[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[S. 1829 Introduced in Senate (IS)]

103d CONGRESS
  2d Session
                                S. 1829

To amend the Internal Revenue Code of 1986 to provide tax incentives to 
           encourage small investors, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

             February 4 (legislative day, January 25), 1994

   Mr. Hatch introduced the following bill; which was read twice and 
                  referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
To amend the Internal Revenue Code of 1986 to provide tax incentives to 
           encourage small investors, 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; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Small Investors 
Tax Relief Act of 1994''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. EXEMPTION OF CERTAIN INTEREST AND DIVIDEND INCOME FROM TAX.

    (a) In General.--Part III of subchapter B of chapter 1 (relating to 
amounts specifically excluded from gross income) is amended by 
inserting after section 115 the following new section:

``SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTEREST RECEIVED BY 
              INDIVIDUALS.

    ``(a) Exclusion From Gross Income.--Gross income does not include 
the sum of the amounts received during the taxable year by an 
individual as--
            ``(1) dividends from domestic corporations, or
            ``(2) interest.
    ``(b) Limitations.--
            ``(1) Maximum amount.--The aggregate amount excluded under 
        subsection (a) for any taxable year shall not exceed $2,000 
        ($4,000 in the case of a joint return).
            ``(2) Certain dividends excluded.--Subsection (a)(1) shall 
        not apply to any dividend from a corporation which, for the 
        taxable year of the corporation in which the distribution is 
        made, or for the next preceding taxable year of the 
        corporation, is a corporation exempt from tax under section 501 
        (relating to certain charitable, etc., organization) or section 
        521 (relating to farmers' cooperative associations).
            ``(3) Indexing for inflation.--In the case of any taxable 
        year beginning after 1995--
                    ``(A) the $2,000 amount under paragraph (1) shall 
                be increased by an amount equal to--
                            ``(i) $2,000, multiplied by
                            ``(ii) the cost-of-living adjustment under 
                        section 1(f)(3) for the calendar year in which 
                        the taxable year begins, except that 
                        subparagraph (B) thereof shall be applied by 
                        substituting `1994' for `1992', and
                    ``(B) the $4,000 amount under paragraph (1) shall 
                be increased to an amount equal to twice the amount 
                determined under subparagraph (A) for the taxable year.
        If the dollar amount determined after the increase under 
        subparagraph (A) is not a multiple of $100, such dollar amount 
        shall be rounded to the next lowest multiple of $100.
    ``(c) Special Rules.--For purposes of this section--
            ``(1) Distributions from regulated investment companies and 
        real estate investment trusts.--Subsection (a) shall apply with 
        respect to distributions by--
                    ``(A) regulated investment companies to the extent 
                provided in section 854(c), and
                    ``(B) real estate investment trusts to the extent 
                provided in section 857(c).
            ``(2) Distributions by a trust.--For purposes of subsection 
        (a), the amount of dividends and interest properly allocable to 
        a beneficiary under section 652 or 662 shall be deemed to have 
        been received by the beneficiary ratably on the same date that 
        the dividends and interest were received by the estate or 
        trust.
            ``(3) Certain nonresident aliens ineligible for 
        exclusion.--In the case of a nonresident alien individual, 
        subsection (a) shall apply only--
                    ``(A) in determining the tax imposed for the 
                taxable year pursuant to section 871(b)(1) and only in 
                respect of dividends and interest which are effectively 
                connected with the conduct of a trade or business 
                within the United States, or
                    ``(B) in determining the tax imposed for the 
                taxable year pursuant to section 877(b).''
    (b) Clerical and Conforming Amendments.--
            (1) The table of sections for part III of subchapter B of 
        chapter 1 is amended by inserting after the item relating to 
        section 115 the following new item:

