[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.
                                 <all>