By Lisa Seachrist

Washington Editor

WASHINGTON — With the 105th Congress less than a week old, one of the first bills introduced in the House would provide a 75 percent capital gains tax exemption to investors who put their money into small corporations and hold on to it for three years.

The bipartisan bill, HR 420 sponsored by Congressmen Robert Matsui (D-CA), Phil English (R-PA) and Jim McCrery (R-LA), addresses problems with the targeted capital gains incentive included in the 1993 Budget Reconciliation Bill while adding provisions that should attract investors to new entrepreneurial companies.

"This is a proposal that Congressman Matsui first introduced in 1993 and a watered down version was enacted," said Jim Bonham, press secretary for Matsui. "We are now taking a second run at trying to pump up the incentive."

"We are extremely happy that members of Congress have seen the value of a targeted capital gains incentive," said Chuck Ludlum at the Biotechnology Industry Organization (BIO). "Getting this bill enacted is one of our top priorities in this Congress."

The original legislation enacted in 1993 provided a 50 percent capital gains exemption to individuals who made new investments in corporations with $50 million or less in capitalization. The investors had to hold onto their stock for five years before they could get the tax exemption and 50 percent of the gains were subject to alternative minimum tax.

HR 420 provides the capital gains incentive for any individual or corporation that purchases new stock directly from the company and holds on to it for three years thereafter. A small company is defined as one that has less than $100 million in capitalization, and the bill allows that figure to be indexed for inflation which the current law forbids. In addition, all of the gains are exempt from alternative minimum tax. The bill provides a roll-over clause that would defer taxes on gains for those who reinvest the money into another venture capital corporation.

Essentially, all founder's stock, initial public offerings, stock options and venture capital investments in qualified corporations would enjoy the capital gains incentive. Should the incentive pass, it could result in a robust infusion of cash into the biotech industry as well as other high technology industries. And that is exactly what Matsui intends with this legislation.

"The main reason that Congressman Matsui proposed this bill is that this sector of the economy has been one of the fastest growing areas of our economy," Bonham said. "We want to give these firms a little extra juice."

BIO's Ludlum noted that while "this bill is not directed at biotech companies, it's a near perfect profile." He told BioWorld Today that "this bill is the most powerful targeted capital gains incentive ever proposed. It should really catch the eye of investors."

Mark Heesen, director of legislative and entrepreneurial affairs at the National Venture Capital Association agreed that the incentive would attract investors at a time when high technology start-ups really need investor support.

"It is becoming more and more expensive every year to bring high technology companies to the market," Heesen said. "They need a lot of seed money, and the capital gains incentive is a good way to attract investors."

As beneficial as this bill may be for start-up companies, Ludlum said that BIO also supports a broad-based capital gains tax cut that would apply to investments in general. However, he noted that because all tax cuts must be accounted for in order to balance the federal budget by 2000, it is too early to tell what priority Congress and the President will put on such a proposal.

The Clinton Administration is supporting a plan to cut capital gains on the sale of homes up to $500,000, while House Republicans are supporting a 50 percent across the board capital gains cut. Ludlum, however, is optimistic that a version of HR 420 will eventually be signed into law because it has bipartisan support and is likely to be something that the Clinton Administration will accept.

"We still have a long way to go, but this is a very good start," Ludlum said. *