                              ``Sec. 116. Partial exclusion of 
                                        dividends and interest received 
                                        by individuals.''
            (2) Paragraph (2) of section 265(a) is amended by inserting 
        before the period at the end thereof the following: ``, or to 
        purchase or carry obligations or shares, or to make deposits, 
        to the extent the interest thereon is excludable from gross 
        income under section 116''.
            (3) Subsection (c) of section 584 is amended by adding at 
        the end the following new sentence:
``The proportionate share of each participant in the amount of 
dividends or interest received by the common trust fund and to which 
section 116 applies shall be considered for purposes of such section as 
having been received by such participant.''
            (4) Subsection (a) of section 643 is amended by inserting 
        after paragraph (6) the following new paragraph:
            ``(7) Dividends or interest.--There shall be included the 
        amount of any dividends or interest excluded from gross income 
        pursuant to section 116.''
            (5) Section 854 is amended by adding at the end the 
        following new subsection:
    ``(c) Treatment Under Section 116.--
            ``(1) In general.--For purposes of section 116, in the case 
        of any dividend (other than a dividend described in subsection 
        (a)) received from a regulated investment company which meets 
        the requirements of section 852 for the taxable year in which 
        it paid the dividend--
                    ``(A) the entire amount of such dividend shall be 
                treated as a dividend if the aggregate dividends and 
                interest received by such company during the taxable 
                year equal or exceed 75 percent of its gross income, or
                    ``(B) if subparagraph (A) does not apply, a portion 
                of such dividend shall be treated as a dividend (and a 
                portion of such dividend shall be treated as interest) 
                based on the portion of the company's gross income 
                which consists of aggregate dividends or aggregate 
                interest, as the case may be.
        For purposes of the preceding sentence, gross income and 
        aggregate interest received shall each be reduced by so much of 
        the deduction allowable by section 163 for the taxable year as 
        does not exceed aggregate interest received for the taxable 
        year.
            ``(2) Notice to shareholders.--The amount of any 
        distribution by a regulated investment company which may be 
        taken into account as a dividend for purposes of the exclusion 
        under section 116 shall not exceed the amount so designated by 
        the company in a written notice to its shareholders mailed not 
        later than 45 days after the close of its taxable year.
            ``(3) Definitions.--For purposes of this subsection--
                    ``(A) the term `gross income' does not include gain 
                from the sale or other disposition of stock or 
                securities, and
                    ``(B) the term `aggregate dividends received' 
                includes only dividends received from domestic 
                corporations other than dividends described in section 
                116(b)(2).
        In determining the amount of any dividend for purposes of 
        subparagraph (B), the rules provided in section 116(c)(1) 
        (relating to certain distributions) shall apply.''
            (6) Subsection (c) of section 857 of such Code is amended 
        to read as follows:
    ``(c) Limitations Applicable to Dividends Received From Real Estate 
Investment Trusts.--
            ``(1) In general.--For purposes of section 116 (relating to 
        an exclusion for dividends and interest received by 
        individuals) and section 243 (relating to deductions for 
        dividends received by corporations), a dividend received from a 
        real estate investment trust which meets the requirements of 
        this part shall not be considered as a dividend.
            ``(2) Treatment as interest.--In the case of a dividend 
        (other than a capital gain dividend, as defined in subsection 
        (b)(3)(C)) received from a real estate investment trust which 
        meets the requirements of this part for the taxable year in 
        which it paid the dividend--
                    ``(A) such dividend shall be treated as interest if 
                the aggregate interest received by the real estate 
                investment trust for the taxable year equals or exceeds 
                75 percent of its gross income, or
                    ``(B) if subparagraph (A) does not apply, the 
                portion of such dividend which bears the same ratio to 
                the amount of such dividend as the aggregate interest 
                received bears to gross income shall be treated as 
                interest.
            ``(3) Adjustments to gross income and aggregate interest 
        received.--For purposes of paragraph (2)--
                    ``(A) gross income does not include the net capital 
                gain,
                    ``(B) gross income and aggregate interest received 
                shall each be reduced by so much of the deduction 
                allowable by section 163 for the taxable year (other 
                than for interest on mortgages on real property owned 
                by the real estate investment trust) as does not exceed 
                aggregate interest received by the taxable year, and
                    ``(C) gross income shall be reduced by the sum of 
                the taxes imposed by paragraphs (4), (5), and (6) of 
                section 857(b).
            ``(4) Notice to shareholders.--The amount of any 
        distribution by a real estate investment trust which may be 
        taken into account as interest for purposes of the exclusion 
        under section 116 shall not exceed the amount so designated by 
        the trust in a written notice to its shareholders mailed not 
        later than 45 days after the close of its taxable year.''
    (c) Effective Date.--The amendments made by this section shall 
apply with respect to amounts received after December 31, 1994, in 
taxable years ending after such date.

