[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1517 Introduced in House (IH)]







105th CONGRESS
  1st Session
                                H. R. 1517

To amend the Internal Revenue Code of 1986 to reduce the capital gains 
tax on individuals and to index the basis of assets of individuals for 
               purposes of determining gains and losses.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                              May 1, 1997

 Mr. Cooksey 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 capital gains 
tax on individuals and to index the basis of assets of individuals for 
               purposes of determining gains and losses.

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

SECTION 1. REDUCTION IN INDIVIDUAL CAPITAL GAINS RATE.

    (a) In General.--Subsection (h) of section 1 of the Internal 
Revenue Code of 1986 (relating to maximum capital gains rate) is 
amended to read as follows:
    ``(h) Maximum Capital Gains Rate.--
            ``(1) In general.--If a taxpayer has a net capital gain for 
        any taxable year, the tax imposed by this section for such 
        taxable year shall not exceed the sum of--
                    ``(A) a tax computed at the rates and in the same 
                manner as if this subsection had not been enacted on 
                taxable income reduced by the net capital gain, plus
                    ``(B) a tax equal to the applicable percentage of 
                the net capital gain or, if less, taxable income.
            ``(2) Applicable percentage.--For purposes of paragraph 
        (1), the term `applicable percentage' means the percentage 
        determined in accordance with the following table:
                                                         The applicable
``For taxable years beginning in:                        percentage is:
    1997..........................................               20    
    1998..........................................               19    
    1999..........................................               18    
    2000..........................................               17    
    2001..........................................               16    
    2002..........................................               15    
    2003..........................................               14    
    2004..........................................               13    
    2005..........................................               12    
    2006..........................................               11    
    2007..........................................               10    
    2008..........................................                9    
    2009..........................................                8    
    2010..........................................                7    
    2011..........................................                6    
    2012..........................................                5    
    2013..........................................                4    
    2014..........................................                3    
    2015..........................................                2    
    2016..........................................                1    
    2017 or thereafter............................               0.    
            ``(3) Net capital gain taken into account as investment 
        income.--For purposes of this subsection and section 
        55(b)(1)(A)(ii), the net capital gain for any taxable year 
        shall be reduced (but not below zero) by the amount which the 
        taxpayer elects to take into account as investment income under 
        section 163(d)(4)(B)(iii).''
    (b) Minimum Tax.--
            (1) In general.--Subparagraph (A) of section 55(b)(1) of 
        such Code is amended by redesignating clauses (ii) and (iii) as 
        clauses (iii) and (iv), respectively, and by inserting after 
        clause (i) the following new clause:
                            ``(ii) Maximum rate of tax on net capital 
                        gain.--The amount determined under the first 
                        sentence of clause (i) shall not exceed the sum 
                        of--
                                    ``(I) the amount determined under 
                                such first sentence computed at the 
                                rates and in the same manner as if this 
                                clause had not been enacted on the 
                                taxable excess reduced by the net 
                                capital gain, plus
                                    ``(II) a tax equal to the 
                                applicable percentage (as defined in 
                                section 1(h)) of the lesser of the net 
                                capital gain or the taxable excess.''
            (2) Conforming amendment.--Clause (iii) of section 
        55(a)(1)(A) of such Code (as redesignated by paragraph (1)) is 
        amended by striking ``clause (i)'' and inserting ``this 
        subparagraph''.
    (c) Conforming Amendments.--
            (1) Section 1202 of such Code (relating to 50-percent 
        exclusion for gain from certain small business stock) is hereby 
        repealed.
            (2)(A) Subsection (a) of section 57 of such Code is amended 
        by striking paragraph (7).
            (B) Subclause (II) of section 53(d)(1)(B)(ii) of such Code 
        is amended by striking ``, (5), and (7)'' and inserting ``and 
        (5)''.
            (3) Paragraph (1) of section 170(e) of such Code is 
        amended--
                    (A) by inserting after ``the amount of gain'' in 
                the material following subparagraph (B)(ii) the 
                following: ``(or in the case of a taxpayer other than a 
                corporation, the appropriate percentage of the amount 
                of gain)'', and
                    (B) by adding at the end the following new 
                sentence: ``In the case of a taxpayer other than a 
                corporation, for purposes of subparagraph (B), the term 
`appropriate percentage' means the percentage equal to the fraction the 
numerator of which is the applicable percentage under section 1(h) over 
28 percent.''
            (4) Paragraph (2) of section 172(d) of such Code is amended 
        to read as follows:
            ``(2) Capital gains and 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.''
            (5) Paragraph (4) of section 642(c) of such Code is amended 
        by striking the first sentence.
            (6) Paragraph (3) of section 643(a) of such Code is amended 
        by striking the last sentence.
            (7) Paragraph (4) of section 691(c) of such Code is amended 
        by striking ``1202,''.
            (8) The second sentence of section 871(a)(2) of such Code 
        is amended by striking ``such gains and losses shall be 
        determined without regard to section 1202 and''.
            (9) Subsection (d) of section 1044 of such Code is amended 
        by striking the last sentence.
            (10) Paragraph (1) of section 1445(e) of such Code is 
        amended by striking ``28 percent'' and inserting ``the 
        applicable percentage under section 1(h)''.
            (11) Section 6652 of such Code is amended by striking 
        subsection (k) and by redesignating subsections (l) and (m) as 
        subsections (k) and (l), respectively.
            (12)(A) The second sentence of section 7518(g)(6)(A) of 
        such Code is amended by striking ``28 percent'' and inserting 
        ``the applicable percentage under section 1(h)''.
            (B) The second sentence of section 607(h)(6)(A) of the 
        Merchant Marine Act, 1936 is amended by striking ``28 percent'' 
        and inserting ``the applicable percentage under section 1(h)''.
            (13) The table of sections for part I of subchapter P of 
        chapter 1 of such Code is amended by striking the item relating 
        to section 1202.
    (d) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 1996.
            (2) Withholding.--The amendment made by subsection (c)(10) 
        shall apply to amounts paid after the date of the enactment of 
        this Act.

