[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4269 Introduced in House (IH)]

103d CONGRESS
  2d Session
                                H. R. 4269

To amend the Internal Revenue Code of 1986 to reduce the tax on capital 
             gains of individuals, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             April 20, 1994

Mr. Smith of Texas 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 reduce the tax on capital 
             gains of individuals, and for other purposes.

    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 ``Economic Investment and Savings 
Incentive Act''.

SEC. 2. REDUCTION IN CAPITAL GAINS TAX FOR INDIVIDUALS.

    (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 by adding at the end thereof the following new section:

``SEC. 1203. DEDUCTION FOR CAPITAL GAINS.

    ``(a) Allowance of Deduction.--If, for any taxable year, a taxpayer 
other than a corporation has a net capital gain, there shall be allowed 
as a deduction from gross income for such taxable year an amount equal 
to the sum of--
            ``(1) 60 percent of the 3-year capital gain,
            ``(2) 40 percent of the 2-year capital gain, and
            ``(3) 20 percent of the 1-year capital gain.
    ``(b) Transitional Rules.--
            ``(1) Years beginning in 1994.--In the case of a taxable 
        year beginning in 1994, the deduction under subsection (a) 
        shall be 60 percent of the net capital gain.
            ``(2) Years beginning in 1995.--In the case of a taxable 
        year beginning in 1995, the deduction under subsection (a) 
        shall be the sum of--
                    ``(A) 60 percent of the 3-year capital gain and the 
                2-year capital gain, and
                    ``(B) 40 percent of the 1-year capital gain.
    ``(c) Definitions.--For purposes of this section:
            ``(1) 3-year capital gain.--The term `3-year capital gain' 
        means the lesser of--
                    ``(A) the net capital gain for the taxable year, or
                    ``(B) the long-term capital gain determined by only 
                taking into account gain from the sale or exchange of 
                assets held for more than 3 years.
            ``(2) 2-year capital gain.--The term `2-year capital gain' 
        means the lesser of--
                    ``(A) the net capital gain for the taxable year 
                reduced by the 3-year capital gain, or
                    ``(B) the long-term capital gain determined by only 
                taking into account gain from the sale or exchange of 
                assets held for more than 2 years but not more than 3 
                years.
            ``(3) 1-year capital gain.--The term `1-year capital gain' 
        means the net capital gains for the taxable year reduced by the 
        3-year capital gain and the 2-year capital gain.
            ``(4) Recapture of net ordinary loss under section 1231.--
        For purposes of this subsection, if any amount is treated as 
        ordinary income under section 1231(c) for any taxable year--
                    ``(A) the amount so treated shall be allocated 
                proportionately among the section 1231 gains (as 
                defined in section 1231(a)) for such taxable year, and
                    ``(B) the amount so allocated to any such gain 
                shall reduce the amount of such gain.
    ``(c) Estate and Trusts.--In the case of an estate or trust, the 
deduction under this section 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 
includable by the income beneficiaries as gain derived from the sale or 
exchange of capital assets.''
    (b) Treatment of Collectibles.--
            (1) In general.--Section 1222 of such Code is amended by 
        inserting after paragraph (11) the following new paragraph:
            ``(12) Special rule for collectibles.--
                    ``(A) In general.--Any gain or loss from the sale 
                or exchange of a collectible shall be treated as a 
                short-term capital gain or loss (as the case may be), 
                without regard to the period such asset was held. The 
                preceding sentence shall apply only to the extent the 
                gain or loss is taken into account in computing taxable 
                income.
                    ``(B) Treatment of certain sales of interest in 
                partnership, etc.--For purposes of subparagraph (A), 
                any gain from the sale or exchange of an interest in a 
                partnership, S corporation, or trust which is 
                attributable to unrealized appreciation in the value of 
                collectibles held by such entity shall be treated as 
                gain from the sale or exchange of a collectible. Rules 
                similar to the rules of section 751(f) shall apply for 
                purposes of the preceding sentence.
                    ``(C) Collectible.--For purposes of this paragraph, 
                the term `collectible' means any capital asset which is 
                a collectible (as defined in section 408(m) without 
                regard to paragraph (3) thereof).''
            (2) Charitable deduction not affected.--
                    (A) Paragraph (1) of section 170(e) is amended by 
                adding at the end thereof the following new sentence: 
                ``For purposes of this paragraph, section 1222 shall be 
                applied without regard to paragraph (12) thereof 
                (relating to special rule for collectibles).''
                    (B) Clause (iv) of section 170(b)(1)(C) is amended 
                by inserting before the period at the end thereof the 
                following: ``and section 1222 shall be applied without 
                regard to paragraph (12) thereof (relating to special 
                rule for collectibles)''.
    (c) Minimum Tax.--Section 56(b) of such Code is amended by adding 
at the end thereof the following new paragraph:
            ``(4) Capital gains deduction allowed.--The deduction under 
        section 1203 shall be allowed.''
    (d) Conforming Amendments.--
            (1) Subsection (h) of section 1 of such Code is hereby 
        repealed.
            (2) Section 62(a) of such Code is amended by inserting 
        after paragraph (15) the following new paragraph:
            ``(16) Capital gains deduction.--The deduction allowed by 
        section 1203.''
            (3) Subparagraph (B) of section 163(d)(4) is amended by 
        striking clauses (i), (ii), and (iii) and inserting the 
        following:
                            ``(i) gross income from property held for 
                        investment (other than any gain taken into 
                        account under clause (ii)), and
                            ``(ii) any net gain attributable to the 
                        disposition of property held for investment 
                        reduced by any deduction allowable under 
                        section 1203 attributable to gain from such 
                        property.''
            (4)(A) Section 170(e)(1)(B) of such Code is amended by 
        inserting ``(or, in the case of a taxpayer other than a 
        corporation, the nondeductible percentage of the amount of 
        gain)'' after ``the amount of gain''.
            (B) Section 170(e)(1) of such Code is amended by adding at 
        the end thereof the following new sentence: ``For purposes of 
        subparagraph (B), the term `nondeductible percentage' means 100 
        percent minus the applicable percentage with respect to such 
        property under section 1203(c).''
            (5) Subparagraph (B) of section 172(d)(2) of such Code is 
        amended by inserting ``, and the deduction provided by section 
        1203,'' after ``section 1202''.
            (6)(A) Section 220 of such Code (relating to cross 
        reference) is amended to read as follows:

``SEC. 220. CROSS REFERENCES.

                                ``(1) For deduction for net capital 
gain, see section 1203.  
                                ``(2) For deductions in respect of a 
decedent, see section 691.''
            (B) The table of sections for part VII of subchapter B of 
        chapter 1 of such Code is amended by striking ``reference'' in 
        the item relating to section 220 and inserting ``references''.
            (7) 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 exclusion 
        allowable to the estate or trust under section 1202 and for any 
        deduction allowable to the estate or trust under section 1203. 
        In the case of a trust, the deduction allowed by this 
        subsection shall be subject to section 681 (relating to 
        unrelated business income).''
            (8) Paragraph (3) of section 643(a) of such Code is amended 
        by inserting ``, and the deduction under section 1203,'' after 
        ``section 1202''.
            (9) Paragraph (6)(C) of section 643(a) of such Code is 
        amended--
                    (A) by inserting ``(i)'' before ``there'', and
                    (B) by inserting ``, and (ii) the deduction under 
                section 1203 (relating to deduction for excess of 
                capital gains over capital losses) shall not be taken 
                into account'' before the period at the end thereof.
            (10) Paragraph (4) of section 691(c) of such Code is 
        amended--
                    (A) by striking ``1(h),'' , and
                    (B) by inserting ``1203,'' after ``1202,''.
            (11) The second sentence of paragraph (2) of section 871(a) 
        of such Code is amended by striking ``section 1202'' and 
        inserting ``sections 1202 and 1203''.
            (12)(A) Subparagraph (B) of section 904(b)(2) of such Code 
        is amended by striking out so much of such subparagraph as 
        precedes clause (i) and inserting the following:
                    ``(B) Special rules where corporate capital rate 
                gain differential.--In the case  of  a  corporation,  
                for  any  taxable  year for which there is a capital 
                gain rate differential--''.
            (B) Subparagraphs (D) and (E) of section 904(b)(3) of such 
        Code are amended to read as follows:
                    ``(D) Capital gain rate differential.--There is a 
                capital gain rate differential for any taxable year if 
                any rate of tax imposed by section 11, 511, or 831(a) 
                or (b) (whichever applies) exceeds the alternative rate 
                of tax under section 1201(a) (determined without regard 
                to the last sentence of section 11(b)(1)).
                    ``(E) Rate differential portion.--The rate 
                differential portion of foreign source net capital 
                gain, net capital, or the excess of net capital gain 
                from sources within the United States over net capital 
                gain, as the case may be, is the same proportion of 
                such amount as--
                            ``(i) the excess of the highest rate of tax 
                        specified in section 11(b)(1) over the 
                        alternative rate of tax under section 1201(a), 
                        bears to
                            ``(ii) the highest rate of tax specified in 
                        section 11(b)(1).''
            (13) Section 1402(i)(1) is amended to read as follows:
            ``(1) In general.--In determining the net earnings from 
        self-employment of any options dealer or commodities dealer--
                    ``(A) notwithstanding subsection (a)(3)(A), there 
                shall not be excluded any gain or loss (in the normal 
                course of the taxpayer's activity of dealing in or 
                trading section 1256 contracts) from section 1256 
                contracts or property related to such contracts, and
                    ``(B) the deduction provided by section 1203 shall 
                not apply.''
    (e) Clerical Amendment.--The table of sections for part I of 
subchapter P of chapter 1 is amended by adding at the end thereof the 
following new item:

                              ``Sec. 1203. Deduction for capital 
                                        gains.''
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1993.

SEC. 3. INDEXING OF CERTAIN ASSETS ACQUIRED ON OR AFTER JANUARY 1, 
              1997, FOR PURPOSES OF DETERMINING GAIN.

    (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 ACQUIRED ON OR AFTER JANUARY 1, 
              1997, FOR PURPOSES OF DETERMINING GAIN.

    ``(a) General Rule.--
            ``(1) Indexed basis substituted for adjusted basis.--Solely 
        for purposes of determining gain on the sale or other 
        disposition by a taxpayer (other than a corporation) of an 
        indexed asset which has been held for more than 1 year, the 
        indexed basis of the asset shall be substituted for its 
        adjusted basis.
            ``(2) Special rule for recapture gain.--
                    ``(A) In general.--Paragraph (1) shall not apply 
                for purposes of determining the amount of recapture 
                gain on the sale or other disposition of an indexed 
                asset, but the amount of any such recapture gain shall 
                increase the adjusted basis of the asset for purposes 
                of applying paragraph (1) to determine the amount of 
                other gain on such sale or other disposition.
                    ``(B) Recapture gain.--For purposes of subparagraph 
                (A), the term `recapture gain' means any gain treated 
                as ordinary income under section 1245, 1250, or 1254 
                and any gain which would have been treated as ordinary 
                income under section 1250 if such section applied to 
                all depreciation adjustments instead of only additional 
                depreciation.
    ``(b) Indexed Asset.--
            ``(1) In general.--For purposes of this section, the term 
        `indexed asset' means--
                    ``(A) any stock in a corporation, and
                    ``(B) any 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)) and the holding period 
        of which begins on or after January 1, 1997.
            ``(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) Collectibles.--Any collectible (as defined in 
                section 408(m)(2) without regard to section 408(m)(3)).
                    ``(C) Options.--Any option or other right to 
                acquire an interest in property.
                    ``(D) Net lease property.--In the case of a lessor, 
                net lease property (within the meaning of subsection 
                (i)(3)).
                    ``(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, or any domestic regional exchange for 
        which quotations are published on a regular basis or is 
        authorized for trading on the national market system operated 
        by the National Association of Securities Dealers other than--
                    ``(A) a passive foreign corporation (as defined in 
                section 1296), and
                    ``(B) 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) Indexed basis.--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 shall be determined by dividing--
                    ``(A) the CPI for the calendar year preceding the 
                calendar year in which the disposition takes place, by
                    ``(B) the CPI for the calendar year preceding the 
                calendar year in which the taxpayer's holding period 
                for such asset began.
        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-thousandth.
            ``(3) Conventions.--For purposes of paragraph (2), if any 
        asset is disposed of during any calendar year--
                    ``(A) such disposition shall be treated as 
                occurring on the last day of such calendar year, and
                    ``(B) the taxpayer's holding period for such asset 
                shall be treated as beginning in the same calendar year 
                as would be determined for an asset actually disposed 
                of on such last day with a holding period of the same 
                length as the actual holding period of the asset 
                involved.
            ``(4) CPI.--For purposes of this subsection, the CPI for 
        any calendar year shall be determined under section 1(f)(4).
    ``(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)(2) 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 corporate shareholders.--Under 
                regulations--
                            ``(i) in the case of a distribution by a 
                        qualified investment entity (directly or 
                        indirectly) to a corporation--
                                    ``(I) the determination of whether 
                                such distribution is a dividend shall 
                                be made without regard to this section, 
                                and
                                    ``(II) the amount treated as gain 
                                by reason of the receipt of any capital 
                                gain dividend shall be increased by the 
                                percentage by which the entity's net 
                                capital gain for the taxable year 
                                determined without regard to this 
                                section exceeds the entity's net 
                                capital gain for such year determined 
                                with regard to this section, and
                            ``(ii) there shall be other appropriate 
                        adjustments (including deemed distributions) so 
                        as to ensure that the benefits of this section 
                        are not allowed (directly or indirectly) to 
                        corporate shareholders of qualified investment 
                        entities.
                For purposes of the preceding sentence, any amount 
                includible in gross income under section 852(b)(3)(D) 
                shall be treated as a capital gain dividend and an S 
