[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[S. 66 Introduced in Senate (IS)]
105th CONGRESS
1st Session
S. 66
To amend the Internal Revenue Code of 1986 to encourage capital
formation through reductions in taxes on capital gains, and for other
purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
January 21, 1997
Mr. Hatch (for himself, Mr. Lieberman, Mr. Grassley, and Mr. Breaux)
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 encourage capital
formation through reductions in taxes on capital gains, 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 ``Capital Formation
Act of 1997''.
(b) Reference to 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.
TITLE I--CAPITAL GAINS REFORM
Subtitle A--Capital Gains Deduction for Taxpayers Other Than
Corporations
SEC. 101. CAPITAL GAINS DEDUCTION.
(a) In General.--Part I of subchapter P of chapter 1 (relating to
treatment of capital gains) is amended by redesignating section 1202 as
section 1203 and by inserting after section 1201 the following:
``SEC. 1202. CAPITAL GAINS DEDUCTION.
``(a) General Rule.--If for any taxable year a taxpayer other than
a corporation 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 Rule.--
``(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) if the net capital gain for such year exceeds
the amount taken into account under subsection (a), the
rate of tax imposed by section 1 on such excess shall
not exceed 28 percent.
``(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.--
Section 62(a) is amended by inserting after paragraph (15) the
following:
``(16) Long-term capital gains.--The deduction allowed by
section 1202.''.
(c) Conforming Amendments.--
(1) Section 1 is amended by striking subsection (h).
(2) Section 170(e)(1) is amended by striking ``the amount
of gain'' in the material following subparagraph (B)(ii) and
inserting ``50 percent (\25/35\ in the case of a corporation)
of the amount of gain''.
(3) Section 172(d)(2)(B) is amended to read as follows:
``(B) the deduction under section 1202 and the
exclusion under section 1203 shall not be allowed.''.
(4) The last sentence of section 453A(c)(3) is amended by
striking all that follows ``long-term capital gain,'' and
inserting ``the maximum rate on net capital gain under section
1201 or the deduction under section 1202 (whichever is
appropriate) shall be taken into account.''.
(5) Section 642(c)(4) 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 or gain described in section 1203(a), proper adjustment
shall be made for any deduction allowable to the estate or
trust under section 1202 (relating to deduction for excess of
capital gains over capital losses) or for the exclusion
allowable to the estate or trust under section 1203 (relating
to exclusion for gain from certain small business stock). In
the case of a trust, the deduction allowed by this subsection
shall be subject to section 681 (relating to unrelated business
income).''.
(6) The last sentence of section 643(a)(3) is amended to
read as follows: ``The deduction under section 1202 (relating
to deduction of excess of capital gains over capital losses)
and the exclusion under section 1203 (relating to exclusion for
gain from certain small business stock) shall not be taken into
account.''.
(7) Section 643(a)(6)(C) is amended by inserting ``(i)''
before ``there shall'' and by inserting before the period ``,
and (ii) the deduction under section 1202 (relating to capital
gains deduction) and the exclusion under section 1203 (relating
to exclusion for gain from certain small business stock) shall
not be taken into account''.
(8) Section 691(c)(4) is amended by striking ``sections
1(h), 1201, 1202, and 1211'' and inserting ``sections 1201,
1202, 1203, and 1211''.
(9) The second sentence of section 871(a)(2) is amended by
inserting ``or 1203'' after ``section 1202''.
(10)(A) Section 904(b)(2) is amended by striking
subparagraph (A), by redesignating subparagraph (B) as
subparagraph (A), and by inserting after subparagraph (A) (as
so redesignated) the following:
``(B) Other taxpayers.--In the case of a taxpayer
other than a corporation, 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) Section 904(b)(2)(A), as so redesignated, is amended--
(i) by striking all that precedes clause (i) and
inserting the following:
``(A) Corporations.--In the case of a corporation--
'', and
(ii) by striking in clause (i) ``in lieu of
applying subparagraph (A),''.
