[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[S. 1711 Introduced in Senate (IS)]







105th CONGRESS
  2d Session
                                S. 1711

 To amend the Internal Revenue Code of 1986 to eliminate the marriage 
 penalty tax, to increase the income levels for the 15 and 28 percent 
tax brackets, to provide a 1-year holding period for long-term capital 
  gains, to index capital assets for inflation, to reduce the highest 
         estate tax rate to 28 percent, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             March 5, 1998

 Mrs. Hutchison (for herself, Mr. Grams, and Mr. Ashcroft) 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 eliminate the marriage 
 penalty tax, to increase the income levels for the 15 and 28 percent 
tax brackets, to provide a 1-year holding period for long-term capital 
  gains, to index capital assets for inflation, to reduce the highest 
         estate tax rate to 28 percent, 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 ``Half and Half: Tax 
Relief and Debt Reduction Act of 1998''.
    (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.
    (c) Section 15 Not To Apply.--No amendment made by section 3 shall 
be treated as a change in a rate of tax for purposes of section 15 of 
the Internal Revenue Code of 1986 .

SEC. 2. COMBINED RETURN TO WHICH UNMARRIED RATES APPLY.

    (a) In General.--Subpart B of part II of subchapter A of chapter 61 
(relating to income tax returns) is amended by inserting after section 
6013 the following new section:

``SEC. 6013A. COMBINED RETURN WITH SEPARATE RATES.

    ``(a) General Rule.--A husband and wife may make a combined return 
of income taxes under subtitle A under which--
            ``(1) a separate taxable income is determined for each 
        spouse by applying the rules provided in this section, and
            ``(2) the tax imposed by section 1 is the aggregate amount 
        resulting from applying the separate rates set forth in section 
        1(c) to each such taxable income.
    ``(b) Treatment of Income.--For purposes of this section--
            ``(1) earned income (within the meaning of section 911(d)), 
        and any income received as a pension or annuity which arises 
        from an employer-employee relationship, shall be treated as the 
        income of the spouse who rendered the services, and
            ``(2) income from property shall be divided between the 
        spouses in accordance with their respective ownership rights in 
        such property.
    ``(c) Treatment of Deductions.--For purposes of this section--
            ``(1) except as otherwise provided in this subsection, the 
        deductions allowed by section 62(a) shall be allowed to the 
        spouse treated as having the income to which such deductions 
        relate,
            ``(2) the deduction for retirement savings described in 
        paragraph (7) of section 62(a) shall be allowed to the spouse 
        for whose benefit the savings are maintained,
            ``(3) the deduction for alimony described in paragraph (10) 
        of section 62(a) shall be allowed to the spouse who has the 
        liability to pay the alimony,
            ``(4) the deduction referred to in paragraph (16) of 
        section 62(a) (relating to contributions to medical savings 
        accounts) shall be allowed to the spouse with respect to whose 
        employment or self-employment such account relates,
            ``(5) the deductions allowable by section 151 (relating to 
        personal exemptions) shall be determined by requiring each 
        spouse to claim 1 personal exemption,
            ``(6) section 63 shall be applied as if such spouses were 
        not married, and
            ``(7) each spouse's share of all other deductions 
        (including the deduction for personal exemptions under section 
        151(c)) shall be determined by multiplying the aggregate amount 
        thereof by the fraction--
                    ``(A) the numerator of which is such spouse's 
                adjusted gross income, and
                    ``(B) the denominator of which is the combined 
                adjusted gross incomes of the 2 spouses.
Any fraction determined under paragraph (7) shall be rounded to the 
nearest percentage point.
    ``(d) Treatment of Credits.--Credits shall be determined (and 
applied against the joint liability of the couple for tax) as if the 
spouses had filed a joint return.
    ``(e) Treatment as Joint Return.--Except as otherwise provided in 
this section or in the regulations prescribed hereunder, for purposes 
of this title (other than sections 1 and 63(c)) a combined return under 
this section shall be treated as a joint return.
    ``(f) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out this section.''.
    (b) Unmarried Rate Made Applicable.--So much of subsection (c) of 
section 1 as precedes the table is amended to read as follows:
    ``(c) Separate or Unmarried Return Rate.--There is hereby imposed 
on the taxable income of every individual (other than a married 
individual (as defined in section 7703) filing a joint return or a 
separate return, a surviving spouse as defined in section 2(a), or a 
head of household as defined in section 2(b)) a tax determined in 
accordance with the following table:''.
    (c) Basic Standard Deduction for Unmarried Individuals Made 
Applicable.--Subparagraph (C) of section 63(c)(2) is amended to read as 
follows:
                    ``(C) $3,000 in the case of an individual who is 
                not--
                            ``(i) a married individual filing a joint 
                        return or a separate return,
                            ``(ii) a surviving spouse, or
                            ``(iii) a head of household, or''.
    (d) Clerical Amendment.--The table of sections for subpart B of 
part II of subchapter A of chapter 61 is amended by inserting after the 
item relating to section 6013 the following:

