[Congressional Bills 106th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1703 Introduced in House (IH)]







106th CONGRESS
  1st Session
                                H. R. 1703

To amend the Internal Revenue Code of 1986 to prevent the conversion of 
ordinary income or short-term capital gain into income eligible for the 
         long-term capital gain rates, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                              May 5, 1999

  Mr. Neal of Massachusetts 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 prevent the conversion of 
ordinary income or short-term capital gain into income eligible for the 
         long-term capital gain rates, 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. TREATMENT OF GAIN FROM CONSTRUCTIVE OWNERSHIP TRANSACTIONS.

    (a) In General.--Part IV of subchapter P of chapter 1 of the 
Internal Revenue Code of 1986 (relating to special rules for 
determining capital gains and losses) is amended by inserting after 
section 1259 the following new section:

``SEC. 1260. GAINS FROM CONSTRUCTIVE OWNERSHIP TRANSACTIONS.

    ``(a) In General.--If the taxpayer has gain from a constructive 
ownership transaction with respect to any financial asset and such gain 
would (without regard to this section) be treated as a long-term 
capital gain--
            ``(1) such gain shall be treated as short-term capital gain 
        to the extent that such gain exceeds the net underlying long-
        term capital gain, and
            ``(2) to the extent such gain is treated as a long-term 
        capital gain after the application of paragraph (1), the 
        determination of the capital gain rate (or rates) applicable to 
        such gain under section 1(h) shall be determined on the basis 
        of the respective rate (or rates) that would have been 
        applicable to the net underlying long-term capital gain.
    ``(b) Interest Charge on Deferral of Gain Recognition.--
            ``(1) In general.--If any gain is treated as short-term 
        capital gain for any taxable year by reason of subsection 
        (a)(1), the tax imposed by this chapter for such taxable year 
        shall be increased by the amount of interest determined under 
        paragraph (2) with respect to each prior taxable year during 
        any portion of which the constructive ownership transaction was 
        open. Any amount payable under this paragraph shall be taken 
        into account in computing the amount of any deduction allowable 
        to the taxpayer for interest paid or accrued during such 
        taxable year.
            ``(2) Amount of interest.--The amount of interest 
        determined under this paragraph with respect to a prior taxable 
        year is the amount of interest which would have been imposed 
        under section 6601 on the underpayment of tax for such year 
        which would have resulted if the gain (which is treated as 
        short-term gain by reason of subsection (a)(1)) had been 
        included in gross income in the taxable years in which it 
        accrued (determined by treating the gain as accruing at a 
        constant rate equal to the applicable Federal rate as in effect 
        on the day the transaction closed). The period during which 
        such interest shall accrue shall end on the due date (without 
        extensions) for the return of tax imposed by this chapter for 
        the taxable year in which such transaction closed.
            ``(3) Applicable federal rate.--For purposes of paragraph 
        (2), the applicable Federal rate is the applicable Federal rate 
        determined under 1274(d) (compounded semiannually) which would 
        apply to a debt instrument with a term equal to the period the 
        transaction was open.
            ``(4) No credits against increase in tax.--Any increase in 
        tax under paragraph (1) shall not be treated as tax imposed by 
        this chapter for purposes of determining--
                    ``(A) the amount of any credit allowable under this 
                chapter, or
                    ``(B) the amount of the tax imposed by section 55.
    ``(c) Financial Asset.--For purposes of this section--
            ``(1) In general.--The term `financial asset' means--
                    ``(A) any equity interest in any pass-thru entity, 
                and
                    ``(B) to the extent provided in regulations--
                            ``(i) any debt instrument, and
                            ``(ii) any stock in a corporation which is 
                        not a pass-thru entity.
            ``(2) Pass-thru entity.--For purposes of paragraph (1), the 
        term `pass-thru entity' means--
                    ``(A) a regulated investment company,
                    ``(B) a real estate investment trust,
                    ``(C) an S corporation,
                    ``(D) a partnership,
                    ``(E) a trust,
                    ``(F) a common trust fund,
                    ``(G) a passive foreign investment company (as 
                defined in section 1297),
                    ``(H) a foreign personal holding company, and
                    ``(I) a foreign investment company (as defined in 
                section 1246(b)).
    ``(d) Constructive Ownership Transaction.--For purposes of this 
section--
            ``(1) In general.--The taxpayer shall be treated as having 
        entered into a constructive ownership transaction with respect 
        to any financial asset if the taxpayer--
                    ``(A) holds a long position under a notional 
                principal contract with respect to the financial asset,
                    ``(B) enters into a forward or futures contract to 
                acquire the financial asset,
                    ``(C) is the holder of a call option, and is the 
                grantor of a put option, with respect to the financial 
                asset and such options have substantially equal strike 
                prices and substantially contemporaneous maturity 
                dates, or
                    ``(D) enters into 1 or more other transactions (or 
                acquires 1 or more positions) that have substantially 
                the same effect as a transaction described in any of 
                the preceding subparagraphs.
            ``(2) Exception for positions which are marked to market.--
        This section shall not apply to any constructive ownership 
        transaction if all of the positions which are part of such 
        transaction are marked to market under any provision of this 
        title or the regulations thereunder.
            ``(3) Long position under notional principal contract.--A 
        person shall be treated as holding a long position under a 
        notional principal contract with respect to any financial asset 
        if such person--
                    ``(A) has the right to be paid (or receive credit 
                for) all or substantially all of the investment yield 
                (including appreciation) on such financial asset for a 
                specified period, and
                    ``(B) is obligated to reimburse (or provide credit 
                for) all or substantially all of any decline in the 
                value of such financial asset.
            ``(4) Forward contract.--The term `forward contract' means 
        any contract to acquire in the future (or provide or receive 
        credit for the future value of) any financial asset.
    ``(e) Net Underlying Long-Term Capital Gain.--For purposes of this 
section, in the case of any constructive ownership transaction with 
respect to any financial asset, the term `net underlying long-term 
capital gain' means the aggregate net capital gain that the taxpayer 
would have had if--
            ``(1) the financial asset had been acquired for fair market 
        value on the date such transaction was opened and sold for fair 
        market value on the date such transaction was closed, and
            ``(2) only gains and losses that would have resulted from 
        the deemed ownership under paragraph (1) were taken into 
        account.
The amount of the net underlying long-term capital gain with respect to 
any financial asset shall be treated as zero unless the amount thereof 
is established by clear and convincing evidence.
    ``(f) Special Rule Where Taxpayer Takes Delivery.--Except as 
provided in regulations prescribed by the Secretary, if a constructive 
ownership transaction is closed by reason of taking delivery, this 
section shall be applied as if the taxpayer had sold all the contracts, 
options, or other positions which are part of such transaction for fair 
market value on the closing date. The amount of gain recognized under 
the preceding sentence shall not exceed the amount of gain treated as 
short-term gain under subsection (a). Proper adjustments shall be made 
in the amount of any gain or loss subsequently realized for gain 
recognized under this subsection.
    ``(g) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section, including regulations permitting taxpayers to mark to market 
constructive ownership transactions in lieu of applying this 
section.''.
    (b) Clerical Amendment.--The table of sections for part IV of 
subchapter P of chapter 1 of such Code is amended by adding at the end 
the following new item:

                              ``Sec. 1260. Gains from constructive 
                                        ownership transactions.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to gains recognized after the date of the enactment of this Act; 
except that such amendments shall not apply to transactions entered 
into before February 5, 1998, and not extended or substantially 
modified on or after such date.
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