[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1584 Introduced in House (IH)]







105th CONGRESS
  1st Session
                                H. R. 1584

  To amend the Internal Revenue Code of 1986 to provide all taxpayers 
 with a 50 percent deduction for capital gains, to index the basis of 
 certain capital assets, to provide credits for families, to phase-out 
           the estate and gift taxes, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                              May 13, 1997

   Mr. Sam Johnson of Texas (for himself, Mr. Burton of Indiana, Mr. 
    Tiahrt, Mr. Barr of Georgia, Mr. Crane, Mr. Pombo, Mr. Lewis of 
Kentucky, Mr. Hostettler, Mr. Sessions, Mr. Chabot, Mr. Bob Schaffer of 
  Colorado, and Mr. Graham) introduced the following bill; which was 
              referred to the Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
  To amend the Internal Revenue Code of 1986 to provide all taxpayers 
 with a 50 percent deduction for capital gains, to index the basis of 
 certain capital assets, to provide credits for families, to phase-out 
           the estate and gift taxes, 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 ``Tax Freedom for Families Act of 
1997''.

      TITLE I--INCENTIVES FOR CAPITAL FORMATION AND JOBS CREATION

SEC. 101. 50 PERCENT CAPITAL GAINS DEDUCTION.

    (a) General Rule.--Section 1201 of the Internal Revenue Code of 
1986 is amended to read as follows:

``SEC. 1201. CAPITAL GAINS DEDUCTION.

