[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3739 Introduced in House (IH)]

103d CONGRESS
  2d Session
                                H. R. 3739

  To amend the Internal Revenue Code of 1986 to provide all taxpayers 
 with a 50 percent deduction for capital gains, to index the basis of 
  certain capital assets, and to allow the capital loss deduction for 
 losses on the sale or exchange of an individual's principal residence.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                            January 26, 1994

Mr. Archer (for himself, Mr. Crane, Mr. Thomas of California, Mr. Shaw, 
 Mr. Sundquist, Mrs. Johnson of Connecticut, Mr. Houghton, Mr. Herger, 
  Mr. McCrery, Mr. Hancock, Mr. Camp, and Mr. Zimmer) introduced the 
 following bill; which was referred to the Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
  To amend the Internal Revenue Code of 1986 to provide all taxpayers 
 with a 50 percent deduction for capital gains, to index the basis of 
  certain capital assets, and to allow the capital loss deduction for 
 losses on the sale or exchange of an individual's principal residence.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Capital Formation and Jobs Creation 
Act of 1994''.

SEC. 2. 50 PERCENT CAPITAL GAINS DEDUCTION.

    (a) General Rule.--Part I of subchapter P of chapter 1 of the 
Internal Revenue Code of 1986 (relating to treatment of capital gains) 
is amended to read as follows:

                  ``PART I--TREATMENT OF CAPITAL GAINS

                              ``Sec. 1201. Capital gains deduction.

``SEC. 1201. CAPITAL GAINS DEDUCTION.