                corporation shall not be treated as a corporation.
                    ``(C) Exception for qualification purposes.--This 
                section shall not apply for purposes of sections 851(b) 
                and 856(c).
                    ``(D) Exception for certain taxes imposed at entity 
                level.--
                            ``(i) Tax on failure to distribute entire 
                        gain.--If any amount is subject to tax under 
                        section 852(b)(3)(A) for any taxable year, the 
                        amount on which tax is imposed under such 
                        section shall be increased by the percentage 
                        determined under subparagraph (B)(i)(II). A 
                        similar rule shall apply in the case of any 
                        amount subject to tax under paragraph (2) or 
                        (3) of section 857(b) to the extent 
                        attributable to the excess of the net capital 
                        gain over the deduction for dividends paid 
                        determined with reference to capital gain 
                        dividends only. The first sentence of this 
                        clause shall not apply to so much of the amount 
                        subject to tax under section 852(b)(3)(A) as is 
                        designated by the company under section 
                        852(b)(3)(D).
                            ``(ii) Other taxes.--This section shall not 
                        apply for purposes of determining the amount of 
                        any tax imposed by paragraph (4), (5), or (6) 
                        of section 857(b).
            ``(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 (determined without regard to 
                the requirement that the holding period begin on or 
                after January 1, 1997) 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 (but only for purposes of determining the 
                income of partners who are not corporations).
                    ``(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. This section shall 
        not apply for purposes of determining the amount of any tax 
        imposed by section 1374 or 1375.
            ``(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 (but only for 
        purposes of determining the income of participants who are not 
        corporations).
    ``(g) Dispositions Between Related Persons.--This section shall not 
apply to any sale or other disposition of property between related 
persons (within the meaning of section 465(b)(3)(C)) if such property, 
in the hands of the transferee, is of a character subject to the 
allowance for depreciation provided in section 167.
    ``(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.
    ``(j) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''
    (b) Gains and Losses From Indexed Assets Not Taken Into Account 
Under Limitation on Investment Interest.--Subparagraph (B) of section 
163(d)(4) of such Code (defining investment income) is amended by 
adding at the end thereof the following new sentences:
        ``Gain from the sale or other disposition of an indexed asset 
        (as defined in section 1022) held for more than 1 year shall 
        not be taken into account for purposes of the preceding 
        sentence. The preceding sentence shall not apply to gain from 
        the sale or other disposition of any such asset if the taxpayer 
        elects to waive the benefits of section 1022 in determining the 
        amount of such gain.''
    (c) 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 
                                        acquired on or after January 1, 
                                        1997, for purposes of 
                                        determining gain.''
    (d) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to the disposition of any property the holding period of 
        which begins on or after January 1, 1997.
            (2) Certain transactions between related persons.--The 
        amendments made by this section shall not apply to the 
        disposition of any property acquired on or after January 1, 
        1997, from a related person (as defined in section 465(b)(3)(C) 
        of the Internal Revenue Code of 1986) if--
                    (A) such property was so acquired for a price less 
                than the property's fair market value, and
                    (B) the amendments made by this section did not 
                apply to such property in the hands of such related 
                person.
    (e) Election To Recognize Gain on Readily Tradable Securities Held 
on January 1, 1997.--
            (1) In general.--If a taxpayer other than a corporation 
        holds any readily tradable security on January 1, 1997, the 
        taxpayer may elect to treat such security as having been sold 
        on the last business day before such date for an amount equal 
        to its closing market price on such last business day (and as 
        having been reacquired on such last business day for an amount 
        equal to such closing market price).
            (2) Treatment of gain or loss.--
                    (A) Any gain resulting from an election under 
                paragraph (1) shall be treated as received or accrued 
                on the last business day referred to in paragraph (1).
                    (B) Any loss resulting from an election under 
                paragraph (1) shall not be allowed for any taxable 
                year.
            (3) Election.--An election under paragraph (1) shall be 
        made in such manner as the Secretary may prescribe and shall 
        specify the readily tradable securities for which such election 
        is made. Such an election, once made with respect to any 
        readily tradable security, shall be irrevocable.
            (4) Readily tradable security.--For purposes of this 
        subsection, the term ``readily tradable security'' means any 
        stock or other security which, as of January 1, 1997, is 
        readily tradable on an established securities market or 
        otherwise.