    ``(a) General Rule.--If for any taxable year a taxpayer has a net 
capital gain, 50 percent of such gain shall be a deduction from gross 
income.
    ``(b) Estates and Trusts.--In the case of an estate or trust, the 
deduction shall be computed by excluding the portion (if any) of the 
gains for the taxable year from sales or exchanges of capital assets 
which, under sections 652 and 662 (relating to inclusions of amounts in 
gross income of beneficiaries of trusts), is includible by the income 
beneficiaries as gain derived from the sale or exchange of capital 
assets.
    ``(c) Coordination With Treatment of Capital Gain Under Limitation 
on Investment Interest.--For purposes of this section, the net capital 
gain for any taxable year shall be reduced (but not below zero) by the 
amount which the taxpayer takes into account as investment income under 
section 163(d)(4)(B)(iii).
    ``(d) Transitional Rules.--
            ``(1) In general.--In the case of a taxable year which 
        includes January 1, 1997--
                    ``(A) the amount taken into account as the net 
                capital gain under subsection (a) shall not exceed the 
                net capital gain determined by only taking into account 
                gains and losses properly taken into account for the 
                portion of the taxable year on or after January 1, 
                1997, and
                    ``(B) the amount of the net capital gain taken into 
                account in applying section 1(h) for such year shall be 
                reduced by the amount taken into account under 
                subparagraph (A) for such year.
            ``(2) Special rules for pass-thru entities.--
                    ``(A) In general.--In applying paragraph (1) with 
                respect to any pass-thru entity, the determination of 
                when gains and losses are properly taken into account 
                shall be made at the entity level.
                    ``(B) Pass-thru entity defined.--For purposes of 
                subparagraph (A), the term `pass-thru entity' means--
                            ``(i) a regulated investment company,
                            ``(ii) a real estate investment trust,
                            ``(iii) an S corporation,
                            ``(iv) a partnership,
                            ``(v) an estate or trust, and
                            ``(vi) a common trust fund.''
    (b) Deduction Allowable in Computing Adjusted Gross Income.--
Subsection (a) of section 62 of such Code is amended by inserting after 
paragraph (16) the following new paragraph:
            ``(17) Long-term capital gains.--The deduction allowed by 
        section 1201.''
    (c) Technical and Conforming Changes.--
            (1)(A) Section 1 of such Code is amended by striking 
        subsection (h).
            (B) Subsection (a) of section 1202 of such Code amended to 
        read as follows:
    ``(a) Maximum Capital Gains Rate for Certain Small Business 
Stock.--
            ``(1) In general.--If for any taxable year a taxpayer other 
        than a corporation has gain from the sale or exchange of any 
        qualified small business stock held for more than 5 years, then 
        the tax imposed by section 1 shall not exceed the sum of--
                    ``(A) a tax computed under section 1 on the taxable 
                income reduced by \1/2\ the amount of the small 
                business gain, at the rates and in the manner as if 
                this subsection had not been enacted, plus
                    ``(B) a tax of 14 percent of the small business 
                gain.
            ``(2) Small business gain.--For purposes of paragraph (1), 
        the term `small business gain' means the lesser of--
                    ``(A) gain from the sale or exchange of any 
                qualified small business stock held for more than 5 
                years, or
                    ``(B) the net capital gain taken into account under 
                section 1201(a).''
            (2) Section 12 of such Code is amended by striking 
        paragraph (4) and redesignating the following paragraphs 
        accordingly.
            (3)(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)''.
            (4) Paragraph (1) of section 170(e) of such Code is amended 
        by striking ``the amount of gain'' in the material following 
        subparagraph (B)(ii) and inserting ``50 percent of the amount 
        of gain''.
            (5) Paragraph (2) of section 172(d) of such Code is amended 
        to read as follows:
            ``(2) Capital gains and losses.--
                    ``(A) Losses of taxpayers other than 
                corporations.--In the case of a taxpayer other than a 
                corporation, the amount deductible on account of losses 
                from sales or exchanges of capital assets shall not 
                exceed the amount includible on account of gains from 
                sales or exchanges of capital assets.
                    ``(B) Deduction for capital gains.--The deduction 
                under section 1201 shall not be allowed.''
            (6) The last sentence of section 453A(c)(3) of such Code is 
        amended by striking all that follows ``long-term capital 
        gain,'' and inserting ``the deduction under section 1201 shall 
        be taken into account.''.
            (7) Paragraph (2) of section 468B(b) of such Code is 
        amended by inserting ``the deduction allowed by section 1201 
        and by'' after ``reduced by''.
            (8) Paragraph (2) of section 527(b) of such Code is hereby 
        repealed.
            (9) Subparagraph (A) of section 641(d)(2) of such Code is 
        amended by striking ``Except as provided in section 1(h), the'' 
        and inserting ``The''.
            (10) Paragraph (4) of section 642(c) of such Code is 
        amended to read as follows:
            ``(4) Adjustments.--To the extent that the amount otherwise 
        allowable as a deduction under this subsection consists of gain 
        from the sale or exchange of capital assets held for more than 
        1 year, proper adjustment shall be made for any deduction 
        allowable to the estate or trust under section 1201 (relating 
        to capital gains deduction). In the case of a trust, the 
        deduction allowed by this subsection shall be subject to 
        section 681 (relating to unrelated business income).''
            (11) The last sentence of section 643(a)(3) of such Code is 
        amended to read as follows: ``The deduction under section 1201 
        (relating to capital gains deduction) shall not be taken into 
        account.''
            (12) Subparagraph (C) of section 643(a)(6) of such Code is 
        amended by inserting ``(i)'' before ``there shall'' and by 
        inserting before the period ``, and (ii) the deduction under 
        section 1201 (relating to capital gains deduction) shall not be 
        taken into account''.
            (13) Paragraph (4) of section 691(c) of such Code is 
        amended by striking ``1(h),''.
            (14) Paragraph (2) of section 801(a) of such Code is hereby 
        repealed.
            (15) Subsection (c) of section 831 of such Code is amended 
        by striking paragraph (1) and redesignating the following 
        paragraphs accordingly.
            (16)(A) Subparagraph (A) of section 852(b)(3) of such Code 
        is amended by striking ``, determined as provided in section 