    ``(a) General Rule.--If for any taxable year a taxpayer has a net 
capital gain, 50 percent of such gain shall be a deduction from gross 
income.
    ``(b) Estates and Trusts.--In the case of an estate or trust, the 
deduction shall be computed by excluding the portion (if any) of the 
gains for the taxable year from sales or exchanges of capital assets 
which, under sections 652 and 662 (relating to inclusions of amounts in 
gross income of beneficiaries of trusts), is includible by the income 
beneficiaries as gain derived from the sale or exchange of capital 
assets.
    ``(c) Coordination With Treatment of Capital Gain Under Limitation 
on Investment Interest.--For purposes of this section, the net capital 
gain for any taxable year shall be reduced (but not below zero) by the 
amount which the taxpayer takes into account as investment income under 
section 163(d)(4)(B)(iii).
    ``(d) Transitional Rule.--
            ``(1) In general.--In the case of a taxable year which 
        includes February 1, 1994, the amount taken into account as the 
        net capital gain under subsection (a) shall not exceed the net 
        capital gain determined by only taking into account gains and 
        losses properly taken into account for the portion of the 
        taxable year on or after February 1, 1994.
            ``(2) Special rules for pass-thru entities.--
                    ``(A) In general.--In applying paragraph (1) with 
                respect to any pass-thru entity, the determination of 
                when gains and losses are properly taken into account 
                shall be made at the entity level.
                    ``(B) Pass-thru entity defined.--For purposes of 
                subparagraph (A), the term `pass-thru entity' means--
                            ``(i) a regulated investment company,
                            ``(ii) a real estate investment trust,
                            ``(iii) an S corporation,
                            ``(iv) a partnership,
                            ``(v) an estate or trust, and
                            ``(vi) a common trust fund.''
    (b) Deduction Allowable in Computing Adjusted Gross Income.--
Subsection (a) of section 62 of such Code is amended by inserting after 
paragraph (15) the following new paragraph:
            ``(16) Long-term capital gains.--The deduction allowed by 
        section 1201.''
    (c) Technical and Conforming Changes.--
            (1) Section 13113 of the Revenue Reconciliation Act of 1993 
        (relating to 50-percent exclusion for gain from certain small 
        business stock), and the amendments made by such section, are 
        hereby repealed; and the Internal Revenue Code of 1986 shall be 
        applied as if such section (and amendments) had never been 
        enacted.
            (2) Section 1 of such Code is amended by striking 
        subsection (h).
            (3) Paragraph (1) of section 170(e) of such Code is amended 
        by striking ``the amount of gain'' in the material following 
        subparagraph (B)(ii) and inserting ``50 percent of the amount 
        of gain''.
            (4)(A) Paragraph (2) of section 172(d) of such Code is 
        amended to read as follows:
            ``(2) Capital gains and losses.--
                    ``(A) Losses of taxpayers other than 
                corporations.--In the case of a taxpayer other than a 
                corporation, the amount deductible on account of losses 
                from sales or exchanges of capital assets shall not 
                exceed the amount includible on account of gains from 
                sales or exchanges of capital assets.
                    ``(B) Deduction under section 1201.--The deduction 
                under section 1201 shall not be allowed.''
            (B) Subparagraph (B) of section 172(d)(4) of such Code is 
        amended by striking ``paragraphs (1) and (3)'' and inserting 
        ``paragraphs (1), (2)(B), and (3)''.
            (5) Paragraph (4) of section 642(c) of such Code is amended 
        to read as follows:
            ``(4) Adjustments.--To the extent that the amount otherwise 
        allowable as a deduction under this subsection consists of gain 
        from the sale or exchange of capital assets held for more than 
        1 year, proper adjustment shall be made for any deduction 
        allowable to the estate or trust under section 1201 (relating 
        to deduction for excess of capital gains over capital losses). 
        In the case of a trust, the deduction allowed by this 
        subsection shall be subject to section 681 (relating to 
        unrelated business income).''
            (6) Paragraph (3) of section 643(a) of such Code is amended 
        by adding at the end thereof the following new sentence: ``The 
        deduction under section 1201 (relating to deduction of excess 
        of capital gains over capital losses) shall not be taken into 
        account.''
            (7) Paragraph (4) of section 691(c) of such Code is amended 
        by striking ``sections 1(h), 1201, and 1211'' and inserting 
        ``sections 1201 and 1211''.
            (8) The second sentence of section 871(a)(2) of such Code 
        is amended by inserting ``such gains and losses shall be 
        determined without regard to section 1201 (relating to 
        deduction for capital gains) and'' after ``except that''.
            (9) Subsection (d) of section 1044 of such Code is amended 
        by striking the last sentence.
            (10)(A) Paragraph (2) of section 1211(b) of such Code is 
        amended to read as follows:
            ``(2) the sum of--
                    ``(A) the excess of the net short-term capital loss 
                over the net long-term capital gain, and
                    ``(B) one-half of the excess of the net long-term 
                capital loss over the net short-term capital gain.''