(C) Section 904(b)(3) is amended by striking subparagraphs
(D) and (E) and inserting the following:
``(D) Rate differential portion.--The rate
differential portion of foreign source net capital
gain, net capital gain, or the excess of net capital
gain from sources within the United States over net
capital gain, as the case may be, is the same
proportion of such amount as the excess of the highest
rate of tax specified in section 11(b) over the
alternative rate of tax under section 1201(a) bears to
the highest rate of tax specified in section 11(b).''.
(D) Section 593(b)(2)(D)(v) is amended--
(i) by striking ``if there is a capital gain rate
differential (as defined in section 904(b)(3)(D)) for
the taxable year,''; and
(ii) by striking ``section 904(b)(3)(E)'' and
inserting ``section 904(b)(3)(D)''.
(11) The last sentence of section 1044(d) is amended by
striking ``1202'' and inserting ``1203''.
(12)(A) Section 1211(b)(2) 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 section 1212(b)(2) 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) Section 1212(b) is amended by adding at the end the
following:
``(3) Transitional rule.--In the case of any amount which,
under this subsection and section 1211(b) (as in effect for
taxable years beginning before January 1, 1998), is treated as
a capital loss in the first taxable year beginning after
December 31, 1997, paragraph (2) and section 1211(b) (as so in
effect) shall apply (and paragraph (2) and section 1211(b) as
in effect for taxable years beginning after December 31, 1997,
shall not apply) to the extent such amount exceeds the total of
any capital gain net income (determined without regard to this
subsection) for taxable years beginning after December 31,
1997.''.
(13) Section 1402(i)(1) is amended by inserting ``, and the
deduction provided by section 1202 and the exclusion provided
by section 1203 shall not apply'' before the period at the end
thereof.
(14) Section 1445(e) is amended--
(A) in paragraph (1), by striking ``35 percent (or,
to the extent provided in regulations, 28 percent)''
and inserting ``25 percent (or, to the extent provided
in regulations, 19.8 percent)''; and
(B) in paragraph (2), by striking ``35 percent''
and inserting ``25 percent''.
(15)(A) The second sentence of section 7518(g)(6)(A) 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 (25 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 (25 percent''.
(16) The table of sections for part I of subchapter P of
chapter 1 is amended by striking the item relating to section
1202 and by inserting after the item relating to section 1201
the following:
``Sec. 1202. Capital gains deduction.
``Sec. 1203. 50-percent exclusion for
gain from certain small
business stock.''.
(e) Effective Dates.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section apply to
taxable years ending after December 31, 1996.
(2) Contributions.--The amendment made by subsection (c)(2)
applies to contributions on or after January 1, 1997.
(3) Use of long-term losses.--The amendments made by
subsection (c)(12) apply to taxable years beginning after
December 31, 1997.
(4) Withholding.--The amendments made by subsection (c)(14)
apply only to amounts paid after the date of enactment of this
Act.
Subtitle B--Capital Gains Reduction for Corporations
SEC. 111. REDUCTION OF ALTERNATIVE CAPITAL GAIN TAX FOR CORPORATIONS.
(a) In General.--Section 1201 is amended to read as follows:
``SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.
``(a) General Rule.--If for any taxable year a corporation has a
net capital gain, then, in lieu of the tax imposed by sections 11, 511,
and 831 (whichever is applicable), there is hereby imposed a tax (if
such tax is less than the tax imposed by such sections) which shall
consist of the sum of--
``(1) a tax computed on the taxable income reduced by the
amount of the net capital gain, at the rates and in the manner
as if this subsection had not been enacted, plus
``(2) a tax of 25 percent of the net capital gain.
``(b) Transitional Rule.--
``(1) In general.--In the case of any taxable year ending
after December 31, 1996, and beginning before January 1, 1998,
in applying subsection (a), net capital gain for such taxable
year shall not exceed such net capital gain determined by
taking into account only gain or loss properly taken into
account for the portion of the taxable year after December 31,
1996.
``(2) Special rule for pass-thru entities.--Section
1202(d)(2) shall apply for purposes of paragraph (1).