                              ``Sec. 6013A. Combined return with 
                                        separate rates.''.
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1998.

SEC. 3. INCOME TAXED AT LOWEST RATE INCREASED TO $35,000 FOR UNMARRIED 
              INDIVIDUALS, $40,000 FOR HEADS OF HOUSEHOLDS, AND $50,000 
              FOR JOINT RETURNS AND SURVIVING SPOUSES.

    (a) General Rule.--Section 1 (relating to tax imposed) is amended 
by striking subsections (a) through (e) and inserting the following:
    ``(a) Married Individuals Filing Joint Returns and Surviving 
Spouses.--There is hereby imposed on the taxable income of--
            ``(1) every married individual (as defined in section 7703) 
        who makes a single return jointly with his spouse under section 
        6013, and
            ``(2) every surviving spouse (as defined in section 2(a)),
a tax determined in accordance with the following table:

``If taxable income is:             The tax is:
    Not over $50,000...............
                                        15% of taxable income.
    Over $50,000 but not over 
        $109,950.
                                        $7,500, plus 28% of the excess 
                                                over $50,000.
    Over $109,950 but not over 
        $155,950.
                                        $24,286, plus 31% of the excess 
                                                over $109,950.
    Over $155,950 but not over 
        $278,450.
                                        $38,546, plus 36% of the excess 
                                                over $155,950.
    Over $278,450..................
                                        $82,646, plus 39.6% of the 
                                                excess over $278,450.
    ``(b) Heads of Households.--There is hereby imposed on the taxable 
income of every head of a household (as defined in section 2(b)) a tax 
determined in accordance with the following table:

``If taxable income is:             The tax is:
    Not over $40,000...............
                                        15% of taxable income.
    Over $40,000 but not over 
        $93,750.
                                        $6,000, plus 28% of the excess 
                                                over $40,000.
    Over $93,750 but not over 
        $142,000.
                                        $21,050, plus 31% of the excess 
                                                over $93,750.
    Over $142,000 but not over 
        $278,450.
                                        $36,007, plus 36% of the excess 
                                                over $142,000.
    Over $278,450..................
                                        $85,129 plus 39.6% of the 
                                                excess over $278,450.
    ``(c) Separate or Unmarried Return Rate.--There is hereby imposed 
on the taxable income of every individual (other than a married 
individual (as defined in section 7703) filing a joint return or a 
separate return, a surviving spouse as defined in section 2(a), or a 
head of household as defined in section 2(b)) a tax determined in 
accordance with the following table:

``If taxable income is:             The tax is:
    Not over $35,000...............
                                        15% of taxable income.
    Over $35,000 but not over 
        $71,050.
                                        $5,250, plus 28% of the excess 
                                                over $35,000.
    Over $71,050 but not over 
        $128,100.
                                        $15,344, plus 31% of the excess 
                                                over $71,050.
    Over $128,100 but not over 
        $278,450.
                                        $33,029, plus 36% of the excess 
                                                over $128,100.
    Over $278,450..................
                                        $87,155, plus 39.6% of the 
                                                excess over $278,450.
    ``(d) Married Individuals Filing Separate Returns.--There is hereby 
imposed on the taxable income of every married individual (as defined 
in section 7703) who does not make a single return jointly with his 
spouse under section 6013, a tax determined in accordance with the 
following table:

``If taxable income is:             The tax is:
    Not over $25,000...............
                                        15% of taxable income.
    Over $25,000 but not over 
        $54,975.
                                        $3,750, plus 28% of the excess 
                                                over $25,000.
    Over $54,975 but not over 
        $77,975.
                                        $12,143, plus 31% of the excess 
                                                over $54,975.
    Over $77,975 but not over 
        $139,225.
                                        $19,273, plus 36% of the excess 
                                                over $77,975.
    Over $139,225..................
                                        $41,323, plus 39.6% of the 
                                                excess over $139,225.
    ``(e) Estates and Trusts.--There is hereby imposed on the taxable 
income of--
            ``(1) every estate, and
            ``(2) every trust,
taxable under this subsection a tax determined in accordance with the 
following table:

``If taxable income is:             The tax is:
    Not over $1,700................
                                        15% of taxable income.
    Over $1,700 but not over $4,000
                                        $255, plus 28% of the excess 
                                                over $1,700.
    Over $4,000 but not over $6,100
                                        $899, plus 31% of the excess 
                                                over $4,000.
    Over $6,100 but not over $8,350
                                        $1,550, plus 36% of the excess 
                                                over $6,100.
    Over $8,350....................
                                        $2,360, plus 39.6% of the 
                                                excess over $8,350.''.
    (b) Inflation Adjustment To Apply in Determining Rates for 1999.--
Subsection (f) of section 1 is amended--
            (1) by striking ``1993'' in paragraph (1) and inserting 
        ``1998'',
            (2) by striking ``1992'' in paragraph (3)(B) and inserting 
        ``1997'', and
            (3) by striking paragraph (7).
    (c) Conforming Amendments.--
            (1) The following provisions are each amended by striking 
        ``1992'' and inserting ``1997'' each place it appears:
                    (A) Section 25A(h).
                    (B) Section 32(j)(1)(B).
                    (C) Section 41(e)(5)(C).
                    (D) Section 42(h)(6)(G)(i)(II).
                    (E) Section 68(b)(2)(B).
                    (F) Section 135(b)(2)(B)(ii).
                    (G) Section 151(d)(4).
                    (H) Section 221(g)(1)(B).
                    (I) Section 512(d)(2)(B).
                    (J) Section 513(h)(2)(C)(ii).
                    (K) Section 877(a)(2).
                    (L) Section 911(b)(2)(D)(ii)(II).
                    (M) Section 4001(e)(1)(B).
                    (N) Section 4261(e)(4)(A)(ii).
                    (O) Section 6039F(d).
                    (P) Section 6334(g)(1)(B).
                    (Q) Section 7430(c)(1).
            (2) Subparagraph (B) of section 59(j)(2) is amended by 
        striking ``, determined by substituting `1997' for `1992' in 
        subparagraph (B) thereof''.
            (3) Subparagraph (B) of section 63(c)(4) is amended by 
        striking ``by substituting for'' and all that follows and 
        inserting ``by substituting for `calendar year 1997' in 
        subparagraph (B) thereof `calendar year 1987' in the case of 
        the dollar amounts contained in paragraph (2) or (5)(A) or 
        subsection (f).''.
            (4) Subparagraph (B) of section 132(f)(6) is amended by 
        inserting before the period ``, determined by substituting 
        `calendar year 1992' for `calendar year 1997' in subparagraph 
        (B) thereof''.
            (5) Paragraph (2) of section 220(g) is amended by striking 
        `` by substituting `calendar year 1997' for `calendar year 
        1992' in subparagraph (B) thereof''.
            (6) Subparagraph (B) of section 685(c)(3) is amended by 
        striking ``, by substituting `calendar year 1997' for `calendar 
        year 1992' in subparagraph (B) thereof''.
            (7) Subparagraph (B) of section 2032A(a)(3) is amended by 
        striking ``by substituting `calendar year 1997' for `calendar 
        year 1992' in subparagraph (B) thereof''.
            (8) Subparagraph (B) of section 2503(b)(2) is amended by 
        striking ``by substituting `calendar year 1997' for `calendar 
        year 1992' in subparagraph (B) thereof''.
            (9) Paragraph (2) of section 2631(c) is amended by striking 
        ``by substituting `calendar year 1997' for `calendar year 1992' 
        in subparagraph (B) thereof''.
            (10) Subparagraph (B) of 6601(j)(3) is amended by striking 
        ``by substituting `calendar year 1997' for `calendar year 1992' 
        in subparagraph (B) thereof''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1998.

SEC. 4. 1-YEAR HOLDING PERIOD FOR ANY LONG-TERM CAPITAL GAIN.

