By Lisa Seachrist

Washington Editor

WASHINGTON — Congress has passed legislation to make the Internal Revenue Service (IRS) a friendlier place, and included in the bill is a measure that provides venture capital firms with a capital gains tax break.

Inserted into the IRS reform bill, which President Clinton is expected to sign later this month, is language that extends a tax incentive currently available to individual investors to the firms which specialize in financing emerging technology businesses such as biotechnology firms.

The provision will allow venture capital firms that invest in small entrepreneurial companies to avoid capital gains taxes by reinvesting all gains into another small company.

"This was a small victory really in a much larger picture," said Chuck Ludlam, vice president for government relations for the Biotechnology Industry Organization (BIO). "However, capital formation is such a huge issue for our companies that this could be an important incentive."

Ludlam noted the measure mostly corrects an error in the Taxpayer's Relief Act of 1997. In that legislation, individuals who invested in small, qualified companies could avoid taxes on gains from the sale of those companies' stocks by rolling over all gains into stocks of other qualified companies. In order to qualify for the tax break all stock must be purchased directly from the companies — not from secondary markets — and reinvested directly in companies with less than $50 million in assets.

The 1997 legislation failed to extend the tax break to partnerships that invest in small companies. That left open the question of whether individuals who invested in small companies via venture capital funds could take advantage of the tax break. The funds are a collection of corporate, institutional and individual investors.

The IRS Reform Bill permits individual members of venture capital partnerships to take advantage of the rollover provision allowed in the 1997 law.

"It's not the most dramatic development," Ludlum said. "But our companies raise most of their money from stock offerings. This extends the tax incentive to the venture capital firms."

Ludlam noted that while the IRS bill mends the venture capital provision, BIO would like to see the definition of small companies changed to include those with more than $50 million in assets, because the aim of a stock offering is to make as much money as possible. *