``(c) Cross References.--
``For computation of the alternative
tax--
``(1) in the case of life insurance
companies, see section 801(a)(2),
``(2) in the case of regulated
investment companies and their shareholders, see section 852(b)(3)(A)
and (D), and
``(3) in the case of real estate
investment trusts, see section 857(b)(3)(A).''.
(b) Conforming Amendment.--Section 852(b)(3)(D)(iii) is amended by
striking ``65 percent'' and inserting ``75 percent''.
(c) Effective Date.--The amendments made by this section apply to
taxable years ending after December 31, 1996.
Subtitle C--Capital Loss Deduction Allowed With Respect to Sale or
Exchange of Principal Residence
SEC. 121. CAPITAL LOSS DEDUCTION ALLOWED WITH RESPECT TO SALE OR
EXCHANGE OF PRINCIPAL RESIDENCE.
(a) In General.--Section 165(c) (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:
``(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 amendments made by subsection (a) apply to
sales and exchanges after December 31, 1996, in taxable years ending
after such date.
TITLE II--SMALL BUSINESS VENTURE CAPITAL STOCK
SEC. 201. MODIFICATIONS TO EXCLUSION OF GAIN ON CERTAIN SMALL BUSINESS
STOCK.
(a) Increase in Exclusion Percentage.--
(1) In general.--Section 1203(a), as redesignated by
section 101, is amended--
(A) by striking ``50 percent'' and inserting ``75
percent''; and
(B) in the heading, by striking ``50-Percent'' and
inserting ``Partial''.
(2) Conforming amendments.--
(A) Section 1203, as so redesignated, is amended by
adding at the end the following:
``(l) Cross Reference.--
``For treatment of eligible gain not
excluded under subsection (a), see sections 1201 and 1202.''.
(B) The heading for section 1203, as so
redesignated, is amended by striking ``50-percent'' and
inserting ``Partial''.
(C) The table of sections for part I of subchapter
P of chapter 1, as amended by section 101(d), is
amended by striking ``50-percent'' in the item relating
to section 1203 and inserting ``Partial''.
(b) Reduction in Holding Period.--Subsection (a) of section 1202 is
amended by striking ``5 years'' and inserting ``3 years''.
(c) Exclusion Available to Corporations.--
(1) In general.--Section 1203(a), as redesignated by
section 101, is amended by striking ``other than a
corporation''.
(2) Conforming amendment.--Section 1203(c), as so
redesignated, is amended by adding at the end the following:
``(4) Stock held among members of controlled group not
eligible.--Stock of a member of a parent-subsidiary controlled
group (as defined in subsection (d)(3)) shall not be treated as
qualified small business stock while held by another member of
such group.''.
(d) Repeal of Minimum Tax Preference.--
(1) In general.--Section 57(a) is amended by striking
paragraph (7).
(2) Conforming amendment.--Section 53(d)(1)(B)(ii)(II) is
amended by striking ``, (5), and (7)'' and inserting ``and
(5)''.
(e) Stock of Larger Businesses Eligible for Exclusion.--
(1) In general.--Section 1203(d)(1), as redesignated by
section 101, is amended by striking ``$50,000,000'' each place
it appears and inserting ``$100,000,000''.
(2) Inflation adjustment.--Section 1203(d), as so
redesignated, is amended by adding at the end the following:
``(4) Inflation adjustment of asset limitation.--In the
case of stock issued in any calendar year after 1998, the
$100,000,000 amount contained in paragraph (1) shall be
increased by an amount equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in which
the taxable year begins, determined by substituting
`calendar year 1997' for `calendar year 1992' in
subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence is not a
multiple of $10,000, such amount shall be rounded to the
nearest multiple of $10,000.''.
(f) Repeal of Per-Issuer Limitation.--Section 1203, as redesignated
by section 101, is amended by striking subsection (b).
(g) Other Modifications.--
(1) Repeal of working capital limitation.--Section
1203(e)(6), as redesignated by section 101, is amended--
(A) in subparagraph (B), by striking ``2 years''
and inserting ``5 years''; and
(B) by striking the last sentence.
