apply to gain incurred from the sale or other disposition of a
capital asset in tax years beginning on or after January 1, 1997,
and to investments in qualified business interests, qualified
investment funds or qualified business assets that occur before
January 1, 2002.
' (2) The Department of Revenue, in conjunction with the
Economic Development Department and the Legislative Revenue
Officer, shall prepare a report regarding the economic impact of
sections 2 to 9 of this Act and shall present the report to those
committees of the Seventy-first Legislative Assembly to which
revenue matters are assigned. The purpose of the report is to
analyze the job creation and tax implications of sections 2 to 9
of this Act. + }
' { + SECTION 11. + } { + (1) For gain incurred from the
sale or other disposition of a capital asset in tax years
beginning on or after January 1, 1996, and before January 1,
SA to SB 323 Page 5
1997, sections 2 to 9 of this Act apply, as modified by this
section.
' (2) A taxpayer may defer recognition of gain on the sale or
other disposition of a capital asset as provided for under
section 3 (2) of this 1995 Act, except that the reinvestment must
be in a qualified business interest or a qualified business
asset.
' (3) Recognition of gain may be deferred under this section
only if the taxpayer's reinvestment:
' (a) Consists of a qualified business interest in a C
corporation; or
' (b) Relates to a qualified business activity in which the
taxpayer materially participates, as that term is defined in
section 469 of the Internal Revenue Code and the regulations
thereunder.
' (4) For purposes of calculating the amount of gain that shall
be considered to be reinvested under this section, section 3 (2)
of this 1995 Act shall not apply and the amount of gain that
shall be considered to be reinvested shall be the lesser of:
' (a) The amount of the gain incurred from the sale or other
disposition of a capital asset by the taxpayer; or
' (b) The amount of the reinvestment. + } ' .
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