68th OREGON LEGISLATIVE ASSEMBLY--1995 Regular Session
NOTE: Matter within { + braces and plus signs + } in an
amended section is new. Matter within { - braces and minus
signs - } is existing law to be omitted. New sections are within
{ + braces and plus signs + } .
LC 1110
Minority Report
B-Engrossed
Senate Bill 323
Ordered by the House May 10
Including Senate Amendments dated March 2 and House Minority
Report Amendments dated May 10
Sponsored by nonconcurring members of the House Committee on
State and School Finance: Representatives BEYER, FEDERICI
SUMMARY
The following summary is not prepared by the sponsors of the
measure and is not a part of the body thereof subject to
consideration by the Legislative Assembly. It is an editor's
brief statement of the essential features of the measure.
Allows deferral of gain, for purposes of state personal income
taxes, on sale or other disposition of capital assets if proceeds
are reinvested in qualified business interest, qualified
investment fund or qualified business asset. Requires
reinvestment of full amount of proceeds to fully defer tax.
{ + Limits deferral of gain to investments that add value to
goods in 'key industry. ' Allows Department of Revenue to adopt
rules to define what constitutes interim holding or incidental
holding. + }
Defines terms. Requires report to Legislative Assembly. Makes
technical changes.
Sunsets deferral on January 1, 2002.
Applies, generally, to investments and tax years beginning on
or after January 1, 1996.
A BILL FOR AN ACT
Relating to taxes, including but not limited to taxes imposed
upon or measured by income.
Be It Enacted by the People of the State of Oregon:
SECTION 1. { + Sections 2 to 10 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:
(A) Adds value, through manufacturing, processing or otherwise,
to goods; and
(B) Involves the conduct of a trade or business in a key
industry.
(b) The business generates income from investment property only
as an incidental effect of the management of working capital.
For purposes of sections 2 to 10 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.
(c) The commercial domicile of the business is in this state.
(d)(A) The employment base of the business in this state is at
least as large as the employment base of the business outside
this state.
(B) For purposes of this paragraph, the employment base of a
business shall be the sum of the number of full-time equivalent
employees and the number of full-time equivalent independent
contractors located in this state or outside this state, as the
case may be.
(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 and that:
(a) Invests in qualified business interests or qualified
business assets; or
(b) Acquires investment property only on an interim basis or an
incidental basis until a suitable qualified business interest or
qualified business asset may be located by the fund.
(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.
(12) 'Key industry' has the meaning given that term in ORS
285.175.
(13) 'Start-up business' means a business that has not had an
intervening year in which the business reported federal taxable
income between the year the business was formed and the current
tax year. + }
SECTION 3. { + (1)(a) 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 within 12 months of
the date on which the gain would otherwise have been recognized.
(b) Gain that is reinvested in a qualified business interest or
a qualified business asset may be deferred under this section
only if the reinvestment described under paragraph (a) of this
subsection:
(A) Results in an increase in the fair market value of the
qualified business activity if immediately after the reinvestment
the increase in fair market value is at least 75 percent of the
amount of reinvestment; or
(B) Is in a qualified business activity that constitutes a
start-up business.
(2) For purposes of sections 2 to 10 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) Upon 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,
the previously deferred gain 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 (3) 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 10 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. + }
SECTION 5. { + (1) A declaration shall accompany the income
tax return of a taxpayer seeking to defer gain under sections 2
to 10 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
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 10 of this 1995 Act. + }
SECTION 7. { + (1) If a taxpayer is granted a deferral under
sections 2 to 10 of this 1995 Act, the amount of the deferred
gain that is reinvested in a qualified business interest,
qualified investment fund or qualified business asset shall be an
adjustment to federal taxable income notwithstanding section 3 of
this 1995 Act when any of the following occur:
(a) The asset ceases to be a qualified business asset.
(b) The investment fund ceases to be a qualified investment
fund.
(c) The business ceases day-to-day operations or ceases to be a
qualified business.
(d) 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) For purposes of subsection (1)(b) of this section, a
qualified investment fund may not be disqualified upon the
disqualification of one or more of the qualified business
activities in which the fund holds interests, if the fund divests
itself of the fund's interests in the disqualified business
activity within 12 months of the date of disqualification. If the
qualified investment fund does not divest itself of the fund's
interests in a disqualified business activity within 12 months of
the disqualification, only that portion of the gain previously
deferred under sections 2 to 10 of this 1995 Act that is
attributable to the interest in the disqualified business
activity shall be an adjustment to the federal taxable income of
the owners of the fund.
(3)(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 10 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)(a), (b) and
(c) 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.
(c) If a qualified investment fund fails to divest itself of
the fund's interests in a disqualified business activity within
the 12-month period described in subsection (2) of this section,
the deferred gain that is required to be recognized by subsection
(2) of this section shall be added to federal taxable income for
the tax year in which expires the 12-month period for
divestment. + }
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 10 of this 1995 Act shall not expire 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 10 of this 1995 Act
that is later required to be added to federal taxable income
under sections 2 to 10 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 10 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 10 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. { + The Department of Revenue may adopt rules
under sections 2 to 10 of this 1995 Act including rules that
define what constitutes an interim holding of investment property
by a qualified investment fund and an incidental holding of
investment property by a qualified business activity or a
qualified investment fund. + }
SECTION 11. { + (1) Sections 2 to 10 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)(a) 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 10 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
10 of this Act.
(b) The confidentiality requirements applicable to tax returns
and the information contained therein shall not be applicable to
the Economic Development Department and the Legislative Revenue
Officer for purposes of preparing the report described in
paragraph (a) of this subsection. + }
SECTION 12. { + (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, 1997, sections 2 to 10 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 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 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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