        1201(a), on'' and inserting ``of 17.5 percent of''.
            (B) Clause (iii) of section 852(b)(3)(D) of such Code is 
        amended--
                    (i) by striking ``65 percent'' and inserting ``82.5 
                percent'', and
                    (ii) by striking ``section 1201(a)'' and inserting 
                ``subparagraph (A)''.
            (17) Clause (ii) of section 857(b)(3)(A) of such Code is 
        amended by striking ``determined at the rate provided in 
        section 1201(a) on'' and inserting ``of 17.5 percent of''.
            (18) The second sentence of section 871(a)(2) of such Code 
        is amended by striking ``1202'' and inserting ``1201''.
            (19) Paragraph (1) of section 882(a) of such Code is 
        amended by striking ``section 11, 55, 59A, or 1201(a)'' and 
        inserting ``section 11, 55, or 59A''.
            (20)(A) Paragraph (2) of section 904(b) of such Code is 
        amended to read as follows:
            ``(2) Capital gains.--Taxable income from sources outside 
        the United States shall include gain from the sale or exchange 
        of capital assets only to the extent of foreign source capital 
        gain net income.''.
            (B) Paragraph (3) of section 904(b) of such Code is amended 
        by striking subparagraphs (B), (D), and (E) and by 
        redesignating subparagraph (C) as subparagraph (B).
            (21)(A) Paragraph (2) of section 1211(b) of such Code is 
        amended to read as follows:
            ``(2) the sum of--
                    ``(A) the excess of the net short-term capital loss 
                over the net long-term capital gain, and
                    ``(B) one-half of the excess of the net long-term 
                capital loss over the net short-term capital gain.''
            (B) So much of paragraph (2) of section 1212(b) of such 
        Code as precedes subparagraph (B) thereof is amended to read as 
        follows:
            ``(2) Special rules.--
                    ``(A) Adjustments.--
                            ``(i) For purposes of determining the 
                        excess referred to in paragraph (1)(A), there 
                        shall be treated as short-term capital gain in 
                        the taxable year an amount equal to the lesser 
                        of--
                                    ``(I) the amount allowed for the 
                                taxable year under paragraph (1) or (2) 
                                of section 1211(b), or
                                    ``(II) the adjusted taxable income 
                                for such taxable year.
                            ``(ii) For purposes of determining the 
                        excess referred to in paragraph (1)(B), there 
                        shall be treated as short-term capital gain in 
                        the taxable year an amount equal to the sum 
                        of--
                                    ``(I) the amount allowed for the 
                                taxable year under paragraph (1) or (2) 
                                of section 1211(b) or the adjusted 
                                taxable income for such taxable year, 
                                whichever is the least, plus
                                    ``(II) the excess of the amount 
                                described in subclause (I) over the net 
                                short-term capital loss (determined 
                                without regard to this subsection) for 
                                such year.''
            (C) Subsection (b) of section 1212 is amended by adding at 
        the end the following new paragraph:
            ``(3) Transitional rule.--
                    ``(A) In general.--The amount determined under 
                subclause (II) of paragraph (2)(A)(ii) for any taxable 
                year shall be reduced (but not below zero) by the 
                excess of--
                            ``(i) the amount of the unused pre-1998 
                        long-term capital loss for such year, over
                            ``(ii) the sum of the long-term capital 
                        gain and the net short-term capital gain for 
                        such taxable year.
                Section 1211(b)(2)(B) shall be applied without regard 
                to `one-half of' with respect to such excess for such 
                taxable year.
                    ``(B) Unused pre-1998 long-term capital loss.--For 
                purposes of this paragraph, the term `unused pre-1998 
                long-term capital loss' means, with respect to a 
                taxable year, the excess of--
                            ``(i) the amount which under paragraph 
                        (1)(B) (as in effect for taxable years 
                        beginning before January 1, 1998) is treated as 
                        a long-term capital loss for the taxpayer's 
                        first taxable year beginning after December 31, 
                        1997, over
                            ``(ii) the sum of--
                                    ``(I) the aggregate amount 
                                determined under subparagraph (A)(ii) 
                                for all prior taxable years beginning 
                                after December 31, 1997, and
                                    ``(II) the aggregate reductions 
                                under subparagraph (A) for all such 
                                prior taxable years.''
            (22) Subsection (b) of section 1374 of such Code is amended 
        by striking paragraph (4).
            (23) Subsection (b) of section 1381 is amended by striking 
        ``or 1201''.
            (24) Paragraph (1) of section 1402(i) of such Code is 
        amended by inserting ``, and the deduction provided by section 
        1201 shall not apply'' before the period at the end thereof.
            (25) Subsection (e) of section 1445 of such Code is 
        amended--
                    (A) in paragraph (1) by striking ``35 percent (or, 
                to the extent provided in regulations, 28 percent)'' 
                and inserting ``17.5 percent (or, to the extent 
                provided in regulations, 19.8 percent)'', and
                    (B) in paragraph (2) by striking ``35 percent'' and 
                inserting ``17.5 percent''.
            (26) Clause (i) of section 6425(c)(1)(A) of such Code is 
        amended by striking ``or 1201(a)''.
            (27) Clause (i) of section 6655(g)(1)(A) of such Code is 
        amended by striking ``or 1201(a)''.
            (28)(A) The second sentence of section 7518(g)(6)(A) of 
        such Code is amended--
                    (i) by striking ``during a taxable year to which 
                section 1(h) or 1201(a) applies'', and
                    (ii) by striking ``28 percent (34 percent'' and 
                inserting ``19.8 percent (17.5 percent''.
            (B) The second sentence of section 607(h)(6)(A) of the 
        Merchant Marine Act, 1936 is amended--
                    (i) by striking ``during a taxable year to which 
                section 1(h) or 1201(a) of such Code applies'', and
                    (ii) by striking ``28 percent (34 percent'' and 
                inserting ``19.8 percent (17.5 percent''.
            (29) The section heading for section 1202 is amended to 
        read as follows:

``SEC. 1202. SMALL BUSINESS STOCK ELIGIBLE FOR PREFERENTIAL RATE.''

            (30) The table of sections for part I of subchapter P of 
        chapter 1 of such Code is amended to read as follows:

                              ``Sec. 1201. Capital gains deduction.
                              ``Sec. 1202. Small business stock 
                                        eligible for preferential 
                                        rate.''
    (d) Effective Dates.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years ending after December 31, 1996.
            (2) Repeal of section 1(h).--The amendments made by 
        subsection (c)(1) shall apply to taxable years beginning after 
        January 1, 1997.
            (3) Contributions.--The amendment made by subsection (c)(4) 
        shall apply only to contributions on or after January 1, 1997.
            (4) Use of long-term losses.--The amendments made by 
        subsection (c)(21) shall apply to taxable years beginning after 
        December 31, 1997.
            (5) Withholding.--The amendment made by subsection (c)(25) 
        shall apply only to amounts paid after the date of the 
        enactment of this Act.
            (6) Coordination with prior transition rule.--Any amount 
        treated as long-term capital gain by reason of paragraph (3) of 
        section 1122(h) of the Tax Reform Act of 1986 shall not be 
        taken into account for purposes of applying section 1201 of the 
        Internal Revenue Code of 1986 (as added by this section).

SEC. 102. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER DECEMBER 31, 1996, 
              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 ACQUIRED AFTER DECEMBER 31, 
              1996, FOR PURPOSES OF DETERMINING GAIN OR LOSS.

    ``(a) General Rule.--
            ``(1) Indexed basis substituted for adjusted basis.--Except 
        as otherwise provided in this subsection, if an indexed asset 
        which has been held for more than 3 years is sold or otherwise 
        disposed of, for purposes of this title the indexed basis of 
        the asset shall be substituted for its adjusted basis.
            ``(2) Exception for depreciation, etc.--The 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.
        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 provided in 
                subparagraph (B), the adjustment under subsection (a) 
                shall be allowed to any qualified investment entity 
                (including for purposes of determining the earnings and 
                profits of such entity).
                    ``(B) Exception for qualification purposes.--This 
                section shall not apply for purposes of sections 851(b) 
                and 856(c).
            ``(2) Adjustments to interests held in entity.--
                    ``(A) 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.
            ``(3) Common trust funds.--In the case of a common trust 
        fund, the adjustment made under subsection (a) at the trust 
        level shall be passed through to the participants.
    ``(g) Dispositions Between Related Persons.--
            ``(1) In general.--This section shall not apply to any sale 
        or other disposition of property between related persons except 
        to the extent that the basis of such property in the hands of 
        the transferee is a substituted basis.
            ``(2) Related persons defined.--For purposes of this 
        section, the term `related persons' means--
                    ``(A) persons bearing a relationship set forth in 
                section 267(b), and
                    ``(B) persons treated as single employer under 
                subsection (b) or (c) of section 414.
    ``(h) Transfers To Increase Indexing Adjustment.--If any person 
transfers cash, debt, or any other property to another person and the 
principal purpose of such transfer is to secure or increase an 
adjustment under subsection (a), the Secretary may disallow part or all 
of such adjustment or increase.
    ``(i) Special Rules.--For purposes of this section--
            ``(1) Treatment 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 ratio 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 is amended by inserting after the item 
relating to section 1021 the following new item:

