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CAPITAL GAINS EXEMPTION FOR "SEED CAPITAL" INVESTMENTS ADDED TO TAX BILL

Executive Summary

Legislation to exempt long-term "seed capital" investments in small firms from capital gains taxes was added by the Senate on Sept. 25 to its version of the tax/urban aid package (HR 11). Proposed by Senate Small Business Committee Chairman Bumpers (D-Ark.) and Sen. Brown (R-Colo.), the capital gains amendment would provide tax exclusions for capital gains on investments in firms that are held for at least five years. The measure applies only to firms with aggregate paid-in capital of up to $5 mil. A 50% exclusion on gains would be provided after five years, increasing to 100% after 10 years. The Senate approved HR 11 on Sept. 30, sending the measure to conference with the House. The House-passed version has a $20 mil. price-tag in comparison to the $30 mil.-plus price for the Senate bill. Among a number of other items added by Senate is a Medicare/Medicaid amendment exempting certain federal purchasers from "best price" calculations (see related story, p. 5). In a Senate floor statement, Bumpers noted that he and Brown introduced legislation earlier this year that would provide certain capital gains tax benefits for venture capital, defined as investments in firms capitalized at up to $100 mil., and advised that he plans to return to the issue next year. Bumpers explained: "Frankly, I just cannot find a [budget savings] offset for both the seed plus venture capital incentives. So I have taken the seed capital provision, which I think everybody will endorse, and will pursue the venture capital incentive." The seed capital provision would cost a projected $340 mil. over five years, which Bumpers proposes to offset through reducing the tax deductions for moving expenses. The Industrial Biotechnology Association issued a Sept. 25 statement in support of the Bumpers bill, although it "would have preferred for the venture capital provision to be included" as well. The biotechnology group noted that the House version of HR 11 also has a seed capital provision, but it applies only to companies in designated "enterprise zones." Sen. Brown is one of the co-chairmen of the Congressional Biotechnology Caucus. Other tax provisions in HR 11 include extensions of the R&D tax credit and the orphan drug tax credit to Sept. 30, 1993 ("The Pink Sheet" Sept. 28, p. 11).

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