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

    (a) In General.--Part II of subchapter O of chapter 1 (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 provided in paragraph (2), if an indexed asset which has 
        been held for more than 1 year is sold or otherwise disposed 
        of, then, 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,
                    ``(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)), and
                    ``(C) the principal residence of the taxpayer 
                (within the meaning of section 1034).
            ``(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 
                (h)(1)).
                    ``(D) Certain preferred stock.--Stock which is 
                preferred as to dividends and does not participate in 
                corporate growth to any significant extent.
                    ``(E) Stock in certain corporations.--Stock in--
                            ``(i) an S corporation (within the meaning 
                        of section 1361),
                            ``(ii) a personal holding company (as 
                        defined in section 542), and
                            ``(iii) a foreign corporation.
            ``(3) Exception for stock in foreign corporation which is 
        regularly traded on national or regional exchange.--Clause 
        (iii) of 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 
        other than--
                    ``(A) stock of a foreign investment company (within 
                the meaning of section 1246(b)), 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 is the percentage arrived at 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 asset was acquired by the 
                taxpayer (or, in the case of an asset acquired before 
                1995, the CPI for 1993).
        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) CPI.--The CPI for any calendar year shall be 
        determined under section 1(f)(4).
            ``(4) Secretary to publish tables.--The Secretary shall 
        publish tables specifying the applicable inflation ratio for 
        each calendar year.
    ``(d) 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.--
                    ``(A) In general.--The applicable inflation ratio 
                shall be appropriately reduced for calendar months at 
                any time during which the asset was not an indexed 
                asset.
                    ``(B) Certain short sales.--For purposes of 
                applying subparagraph (A), an asset shall be treated as 
                not an indexed asset for any short sale period during 
                which the taxpayer or the taxpayer's spouse sells short 
                property substantially identical to the asset. For 
                purposes of the preceding sentence, the short sale 
                period begins on the day after the substantially 
                identical property is sold and ends on the closing date 
                for the sale.
            ``(3) Treatment of certain distributions.--A distribution 
        with respect to stock in a corporation which is not a dividend 
        shall be treated as a disposition.
            ``(4) 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.
            ``(5) 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.
            ``(6) Collapsible corporations.--The application of section 
        341(a) (relating to collapsible corporations) shall be 
        determined without regard to this section.
    ``(e) Certain Conduit Entities.--
            ``(1) Regulated investment companies; real estate 
        investment trusts; common trust funds.--
                    ``(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.
                    ``(E) Qualified investment entity.--For purposes of 
                this paragraph, the term `qualified investment entity' 
                means--
                            ``(i) a regulated investment company 
                        (within the meaning of section 851),
                            ``(ii) a real estate investment trust 
                        (within the meaning of section 856), and
                            ``(iii) a common trust fund (within the 
                        meaning of section 584).
            ``(2) Partnerships.--In the case of a partnership, the 
        adjustment made under subsection (a) at the partnership level 
        shall be passed through to the partners.
            ``(3) Subchapter s corporations.--In the case of an 
        electing small business corporation, the adjustment under 
        subsection (a) at the corporate level shall be passed through 
        to the shareholders.
    ``(f) 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.
    ``(g) Transfers To Increase Indexing Adjustment or Depreciation 
Allowance.--If any person transfers cash, debt, or any other property 
to another person and the principal purpose of such transfer is--
            ``(1) to secure or increase an adjustment under subsection 
        (a), or
            ``(2) to increase (by reason of an adjustment under 
        subsection (a)) a deduction for depreciation, depletion, or 
        amortization,
the Secretary may disallow part or all of such adjustment or increase.
    ``(h) Definitions.--For purposes of this section--
            ``(1) Net lease property defined.--The term `net lease 
        property' means leased real 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.
            ``(2) Stock includes interest in common trust fund.--The 
        term `stock in a corporation' includes any interest in a common 
        trust fund (as defined in section 584(a)).
    ``(i) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''
    (b) Adjustment To Apply for Purposes of Determining Earnings and 
Profits.--Subsection (f) of section 312 (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 after 
December 31, 1994, see section 1022(a)(1).''
    (c) Clerical Amendment.--The table of sections for part II of 
subchapter O of such chapter 1 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.''
    (d) Effective Date.--The amendments made by this section shall 
apply to dispositions after December 31, 1994.