                              ``Sec. 1022. Indexing of certain assets 
                                        acquired after December 31, 
                                        1996, for purposes of 
                                        determining gain or loss.''
    (c) 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 after December 31, 1996.
            (2) Certain transactions between related persons.--The 
        amendments made by this section shall not apply to the 
        disposition of any property acquired after December 31, 1996, 
        from a related person (as defined in section 1022(g)(2) of the 
        Internal Revenue Code of 1986, as added by this section) 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.
    (d) Election To Recognize Gain on Assets Held on January 1, 1997.--
For purposes of the Internal Revenue Code of 1986--
            (1) In general.--A taxpayer may elect to treat--
                    (A) any readily tradable stock (which is an indexed 
                asset) held by such taxpayer on January 1, 1997, and 
                not sold before the next business day after such date, 
                as having been sold on such next business day for an 
                amount equal to its closing market price on such next 
                business day (and as having been reacquired on such 
                next business day for an amount equal to such closing 
                market price), and
                    (B) any other indexed asset held by the taxpayer on 
                January 1, 1997, as having been sold on such date for 
                an amount equal to its fair market value on such date 
                (and as having been reacquired on such date for an 
                amount equal to such fair market value).
            (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 date the asset is treated as sold under 
                paragraph (1) and shall be recognized notwithstanding 
                any provision of the Internal Revenue Code of 1986.
                    (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 assets for which such election is made. Such an 
election, once made with respect to any asset, shall be irrevocable.
            (4) Readily tradable stock.--For purposes of this 
        subsection, the term ``readily tradable stock'' means any stock 
        which, as of January 1, 1997, is readily tradable on an 
        established securities market or otherwise.
    (e) Treatment of Principal Residences.--Property held and used by 
the taxpayer on January 1, 1997, as his principal residence (within the 
meaning of section 1034 of the Internal Revenue Code of 1986) shall be 
treated--
            (1) for purposes of subsection (c)(1) of this section and 
        section 1022 of such Code, as having a holding period which 
        begins on January 1, 1997, and
            (2) for purposes of section 1022(c)(2)(B)(ii) of such Code, 
        as having been acquired on January 1, 1997.
Subsection (d) shall not apply to property to which this subsection 
applies.

SEC. 103. CAPITAL LOSS DEDUCTION ALLOWED WITH RESPECT TO SALE OR 
              EXCHANGE OF PRINCIPAL RESIDENCE.

    (a) In General.--Subsection (c) of section 165 of the Internal 
Revenue Code of 1986 (relating to limitation on losses of individuals) 
is amended by striking ``and'' at the end of paragraph (2), by striking 
the period at the end of paragraph (3) and inserting ``; and'', and by 
adding at the end the following new paragraph:
            ``(4) losses arising from the sale or exchange of the 
        principal residence (within the meaning of section 1034) of the 
        taxpayer.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to sales and exchanges after December 31, 1996, in taxable years 
ending after such date.

                     TITLE II--CREDITS FOR FAMILIES

SEC. 201. FAMILY TAX CREDIT.

    (a) In General.--Subpart A of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 is amended by inserting after 
section 23 the following new section:

``SEC. 24. FAMILY TAX CREDIT.