SEC. 4. MIDDLE INCOME SAVINGS INCENTIVES.

    (a) General Rule.--Part III of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to items specifically excluded 
from gross income) is amended by inserting after section 115 the 
following new section:

``SEC. 116. MIDDLE INCOME EXCLUSION FOR INVESTMENT INCOME.

    ``(a) General Rule.--In the case of an eligible individual, gross 
income does not include qualified investment income.
    ``(b) Limitation.--
            ``(1) In general.--The amount excluded from gross income 
        under subsection (a) for any taxable year shall not exceed $500 
        ($1,000 in the case of a joint return).
            ``(2) Phaseout.--If the modified adjusted gross income of 
        the individuals exceeds $40,000 ($20,000 in the case of a 
        separate return by a married individual), the amount determined 
        under paragraph (1) shall be reduced by an amount equal to 10 
        percent of such excess.
    ``(c) Definitions.--For purposes of this section:
            ``(1) Qualified individual.--The term `qualified 
        individual' means any individual if--
                    ``(A) such individual's modified adjusted gross 
                income for the taxable year does not exceed $50,000 
                ($25,000 in the case of a separate return by a married 
                individual), and
                    ``(B) at least 50 percent of such individuals 
                modified adjusted gross income for the taxable year is 
                attributable to earned income (as defined in section 
                911(d)(2)).
        For purposes of this section, marital status shall be 
        determined under section 7703.
            ``(2) Qualified investment income.--The term `qualified 
        investment income' means gross income from property held for 
        investment except that such term shall not include--
                    ``(A) any gain on the sale or other disposition of 
                property held for investment, and
                    ``(B) any income taken into account under section 
                469 in computing income or loss from a passive 
                activity.
            ``(3) Modified adjusted gross income.--The term `modified 
        adjusted gross income' means adjusted gross income determined--
                    ``(A) without regard to this section and sections 
                135, 911, 931, and 933, and
                    ``(B) after the application of sections 86, 469, 
                and 219.
    ``(d) Special Rule.--This section shall not apply in the case of an 
estate or trust.''
    (b) Minimum Tax.--Subsection (b) of section 56 of such Code is 
amended by adding at the end thereof the following new paragraph:
            ``(4) Middle exclusion allowed.--The exclusion provided by 
        section 116 shall be allowed.''
    (c) Conforming Amendments.--
            (1) Subparagraph (A) of section 86(b)(2) of such Code is 
        amended by inserting ``116,'' before ``135''.
            (2) Subparagraph (A) of section 135(c)(4) of such Code is 
        amended by inserting ``116,'' before ``911''.
            (3) Clause (ii) of section 469(i)(3)(E) if such Code is 
        amended by striking ``section 135'' and inserting ``sections 
        116 and 135''.
            (4) Clause (ii) of section 219(g)(3)(A) of such Code is 
        amended by striking ``section 135'' and inserting ``sections 
        116, 135,''.
    (d) Clerical Amendment.--The table of sections for part III of 
subchapter B of chapter 1 of such Code is amended by inserting after 
the item relating to section 115 the following new item:

                              ``Sec. 116. Middle income exclusion for 
                                        investment income.''
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1993.

                                 <all>

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