SEC. 2. 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.--Solely 
        for purposes of determining gain or loss on the sale or other 
        disposition by a taxpayer (other than a corporation) of an 
        indexed asset which has been held for more than 3 years, the 
        indexed basis of the asset shall be substituted for its 
        adjusted basis.
            ``(2) Exception for depreciation, etc.--The deductions 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) common stock in a C corporation (other than a 
                foreign corporation), and
                    ``(B) tangible property,
        which is a capital asset or property used in the trade or 
        business (as defined in section 1231(b)).
            ``(2) Stock in certain foreign corporations included.--For 
        purposes of this section--
                    ``(A) In general.--The term `indexed asset' 
                includes common stock in a foreign corporation which is 
                regularly traded on an established securities market.
                    ``(B) Exception.--Subparagraph (A) shall not apply 
                to--
                            ``(i) stock of a foreign investment company 
                        (within the meaning of section 1246(b)),
                            ``(ii) stock in a passive foreign 
                        investment company (as defined in section 
                        1296),
                            ``(iii) stock in a foreign corporation held 
                        by a United States person who meets the 
                        requirements of section 1248(a)(2), and
                            ``(iv) stock in a foreign personal holding 
                        company (as defined in section 552).
                    ``(C) Treatment of american depository receipts.--
                An American depository receipt for common stock in a 
                foreign corporation shall be treated as common stock in 
                such corporation.
    ``(c) Indexed Basis.--For purposes of this section--
            ``(1) General rule.--The indexed basis for any asset is--
                    ``(A) the adjusted basis of the asset, increased by
                    ``(B) the applicable inflation adjustment.
            ``(2) Applicable inflation adjustment.--The applicable 
        inflation adjustment for any asset is an amount equal to--
                    ``(A) the adjusted basis of the asset, multiplied 
                by
                    ``(B) the percentage (if any) by which--
                            ``(i) the gross domestic product deflator 
                        for the last calendar quarter ending before the 
                        asset is disposed of, exceeds
                            ``(ii) the gross domestic product deflator 
                        for the last calendar quarter ending before the 
                        asset was acquired by the taxpayer (or, if 
                        later, the calendar quarter ending on December 
                        31, 1996).
        The percentage under subparagraph (B) shall be rounded to the 
        nearest \1/10\ of 1 percentage point.
            ``(3) Gross domestic product deflator.--The gross domestic 
        product deflator for any calendar quarter is the implicit price 
        deflator for the gross domestic product for such quarter (as 
        shown in the last revision thereof released by the Secretary of 
        Commerce before the close of the following calendar quarter).
    ``(d) Suspension of Holding Period Where Diminished Risk of Loss; 
Treatment of Short Sales.--
            ``(1) In general.--If the taxpayer (or a related person) 
        enters into any transaction which substantially reduces the 
        risk of loss from holding any asset, such asset shall not be 
        treated as an indexed asset for the period of such reduced 
        risk.
            ``(2) Short sales.--
                    ``(A) In general.--In the case of a short sale of 
                an indexed asset with a short sale period in excess of 
                3 years, for purposes of this title, the amount 
                realized shall be an amount equal to the amount 
                realized (determined without regard to this paragraph) 
                increased by the applicable inflation adjustment. 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 of acquisition 
                and the closing date for the sale shall be treated as 
                the date of disposition.
                    ``(B) Short sale period.--For purposes of 
                subparagraph (A), the short sale period begins on the 
                day that the 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) Regulated investment companies.--Stock in a 