    ``(a) Allowance of Credit.--There shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year an amount 
equal to $500 multiplied by the number of qualifying children of the 
taxpayer.
    ``(b) Qualifying Child.--For purposes of this section--
            ``(1) In general.--The term `qualifying child' means any 
        individual if--
                    ``(A) the taxpayer is allowed a deduction under 
                section 151 with respect to such individual for such 
                taxable year,
                    ``(B) such individual has not attained the age of 
                18 as of the close of the calendar year in which the 
                taxable year of the taxpayer begins, and
                    ``(C) such individual bears a relationship to the 
                taxpayer described in section 32(c)(3)(B) (determined 
                without regard to clause (ii) thereof).
            ``(2) Exception for certain noncitizens.--The term 
        `qualifying child' shall not include any individual who would 
        not be a dependent if the first sentence of section 152(b)(3) 
        were applied without regard to all that follows `resident of 
        the United States'.''
    (b) Conforming Amendment.--The table of sections for subpart A of 
part IV of subchapter A of chapter 1 of such Code is amended by 
inserting after the item relating to section 23 the following new item:

                              ``Sec. 24. Family tax credit.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.

SEC. 202. CREDIT TO REDUCE MARRIAGE PENALTY.

    (a) In General.--Subpart A of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 is amended by inserting after 
section 24 the following new section:

``SEC. 24A. CREDIT TO REDUCE MARRIAGE PENALTY.

    ``(a) Allowance of Credit.--In the case of a joint return for the 
taxable year, there shall be allowed as a credit against the tax 
imposed by this chapter for such taxable year an amount equal to the 
marriage penalty reduction credit.
    ``(b) Limitations.--
            ``(1) Dollar limitation.--The amount of credit allowed by 
        subsection (a) for the taxable year shall not exceed $145.
            ``(2) Credit disallowed for individuals claiming section 
        911, etc.--No credit shall be allowed under this section for 
        any taxable year if either spouse claims the benefits of 
        section 911, 931, or 933 for such taxable year.
    ``(c) Marriage Penalty Reduction Credit.--For purposes of this 
section--
            ``(1) In general.--The marriage penalty reduction credit is 
        an amount equal to the excess (if any) of--
                    ``(A) the joint tax amount of the taxpayer, over
                    ``(B) the sum of the unmarried tax amounts for each 
                spouse.
            ``(2) Unmarried tax amount.--For purposes of paragraph (1), 
        the unmarried tax amount, with respect to an individual, is the 
        amount of tax which would be imposed by section 1(c) if such 
        individual's taxable income were equal to the excess (if any) 
        of--
                    ``(A) such individual's qualified earned income for 
                the taxable year, over
                    ``(B) the sum of--
                            ``(i) an amount equal to the basic standard 
                        deduction under section 63(c)(2)(C) for the 
                        taxable year, plus
                            ``(ii) the exemption amount (as defined in 
                        section 151(d)) for such taxable year.
            ``(3) Joint tax amount.--For purposes of paragraph (1), the 
        joint tax amount is the amount of tax which would be imposed by 
        section 1(a) if the taxpayer's taxable income were equal to the 
        excess (if any) of--
                    ``(A) the taxpayer's qualified earned income for 
                the taxable year, over
                    ``(B) the sum of--
                            ``(i) an amount equal to the basic standard 
                        deduction under section 63(c)(2)(A) for the 
                        taxable year, plus
                            ``(ii) an amount equal to twice the 
                        exemption amount (as so defined) for such 
                        taxable year.
    ``(d) Qualified Earned Income.--For purposes of this section--
            ``(1) In general.--The term `qualified earned income' means 
        an amount equal to the excess (if any) of--
                    ``(A) the earned income for the taxable year, over
                    ``(B) an amount equal to the sum of the deductions 
                described in paragraphs (1), (2), (6), (7), and (12) of 
                section 62(a) to the extent that such deductions are 
                properly allocable to or chargeable against earned 
                income for such taxable year.
        The amount of qualified earned income shall be determined 
        without regard to any community property laws.
            ``(2) Earned income.--For purposes of paragraph (1)--
                    ``(A) In general.--The term `earned income' means 
                income which is earned income within the meaning of 
                section 401(c)(2)(C) or 911(d)(2) (determined without 
                regard to the phrase `not in excess of 30 percent of 
his share of the net profits of such trade or business' in subparagraph 
(B) thereof).
                    ``(B) Exception.--Such term shall not include any 
                amount--
                            ``(i) not includible in gross income,
                            ``(ii) received as a pension or annuity,
                            ``(iii) paid or distributed out of an 
                        individual retirement plan (within the meaning 
                        of section 7701(a)(37)),
                            ``(iv) received as deferred compensation, 
                        or
                            ``(v) received for services performed by an 
                        individual in the employ of his spouse (within 
                        the meaning of section 3121(b)(3)(B)).
    ``(e) Amount of Credit To Be Determined Under Tables.--
            ``(1) In general.--The amount of the credit allowed by this 
        section shall be determined under tables prescribed by the 
        Secretary.
            ``(2) Requirements for tables.--The tables prescribed under 
        paragraph (1) shall reflect the provisions of subsection (c) 
        and shall round to the nearest $25 any amount of credit which 
        is less than the maximum credit under subsection (b)(1).''
    (b) Clerical Amendment.--The table of sections for subpart A of 
part IV of subchapter A of chapter 1 of such Code is amended by 
inserting after the item relating to section 24 the following new item:

                              ``Sec. 24A. Credit to reduce marriage 
                                        penalty.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.

             TITLE III--PHASE-OUT OF ESTATE AND GIFT TAXES

SEC. 301. PHASE-OUT OF ESTATE AND GIFT TAXES THROUGH INCREASE IN 
              UNIFIED ESTATE AND GIFT TAX CREDIT.

    (a) Estate Tax Credit.--
            (1) In general.--Section 2010(a) of the Internal Revenue 
        Code of 1986 (relating to unified credit against estate tax) is 
        amended by striking ``$192,800'' and inserting ``the applicable 
        credit amount''.
            (2) Applicable credit amount.-- Section 2010 of such Code 
        is amended by redesignating subsection (c) as subsection (d) 
        and by inserting after subsection (b) the following:
    ``(c) Applicable Credit Amount.--For purposes of this section, the 
applicable credit amount is the amount of the tentative tax which would 
be determined under the rate schedule set forth in section 2001(c) if 
the amount with respect to which such tentative tax is to be computed 
were the applicable exclusion amount determined in accordance with the 
following table:

        ``In the case of estates of decedents
                                                         The applicable
          dying, and gifts made, during:
                                                   exclusion amount is:
                  1998...............................       $1,000,000 
                  1999...............................       $1,500,000 
                  2000...............................       $2,000,000 
                  2001...............................       $2,500,000 
                  2002...............................    $5,000,000.''.
            (3) Conforming amendments.--
                    (A) Section 6018(a)(1) of such Code is amended by 
                striking ``$600,000'' and inserting ``the applicable 
                exclusion amount in effect under section 2010(c) for 
                the calendar year which includes the date of death''.
                    (B) Section 2001(c)(2) of such Code is amended by 
                striking ``$21,040,000'' and inserting ``the amount at 
                which the average tax rate under this section is 55 
                percent''.
                    (C) Section 2102(c)(3)(A) of such Code is amended 
                by striking ``$192,800'' and inserting ``the applicable 
                credit amount in effect under section 2010(c) for the 
                calendar year which includes the date of death''.
    (b) Unified Gift Tax Credit.--Section 2505(a)(1) of the Internal 
Revenue Code of 1986 (relating to unified credit against gift tax) is 
amended by striking ``$192,800'' and inserting ``the applicable credit 
amount in effect under section 2010(c) for such calendar year''.
    (c) Effective Date.--The amendments made by this section shall 
apply to the estates of decedents dying, and gifts made, after December 
31, 1997.

SEC. 302. REPEAL OF FEDERAL TRANSFER TAXES.

    (a) In General.--Subtitle B of the Internal Revenue Code of 1986 is 
repealed.
    (b) Effective Date.--The repeal made by subsection (a) shall apply 
to the estates of decedents dying, and gifts and generation-skipping 
transfers made, after December 31, 2002.
    (c) Technical and Conforming Changes.--The Secretary of the 
Treasury or the Secretary's delegate shall not later than 90 days after 
the effective date of this section, submit to the Committee on Ways and 
Means of the House of Representatives and the Committee on Finance of 
the Senate a draft of any technical and conforming changes in the 
Internal Revenue Code of 1986 which are necessary to reflect throughout 
such Code the changes in the substantive provisions of law made by this 
Act.

                                 <all>