(2) Exception from redemption rules where business
purpose.--Section 1203(c)(3), as so redesignated, is amended by
adding at the end the following:
``(D) Waiver where business purpose.--A purchase of
stock by the issuing corporation shall be disregarded
for purposes of subparagraph (B) if the issuing
corporation establishes that there was a business
purpose for such purchase and one of the principal
purposes of the purchase was not to avoid the
limitations of this section.''.
(h) Qualified Trade or Business.--Section 1203(e)(3), as
redesignated by section 101, is amended by inserting ``and'' at the end
of subparagraph (C), by striking ``, and'' at the end of subparagraph
(D) and inserting a period, and by striking subparagraph (E).
(i) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section apply to stock issued after the
date of enactment of this Act.
(2) Special rule.--The amendments made by subsections (a),
(c), (e), and (f) apply to stock issued after August 10, 1993.
SEC. 202. ROLLOVER OF GAIN FROM SALE OF QUALIFIED STOCK.
(a) In General.--Part III of subchapter O of chapter 1 is amended
by adding at the end the following:
``SEC. 1045. ROLLOVER OF GAIN FROM QUALIFIED SMALL BUSINESS STOCK TO
ANOTHER QUALIFIED SMALL BUSINESS STOCK.
``(a) Nonrecognition of Gain.--In the case of any sale of qualified
small business stock with respect to which the taxpayer elects the
application of this section, eligible gain from such sale shall be
recognized only to the extent that the amount realized on such sale
exceeds--
``(1) the cost of any qualified small business stock
purchased by the taxpayer during the 60-day period beginning on
the date of such sale, reduced by
``(2) any portion of such cost previously taken into
account under this section.
This section shall not apply to any gain which is treated as ordinary
income for purposes of this title.
``(b) Definitions and Special Rules.--For purposes of this
section--
``(1) Qualified small business stock.--The term `qualified
small business stock' has the meaning given such term by
section 1203(c).
``(2) Eligible gain.--The term `eligible gain' means any
gain from the sale or exchange of qualified small business
stock held for more than 3 years.
``(3) Purchase.--A taxpayer shall be treated as having
purchased any property if, but for paragraph (4), the
unadjusted basis of such property in the hands of the taxpayer
would be its cost (within the meaning of section 1012).
``(4) Basis adjustments.--If gain from any sale is not
recognized by reason of subsection (a), such gain shall be
applied to reduce (in the order acquired) the basis for
determining gain or loss of any qualified small business stock
which is purchased by the taxpayer during the 60-day period
described in subsection (a).
``(c) Special Rules for Treatment of Replacement Stock.--
``(1) Holding period for accrued gain.--For purposes of
this chapter, gain from the disposition of any replacement
qualified small business stock shall be treated as gain from
the sale or exchange of qualified small business stock held
more than 3 years to the extent that the amount of such gain
does not exceed the amount of the reduction in the basis of
such stock by reason of subsection (b)(4).
``(2) Tacking of holding period for purposes of deferral.--
Solely for purposes of applying this section, if any
replacement qualified small business stock is disposed of
before the taxpayer has held such stock for more than 3 years,
gain from such stock shall be treated eligible gain for
purposes of subsection (a).
``(3) Replacement qualified small business stock.--For
purposes of this subsection, the term `replacement qualified
small business stock' means any qualified small business stock
the basis of which was reduced under subsection (b)(4).''.
(b) Conforming Amendments.--
(1) Section 1016(a)(23) is amended--
(A) by striking ``or 1044'' and inserting ``, 1044,
or 1045''; and
(B) by striking ``or 1044(d)'' and inserting ``,
1044(d), or 1045(b)(4)''.
(2) The table of sections for part III of subchapter O of
chapter 1 is amended by adding at the end the following:
``Sec. 1045. Rollover of gain from
qualified small business stock
to another qualified small
business stock.''.
(c) Effective Date.--The amendments made by this section apply to
stock sold or exchanged after the date of enactment of this Act.
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