                regulated investment company (within the meaning of 
                section 851) shall be an indexed asset for any calendar 
                quarter in the same ratio as--
                            ``(i) the average of the fair market values 
                        of the indexed assets held by such company at 
                        the close of each month during such quarter, 
                        bears to
                            ``(ii) the average of the fair market 
                        values of all assets held by such company at 
                        the close of each such month.
                    ``(B) Real estate investment trusts.--Stock in a 
                real estate investment trust (within the meaning of 
                section 856) shall be an indexed asset for any calendar 
                quarter in the same ratio as--
                            ``(i) the fair market value of the indexed 
                        assets held by such trust at the close of such 
                        quarter, bears to
                            ``(ii) the fair market value of all assets 
                        held by such trust at the close of such 
                        quarter.
                    ``(C) Ratio of 80 percent or more.--If the ratio 
                for any calendar quarter determined under subparagraph 
                (A) or (B) would (but for this subparagraph) be 80 
                percent or more, such ratio for such quarter shall be 
                100 percent.
                    ``(D) Ratio of 20 percent or less.--If the ratio 
                for any calendar quarter determined under subparagraph 
                (A) or (B) would (but for this subparagraph) be 20 
                percent or less, such ratio for such quarter shall be 
                zero.
                    ``(E) Look-thru of partnerships.--For purposes of 
                this paragraph, a qualified investment entity which 
                holds a partnership interest shall be treated (in lieu 
                of holding a partnership interest) as holding its 
                proportionate share of the assets held by the 
                partnership.
            ``(3) Treatment of return of capital distributions.--Except 
        as otherwise provided by the Secretary, a distribution with 
        respect to stock in a qualified investment entity which is not 
        a dividend and which results in a reduction in the adjusted 
        basis of such stock shall be treated as allocable to stock 
        acquired by the taxpayer in the order in which such stock was 
        acquired.
            ``(4) 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. 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.
            ``(4) Indexing adjustment disregarded in determining loss 
        on sale of interest in entity.--Notwithstanding the preceding 
        provisions of this subsection, for purposes of determining the 
        amount of any loss on a sale or exchange of an interest in a 
        partnership, S corporation, or common trust fund, the 
        adjustment made under subsection (a) shall not be taken into 
account in determining the adjusted basis of such interest.
    ``(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 of improvements, etc.--If there is an 
        addition to the adjusted basis of any tangible property or of 
        any stock in a corporation during the taxable year by reason of 
        an improvement to such property or a contribution to capital of 
        such corporation--
                    ``(A) such addition shall never be taken into 
                account under subsection (c)(1)(A) if the aggregate 
                amount thereof during the taxable year with respect to 
                such property or stock is less than $1,000, and
                    ``(B) such addition shall be treated as a separate 
                asset acquired at the close of such taxable year if the 
                aggregate amount thereof during the taxable year with 
                respect to such property or stock is $1,000 or more.
        A rule similar to the rule of the preceding sentence shall 
        apply to 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 adjustment shall be 
        appropriately reduced for periods during which the asset was 
        not an indexed asset.
            ``(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.
    ``(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) Effective Date.--The amendments made by this section shall 
apply to dispositions after December 31, 1996, in taxable years ending 
after such date.
                                 <all>