    (a) In General.--Section 1(h)(4) (defining adjusted net capital 
gain) is amended by adding ``and'' at the end of subparagraph (B), by 
striking ``, and'' at the end of subparagraph (C) and inserting a 
period, and by striking subparagraph (D).
    (b) Conforming Amendments.--Section 1(h) is amended--
            (1) in paragraph (6), by striking subparagraph (A) and 
        inserting the following:
                    ``(A) In general.--The term `unrecaptured section 
                1250 gain' means the amount of long-term capital gain 
                which would be treated as ordinary income if section 
                1250(b)(1) included all depreciation and the applicable 
                percentage under section 1250(a) were 100 percent.'',
            (2) by striking paragraphs (8), (10), and (11),
            (3) in paragraph (9), by striking ``section 1202 gain, or 
        mid-term gain'' and inserting ``or section 1202 gain'',
            (4) by redesignating paragraph (9) as paragraph (8), and
            (5) by adding at the end the following:
            ``(8) Treatment of pass-thru entities.--
                    ``(A) In general.--The Secretary may prescribe such 
                regulations as are appropriate (including regulations 
                requiring reporting) to apply this subsection in the 
case of sales and exchanges by pass-thru entities and of interests in 
such entities.
                    ``(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.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1998.

SEC. 5. 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, and
                    ``(B) tangible property (or any interest therein), 
                which is a capital asset or property used in the trade 
                or business (as defined in section 1231(b)).
            ``(2) Certain property excluded.--For purposes of this 
        section, the term `indexed asset' does not include--
                    ``(A) Creditor's interest.--Any interest in 
                property which is in the nature of a creditor's 
                interest.
                    ``(B) Options.--Any option or other right to 
                acquire an interest in property.
                    ``(C) Net lease property.--In the case of a lessor, 
                net lease property (within the meaning of subsection 
                (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) 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 chain-type price index for GDP 
                        for the last calendar quarter ending before the 
                        asset is disposed of, exceeds
                            ``(ii) the chain-type price index for GDP 
                        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) Chain-type price index for gdp.--The chain-type price 
        index for GDP for any calendar quarter is such index 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) 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, and
                    ``(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) 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 
                                        for purposes of determining 
                                        gain or loss.''.
    (c) 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, 1998, see section 1022(a)(1).''.
    (d) Effective Dates.--
            (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, 1998.
            (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, 1998, 
        from a related person (as defined in section 1022(f)(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.

SEC. 6. REDUCTION OF TOP ESTATE TAX RATE FROM 55 TO 28 PERCENT.

    (a) In General.--Section 2001(c) (relating to imposition and rate 
of tax) is amended to read as follows:
    ``(c) Rate Schedule.--

``If the amount with respect to     The tentative tax is:
        which the tentative tax to 
        be computed is:
    Not over $10,000...............
                                        18 percent of such amount.
    Over $10,000 but not over 
        $20,000.
                                        $1,800 plus 20 percent of the 
                                                excess of such amount 
                                                over $10,000.
    Over $20,000 but not over 
        $40,000.
                                        $3,800 plus 22 percent of the 
                                                excess of such amount 
                                                over $20,000.
    Over $40,000 but not over 
        $60,000.
                                        $8,200 plus 24 percent of the 
                                                excess of such amount 
                                                over $40,000.
    Over $60,000 but not over 
        $80,000.
                                        $13,000 plus 26 percent of the 
                                                excess of such amount 
                                                over $60,000.
    Over $80,000...................
                                        $18,200 plus 28 percent of the 
                                                excess of such amount 
                                                over $80,000.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to the estates of decedents dying, and gifts made, after December 31, 
1998.

SEC. 7. REVENUE EFFECT OF ACT NOT TO EXCEED 50 PERCENT OF FEDERAL 
              BUDGET SURPLUS.

    Not later than 90 days after the date of enactment of this Act, if 
the Secretary of the Treasury determines that in any of the 4 
succeeding fiscal years the amendments made by this Act will result in 
a reduction of the estimated revenues received in the Treasury for such 
fiscal year in an amount in excess of 50 percent of the estimated 
Federal unified budget surplus (if any) for such year (determined 
without regard to such amendments), the Secretary shall submit to the 
Committee on Ways and Means of the House of Representatives and the 
Committee on Finance of the Senate a legislative proposal to 
appropriately modify the provisions of the Internal Revenue Code of 
1986 affected by such amendments to eliminate such excess amount. Any 
legislation enacted for the purpose of achieving the revenue effect of 
such legislative proposal submitted pursuant to this subsection shall 
appropriately identify such purpose.
                                 <all>