WASHINGTON -- The enterprise zone legislation pending in Congress should be amended to exempt bonds issued in the zones from private-activity volume limits during the first two years, an American Bar Association committee told Clinton administration officials and congressional tax staffers.

The recommendation was one of several changes that ABA's tax-exempt financing committee recommended in a position paper sent last week to Margaret Richardson, commissioner of the Internal Revenue Service; Leslie Samuels, Treasury assistant secretary for tax policy; and several congressional tax aides.

The committee's recommendations come as House and Senate conferees began negotiating a final tax bill under pressure from administration officials to include President Clinton's enterprise zone proposal. The proposal was in the tax bill passed by the House, but not in the Senate version.

However, because the committee is calling for changes that would in effect expand the existing legislation, it is not clear if the conferees could make them because they may be bound to the versions that passed both houses.

Under the proposal in the House bill, a category of tax-exempt bonds called enterprise zone facility bonds would be created to finance businesses and activities in 10 "empowerment zones" and 100 "enterprise communities" that would be established in economically distressed areas.

The House proposal would exempt 50% of each bond issue from the limit on the volume of private-activity bonds that states can issue each year based on population. The exemption would be increased to 75% for bond issues used to finance businesses that are more than 50% owned by residents of these zones.

While these partial exemptions from state volume caps "appear generous," the bar association subcommittee said, they may actually deter significant use of enterprise zone facility bonds before 1994 or 1995 because many states have already determined which bonds will be issued under their caps for 1993, in addition, states whose legislatures meet every two years may not be able to change their bond volume allocations until 1995, the committee said. And none of the states has procedures in place to allocate the new enterprise zone facility bonds.

"Thus to the extent any portion of the bonds are subject to the volume cap, it will be impossible to issue [them] in the near future," the committee said in the paper.

To overcome this problem, the committee said, Congress should amend the legislation to permit bonds issued in the enterprise zone program to be entirely exempt from the state volume limits during the first two years.

This would not result in the unlimited use of enterprise zone facility bonds, the committee said, because the current legislation places limits on enterprise zone businesses and restricts companies or organizations from using more than $20 million of these bonds nationwide for zone activities.

The ABA committee also recommended that Congress simplify the legislation by eliminating a provision that would limit the amount of enterprise zone facility bonds that could be issued to $3 million per business per zone or community. By eliminating this cap, companies could use up to a total of $20 million of such bonds in any zone or zones.

The legislation's definition of "enterprise zone business" should be simplified to contain two instead of seven or eight proposed requirements, the committee said. One of those two requirements calls for all of the activities of an enterprise zone business to be located in an enterprise zone or community. The other stipulates that at least 35% of the employees of the business be residents of the zone or community.

The committee also said the lawmakers should correct provisions in the legislation governing bond financing of "qualified zone property" that appear to be inconsistent and are more restrictive than the requirements for private-activity bonds contained in current law.

Under current law, tax-exempt private-activity bonds can be used to acquire an existing building only if there will be a 15% rehabilitation of the building or to acquire other used structures if there will be a 100% renovation, the ABA committee said.

One provision of the pending legislation stipulates that the limitations on acquiring used buildings or structures would not apply to enterprise zone facility bonds. Another stipulates that the proceeds of enterprise zone facility bonds can be used only to acquire new property in an empowerment zone.

The two provisions are inconsistent and the one limiting tax-exempt bond financing to new buildings or other structures is more restrictive than current law, the committee said.

The committee did not recommend a specific solution. But William Loafman, a lawyer with Whitman & Ransom in New York City who chairs the committee, said in an interview that he would like to see the legislation amended to make it clear that bonds could be used to acquire used buildings and other structures without the rehabilitation requirements.

"The whole concept is to loosen the rules to encourage people to invest in and revitalize businesses and facilities in poor areas," Loafman said. Overly restrictive rules will discourage such investment, he said.

The committee applauded the legislation for making the enterprise zone facility bonds bank-eligible, saying this is "critical to its success in helping the smaller projects and businesses which may not be large enough to support a public offering or private placement."

The committee said the proposed legislation generally works and "will be administrable," but could be improved with these recommended changes.

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