            (B) So much of paragraph (2) of section 1212(b) of such 
        Code as precedes subparagraph (B) thereof is amended to read as 
        follows:
            ``(2) Special rules.--
                    ``(A) Adjustments.--
                            ``(i) For purposes of determining the 
                        excess referred to in paragraph (1)(A), there 
                        shall be treated as short-term capital gain in 
                        the taxable year an amount equal to the lesser 
                        of--
                                    ``(I) the amount allowed for the 
                                taxable year under paragraph (1) or (2) 
                                of section 1211(b), or
                                    ``(II) the adjusted taxable income 
                                for such taxable year.
                            ``(ii) For purposes of determining the 
                        excess referred to in paragraph (1)(B), there 
                        shall be treated as short-term capital gain in 
                        the taxable year an amount equal to the sum 
                        of--
                                    ``(I) the amount allowed for the 
                                taxable year under paragraph (1) or (2) 
                                of section 1211(b) or the adjusted 
                                taxable income for such taxable year, 
                                whichever is the least, plus
                                    ``(II) the excess of the amount 
                                described in subclause (I) over the net 
                                short-term capital loss (determined 
                                without regard to this subsection) for 
                                such year.''
            (11) Paragraph (1) of section 1402(i) of such Code is 
        amended by inserting ``, and the deduction provided by section 
        1201 shall not apply'' before the period at the end thereof.
            (12) Section 12 of such Code is amended by striking 
        paragraph (4) and redesignating the following paragraphs 
        accordingly.
            (13) Paragraph (2) of section 527(b) of such Code is hereby 
        repealed.
            (14) Subparagraph (D) of section 593(b)(2) of such Code is 
        amended by adding ``and'' at the end of clause (iii), by 
        striking ``, and'' at the end of clause (iv) and inserting a 
        period, and by striking clause (v).
            (15) Paragraph (2) of section 801(a) of such Code is hereby 
        repealed.
            (16) Subsection (c) of section 831 of such Code is amended 
        by striking paragraph (1) and redesignating the following 
        paragraphs accordingly.
            (17)(A) Subparagraph (A) of section 852(b)(3) of such Code 
        is amended by striking ``, determined as provided in section 
        1201(a), on'' and inserting ``of 17.5 percent of''.
            (B) Clause (iii) of section 852(b)(3)(D) of such Code is 
        amended--
                    (i) by striking ``65 percent'' and inserting ``82.5 
                percent'', and
                    (ii) by striking ``section 1201(a)'' and inserting 
                ``subparagraph (A)''.
            (18) Clause (ii) of section 857(b)(3)(A) of such Code is 
        amended by striking ``determined at the rate provided in 
        section 1201(a) on'' and inserting ``of 17.5 percent of''.
            (19) Paragraph (1) of section 882(a) of such Code is 
        amended by striking ``section 11, 55, or 1201(a)'' and 
        inserting ``section 11 or 55''.
            (20) Subsection (b) of section 904 of such Code is amended 
        by striking paragraphs (2)(B), (3)(B), (3)(D), and (3)(E).
            (21) Subsection (b) of section 1374 of such Code is amended 
        by striking paragraph (4).
            (22) Subsection (b) of section 1381 is amended by striking 
        ``or 1201''.
            (23) Paragraph (1) of section 1445(e) of such Code is 
        amended by striking ``35 percent (or, to the extent provided in 
        regulations, 28 percent)'' and inserting ``17.5 percent (or, to 
        the extent provided in regulations, 19.8 percent)''.
            (24) Clause (i) of section 6425(c)(1)(A) of such Code is 
        amended by striking ``or 1201(a)''.
            (25) Clause (i) of section 6655(g)(1)(A) of such Code is 
        amended by striking ``or 1201(a)''.
            (26)(A) The second sentence of section 7518(g)(6)(A) of 
        such Code is amended--
                    (i) by striking ``during a taxable year to which 
                section 1(h) or 1201(a) applies'', and
                    (ii) by striking ``28 percent (34 percent'' and 
                inserting ``19.8 percent (17.5 percent''.
            (B) The second sentence of section 607(h)(6)(A) of the 
        Merchant Marine Act, 1936 is amended--
                    (i) by striking ``during a taxable year to which 
                section 1(h) or 1201(a) of such Code applies'', and
                    (ii) by striking ``28 percent (34 percent'' and 
                inserting ``19.8 percent (17.5 percent''.
    (d) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years ending after the date of the enactment of this 
        Act.
            (2) Transitional rule.--The amendments made by subsection 
        (c) (other than paragraph (3)) shall not apply to gains and 
        losses properly taken into account for the portion of the 
        taxable year before February 1, 1994.
            (3) Contributions.--The amendment made by subsection (c)(3) 
        shall apply only to contributions on or after February 1, 1994.
            (4) Withholding.--The amendment made by subsection (c)(23) 
        shall apply only to amounts paid after the date of the 
        enactment of this Act.

