BUSINESS INVESTMENT-INCENTIVE ACT POLICY:
To make funds available to the small business community. Most small business people today do not have access to vehicles where substantial capital is available such as the public sale of equity securities, the issuance of bonds and venture capital markets. Most of the capital available for the small business comes from personal savings, friends, relatives and business associates. The investment in small business is generally considered a high risk .venture, thus many of the people with available capital are discouraged from making this kind of risk investment. This is also compounded by present tax laws which make this kind of venture unattractive, capital loss provisions on the sale of stock, and the treatment of loans to small business as non business loans.
RECOMMENDATIONS
We therefore recommend that investors in qualified small business be able to do so with funds earned by the investors before paying taxes on such earned funds. Thus the investor will reduce from gross income in computing taxable income amounts invested in qualified small business. For the purpose of this legislation, it is assumed that a small business is a business which is generally defined as a closely-held corporation.
QUALIFICATIONS AND LIMITATIONS
1. There shall be a $50,000 limitation as to the deductibility under this plan per person per year ($100,000 on a joint return). (Rationale: the $50,000 limitation is arbitrary, however, it is our view that at the present time no more than $50,000 be deductible to anyone individual in any given year.)
2. A corporation under the provisions of this plan may only sell $250,000 worth of stock. (Rationale: it is our view that $250,000 for most small business would be appropriate. We further feel that if these funds can become available as a result of this plan then it is conceivable that the activities of the Small Business Administration may be greatly reduced. Thus, reducing the government involvement in the direct financing of small business.)
3. The investor may not, after the purchase of stock under this plan, own more than fifty percent of the corporate stock. (Rationale: it is our view that the ownership of stock of any corporation under this plan should be limited so that the plan cannot be used as an arbitrary tax shelter for the benefit of individuals who have existing businesses. By the mere fact of incorporating an existing business, they would receive a tax benefit. The purpose of this plan is to raise capital and create more available capital for businesses that exist.)
4. The funds used to purchase the stock must go directly to the company. (Rationale: the purpose of this plan is to have money funded directly into small businesses as opposed to having individuals receive tax deductions for the purchase of stock with the resulting additional capital not going to the company.)
5. Purchase of stock under this plan shall be by cash only (any property transferred or sold to the corporation, except for the purchase of inventory in the normal course of business, from the purchaser of the stock under this plan, shall disqualify the stock as a tax deduction.) (Rationale: it is our view that the purpose of this plan is to make cash available to small businesses for purposes of enhancing their business, therefore, we do not feel that it would be appropriate for individuals to receive a tax benefit for services, property, etc., being contributed to small business. We also feel that this limitation would prevent an individual or group of individuals who own an existing proprietorship, or partnership, from transferring only cash to a newly-formed corporation taking this deduction under this plan and subsequently selling the other partnership assets to the newly-formed corporation.)
6. An existing owner of a company may not purchase stock under this plan unless he is an owner by sole reason of having previously purchased stock under this plan. (Rationale: it is our view that the purpose of this plan is not to give owners of existing business a tax benefit for putting their own funds into the business. The plan has been primarily designed for owners of existing small businesses to be able to raise capital for those businesses.)
7. The corporation shall not pay any individual who has purchased stock under this plan either dividends or return of capital for a period of not less than 3 years from the date of purchase of stock under this plan. (Rationale: we feel that a 3-year period is sufficient to prevent abuses of individuals investing cash in a qualified small business and taking a tax deduction in one year and in the subsequent year taking some kind of a dividend or capital distribution from the small business, thus giving them the ability of rolling income from one year to the next.) 8. The sale of securities purchased under this plan is permissible but not to an existing shareholder of the company for 3 years from the date of purchase of the stock. (Rationale: it is our view that the purchaser of securities under this plan should be allowed to sell his securities to any individual that he sees fit, however to prevent abuses, we feel that there should not be an agreement with an existing shareholder to purchase the stock back in less than 3 years. For example, it is conceivable for an individual to invest in one year and take a tax deduction, enter into an agreement and have the existing shareholder purchase the shares back in the following year, thus affording the investor the ability to roll his income from year to year. We view this as a method of avoiding a series of tax shelter schemes developing which would allow income to be rolled (from one year to the next.)
9. If the purchaser of stock under this plan has made a reciprocal agreement whereby his purchase of stock is contingent upon another individual purchasing stock in his existing closely-held corporation, then both purchases of stock will not qualify for a deduction under this plan. (Rationale: two individuals who each own their own companies could conceivably enter into an agreement whereby they agree to invest in each others company. The underlying substance of such transaction is that they are in effect investing in their own company. Under provision of #6 above, they are prohibited from investing in their own companies. This would prevent abuses in this area.)
10. The selling corporation must be actively engaged in a trade or business and the funds must be used in the conduct of the trade or business of the selling corporation. (Rationale: the purpose of this section is to make sure that shell corporations or passive type corporations are not utilized for purposes of taking advantage of the law and developing tax shelter schemes whereby an investor going into a shell corporation can take a deduction under the provisions of this plan thus avoiding income tax without making any economic investment in an existing active business.)
11. Upon the disposition of the stock purchased under this plan, gain will be recapturable at ordinary income rates to the extent of previous write-offs taken. All amounts received in excess of the original purchase price will be subject to capital gains tax. (Rationale: since there is a high degree of tax benefit available to the purchaser of stock under this plan, the ultimate disposition of stock at a profit would result in a return of that tax benefit to the treasury.)
12. Corporations which are a member of a control group shall be treated as a single corporation for purposes of this plan. (Rationale: this would prevent a series of corporations from being formed with the goal of securing tax write-offs under the provisions of this plan.)
13. Personal service corporations are prohibited from qualifying under this plan. (Rationale: the purpose of this plan is to raise funds for those businesses in productive endeavors and not for the businesses rendering personal service, such as doctors, lawyers and accountants)