SEC. 4. REDUCTION IN CAPITAL GAINS TAX FOR INDIVIDUALS.

    (a) General Rule.--Part I of subchapter P of chapter 1 (relating to 
treatment of capital gains) is amended by adding at the end thereof the 
following new section:

``SEC. 1203. CAPITAL GAINS DEDUCTION FOR INDIVIDUALS.

    ``(a) In General.--In the case of an individual, there shall be 
allowed as a deduction for the taxable year an amount equal to the 
annual capital gains deduction (if any) determined under subsection 
(b).
    ``(b) Annual Capital Gains Deduction.--
            ``(1) In general.--For purposes of subsection (a), the 
        annual capital gains deduction determined under this subsection 
        is the lesser of--
                    ``(A) the net capital gain for the taxable year, or
                    ``(B) $50,000 ($100,000 in the case of a joint 
                return).
            ``(2) Coordination with exclusion for gain from small 
        business stock.--For purposes of paragraph (1)(A), net capital 
        gain shall be determined without regard to any gain from the 
        sale or exchange of qualified small business stock (as defined 
        in section 1202(c)) held for more than 5 years.
            ``(3) Certain individuals not eligible.--This subsection 
        shall not apply to any individual with respect to whom a 
        deduction under section 151 is allowable to another taxpayer 
        for a taxable year beginning in the calendar year in which such 
        individual's taxable year begins.
            ``(4) Annual deduction not available for sales to related 
        persons.--The amount of the net capital gain taken into account 
        under paragraph (1)(A) shall not exceed the amount of the net 
        capital gain determined by not taking into account gains and 
        losses from sales and exchanges to any related person (as 
        defined in section 267(f)).
            ``(5) Indexing for inflation.--In the case of any taxable 
        year beginning after 1995--
                    ``(A) the $50,000 amount under paragraph (1)(B) 
                shall be increased by an amount equal to--
                            ``(i) $50,000, multiplied by
                            ``(ii) the cost-of-living adjustment under 
                        section 1(f)(3) for the calendar year in which 
                        the taxable year begins, except that 
                        subparagraph (B) thereof shall be applied by 
                        substituting `1994' for `1992', and
                    ``(B) the $100,000 amount under paragraph (1)(B) 
                shall be increased to an amount equal to twice the 
                amount determined under subparagraph (A) for the 
                taxable year.
        If the dollar amount determined after the increase under this 
        paragraph is not a multiple of $1,000, such dollar amount shall 
        be rounded to the next lowest multiple of $1,000.
    ``(c) Section Not To Apply to Estates or Trusts.--No deduction 
shall be allowed under this section to an estate or trust.
    ``(d) Special Rules.--
            ``(1) Deduction available only for sales or exchanges after 
        december 31, 1994.--The amount of the net capital gain taken 
        into account under subsection (b)(1)(A) shall not exceed the 
        amount of the net capital gain determined by only taking into 
        account gains and losses from sales and exchanges after 
        December 31, 1994.
            ``(2) Special rule for pass-thru entities.--
                    ``(A) In general.--In applying this section with 
                respect to any pass-thru entity, the determination of 
                when the sale or exchange occurs 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) Conforming Amendments.--
            (1) Subsection (a) of section 62 is amended by inserting 
        after paragraph (15) the following new paragraph:
            ``(16) Capital gains deduction.--The deduction allowed by 
        section 1203.''
            (2) Paragraph (2) of section 172(d) is amended by inserting 
        ``and the deduction provided by section 1203'' after ``1202''.
            (3)(A) Section 220 (relating to cross reference) is amended 
        to read as follows:

``SEC. 220. CROSS REFERENCES.

                                ``(1) For deduction for net capital 
gains in the case of a taxpayer other than a corporation, 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 is amended by striking ``reference'' in the item 
        relating to section 220 and inserting ``references''.
            (4) Paragraph (4) of section 691(c) is amended by inserting 
        ``1203,'' after ``1202,''.
            (5) The second sentence of paragraph (2) of section 871(a) 
        is amended by inserting ``or 1203'' after ``1202''.
    (c) 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. Capital gains deduction for 
                                        individuals.''
    (d) Effective Date.--The amendments made by this section shall 
apply to sales or exchanges after December 31, 1994, in taxable years 
ending after such date.

                                 <all>

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