SEC. 3. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF DETERMINING GAIN OR 
              LOSS.

    (a) In General.--Part II of subchapter O of chapter 1 of the 
Internal Revenue Code of 1986 (relating to basis rules of general 
application) is amended by inserting after section 1021 the following 
new section:

``SEC. 1022. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF DETERMINING 
              GAIN OR LOSS.

    ``(a) General Rule.--
            ``(1) Indexed basis substituted for adjusted basis.--Except 
        as otherwise provided in this subsection, if an indexed asset 
        which has been held for more than 1 year is sold or otherwise 
        disposed of, for purposes of this title the indexed basis of 
        the asset shall be substituted for its adjusted basis.
            ``(2) Exception for depreciation, etc.--The deduction for 
        depreciation, depletion, and amortization shall be determined 
        without regard to the application of paragraph (1) to the 
        taxpayer or any other person.
    ``(b) Indexed Asset.--
            ``(1) In general.--For purposes of this section, the term 
        `indexed asset' means--
                    ``(A) stock in a corporation, and
                    ``(B) tangible property (or any interest therein),
        which is a capital asset or property used in the trade or 
        business (as defined in section 1231(b)).
            ``(2) Certain property excluded.--For purposes of this 
        section, the term `indexed asset' does not include--
                    ``(A) Creditor's interest.--Any interest in 
                property which is in the nature of a creditor's 
                interest.
                    ``(B) Options.--Any option or other right to 
                acquire an interest in property.
                    ``(C) Net lease property.--In the case of a lessor, 
                net lease property (within the meaning of subsection 
                (i)(3)).
                    ``(D) Certain preferred stock.--Stock which is 
                fixed and preferred as to dividends and does not 
                participate in corporate growth to any significant 
                extent.
                    ``(E) Stock in foreign corporations.--Stock in a 
                foreign corporation.
                    ``(F) Stock in s corporations.--Stock in an S 
                corporation.
            ``(3) Exception for stock in foreign corporation which is 
        regularly traded on national or regional exchange.--Paragraph 
        (2)(E) shall not apply to stock in a foreign corporation the 
        stock of which is listed on the New York Stock Exchange, the 
        American Stock Exchange, the national market system operated by 
        the National Association of Securities Dealers, or any domestic 
        regional exchange for which quotations are published on a 
        regular basis other than--
                    ``(A) stock of a foreign investment company (within 
                the meaning of section 1246(b)),
                    ``(B) stock in a passive foreign investment company 
                (as defined in section 1296), and
                    ``(C) stock in a foreign corporation held by a 
                United States person who meets the requirements of 
                section 1248(a)(2).
    ``(c) Indexed Basis.--For purposes of this section:
            ``(1) General rule.--Except as provided in paragraph (2), 
        the indexed basis for any asset is--
                    ``(A) the adjusted basis of the asset, multiplied 
                by
                    ``(B) the applicable inflation ratio.
            ``(2) Applicable inflation ratio.--The applicable inflation 
        ratio for any asset is the percentage arrived at by dividing--
                    ``(A) the gross national product deflator the 
                calendar quarter in which the disposition takes place, 
                by
                    ``(B) the gross national product deflator for the 
                calendar quarter in which the asset was acquired by the 
                taxpayer (or, if later, the calendar quarter ending on 
                December 31, 1994).
        The applicable inflation ratio shall not be taken into account 
        unless it is greater than 1. The applicable inflation ratio for 
        any asset shall be rounded to the nearest one-tenth of 1 
        percent.
            ``(3) Gross national product deflator.--The gross national 
        product deflator for any calendar quarter is the implicit price 
        deflator for the gross national product for such quarter (as 
        shown in the first revision thereof).
    ``(d) Short Sales.--
            ``(1) In general.--In the case of a short sale of an 
        indexed asset with a short sale period in excess of 1 year, for 
        purposes of this title, the amount realized shall be an amount 
        equal to the amount realized (determined without regard to this 
        paragraph) multiplied by the applicable inflation ratio. In 
        applying subsection (c)(3) for purposes of the preceding 
        sentence, the date on which the property is sold short shall be 
        treated as the date on which the holding period for the asset 
        begins and the closing date for the sale shall be treated as 
        the date of disposition.
            ``(2) Short sale of substantially identical property.--If 
        the taxpayer or the taxpayer's spouse sells short property 
        substantially identical to an asset held by the taxpayer, the 
        asset held by the taxpayer and the substantially identical 
        property shall not be treated as indexed assets for the short 
        sale period.
            ``(3) Short sale period.--For purposes of this subsection, 
        the short sale period begins on the day after property is sold 
        and ends on the closing date for the sale.
    ``(e) Treatment of Regulated Investment Companies and Real Estate 
Investment Trusts.--
            ``(1) Adjustments at entity level.--
                    ``(A) In general.--Except as otherwise provided in 
                this paragraph, the adjustment under subsection (a) 
                shall be allowed to any qualified investment entity 
                (including for purposes of determining the earnings and 
                profits of such entity).
                    ``(B) Exception for qualification purposes.--This 
                section shall not apply for purposes of sections 851(b) 
                and 856(c).
            ``(2) Adjustments to interests held in entity.--
                    ``(A) In general.--Stock in a qualified investment 
                entity shall be an indexed asset for any calendar month 
                in the same ratio as the fair market value of the 
                assets held by such entity at the close of such month 
                which are indexed assets bears to the fair market value 
                of all assets of such entity at the close of such 
                month.
                    ``(B) Ratio of 90 percent or more.--If the ratio 
                for any calendar month determined under subparagraph 
                (A) would (but for this subparagraph) be 90 percent or 
                more, such ratio for such month shall be 100 percent.
                    ``(C) Ratio of 10 percent or less.--If the ratio 
                for any calendar month determined under subparagraph 
                (A) would (but for this subparagraph) be 10 percent or 
                less, such ratio for such month shall be zero.
                    ``(D) Valuation of assets in case of real estate 
                investment trusts.--Nothing in this paragraph shall 
                require a real estate investment trust to value its 
                assets more frequently than once each 36 months (except 
                where such trust ceases to exist). The ratio under 
                subparagraph (A) for any calendar month for which there 
                is no valuation shall be the trustee's good faith 
                judgment as to such valuation.
            ``(3) Qualified investment entity.--For purposes of this 
        subsection, the term `qualified investment entity' means--
                    ``(A) a regulated investment company (within the 
                meaning of section 851), and
                    ``(B) a real estate investment trust (within the 
                meaning of section 856).
    ``(f) Other Pass-Thru Entities.--
            ``(1) Partnerships.--
                    ``(A) In general.--In the case of a partnership, 
                the adjustment made under subsection (a) at the 
                partnership level shall be passed through to the 
                partners.
                    ``(B) Special rule in the case of section 754 
                elections.--In the case of a transfer of an interest in 
                a partnership with respect to which the election 
                provided in section 754 is in effect--
                            ``(i) the adjustment under section 
                        743(b)(1) shall, with respect to the transferor 
                        partner, be treated as a sale of the 
                        partnership assets for purposes of applying 
                        this section, and
                            ``(ii) with respect to the transferee 
                        partner, the partnership's holding period for 
                        purposes of this section in such assets shall 
                        be treated as beginning on the date of such 
                        adjustment.
            ``(2) S corporations.--In the case of an S corporation, the 
        adjustment made under subsection (a) at the corporate level 
        shall be passed through to the shareholders.
            ``(3) Common trust funds.--In the case of a common trust 
        fund, the adjustment made under subsection (a) at the trust 
        level shall be passed through to the participants.
    ``(g) Dispositions Between Related Persons.--
            ``(1) In general.--This section shall not apply to any sale 
        or other disposition of property between related persons except 
        to the extent that the basis of such property in the hands of 
        the transferee is a substituted basis.
            ``(2) Related persons defined.--For purposes of this 
        section, the term `related persons' means--
                    ``(A) persons bearing a relationship set forth in 
                section 267(b), and
                    ``(B) persons treated as single employer under 
                subsection (b) or (c) of section 414.
    ``(h) Transfers To Increase Indexing Adjustment.--If any person 
transfers cash, debt, or any other property to another person and the 
principal purpose of such transfer is to secure or increase an 
adjustment under subsection (a), the Secretary may disallow part or all 
of such adjustment or increase.
    ``(i) Special Rules.--For purposes of this section:
            ``(1) Treatment as separate asset.--In the case of any 
        asset, the following shall be treated as a separate asset:
                    ``(A) A substantial improvement to property.
                    ``(B) In the case of stock of a corporation, a 
                substantial contribution to capital.
                    ``(C) Any other portion of an asset to the extent 
                that separate treatment of such portion is appropriate 
                to carry out the purposes of this section.
            ``(2) Assets which are not indexed assets throughout 
        holding period.--The applicable inflation ratio shall be 
        appropriately reduced for periods during which the asset was 
        not an indexed asset.
            ``(3) Net lease property defined.--The term `net lease 
        property' means leased property where--
                    ``(A) the term of the lease (taking into account 
                options to renew) was 50 percent or more of the useful 
                life of the property, and
                    ``(B) for the period of the lease, the sum of the 
                deductions with respect to such property which are 
                allowable to the lessor solely by reason of section 162 
                (other than rents and reimbursed amounts with respect 
                to such property) is 15 percent or less of the rental 
                income produced by such property.
            ``(4) Treatment of certain distributions.--A distribution 
        with respect to stock in a corporation which is not a dividend 
        shall be treated as a disposition.
            ``(5) Section cannot increase ordinary loss.--To the extent 
        that (but for this paragraph) this section would create or 
        increase a net ordinary loss to which section 1231(a)(2) 
        applies or an ordinary loss to which any other provision of 
        this title applies, such provision shall not apply. The 
        taxpayer shall be treated as having a long-term capital loss in 
        an amount equal to the amount of the ordinary loss to which the 
        preceding sentence applies.
            ``(6) Acquisition date where there has been prior 
        application of subsection (a)(1) with respect to the 
        taxpayer.--If there has been a prior application of subsection 
        (a)(1) to an asset while such asset was held by the taxpayer, 
        the date of acquisition of such asset by the taxpayer shall be 
        treated as not earlier than the date of the most recent such 
        prior application.
            ``(7) Collapsible corporations.--The application of section 
        341(a) (relating to collapsible corporations) shall be 
        determined without regard to this section.
    ``(j) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''
    (b) Clerical Amendment.--The table of sections for part II of 
subchapter O of chapter 1 of such Code is amended by inserting after 
the item relating to section 1021 the following new item:

                              ``Sec. 1022. Indexing of certain assets 
                                        for purposes of determining 
                                        gain or loss.''
    (c) Adjustment To Apply for Purposes of Determining Earnings and 
Profits.--Subsection (f) of section 312 of such Code (relating to 
effect on earnings and profits of gain or loss and of receipt of tax-
free distributions) is amended by adding at the end thereof the 
following new paragraph:
            ``(3) Effect on earnings and profits of indexed basis.--

                                For substitution of indexed basis for 
adjusted basis in the case of the disposition of certain assets, see 
section 1022(a)(1).''
    (d) Effective Date.--The amendments made by this section shall 
apply to dispositions after December 31, 1994, in taxable years ending 
after such date.

SEC. 4. CAPITAL LOSS DEDUCTION ALLOWED WITH RESPECT TO SALE OR EXCHANGE 
              OF PRINCIPAL RESIDENCE.

    (a) In General.--Subsection (c) of section 165 of the Internal 
Revenue Code of 1986 (relating to limitation on losses of individuals) 
is amended by striking ``and'' at the end of paragraph (2), by striking 
the period at the end of paragraph (3) and inserting ``; and'', and by 
adding at the end the following new paragraph:
            ``(4) losses arising from the sale or exchange of the 
        principal residence (within the meaning of section 1034) of the 
        taxpayer.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to sales and exchanges on or after February 1, 1994, in taxable 
years ending after such date.

                                 <all>

HR 3739 IH----2