[Congressional Record Volume 141, Number 4 (Monday, January 9, 1995)]
[Senate]
[Pages S671-S677]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HATCH:
  S. 181. A bill to amend the Internal Revenue Code, of 1986 to provide 
tax incentives to encourage small investors, and for other purposes; to 
the Committee on Finance.
  S. 182. A bill to amend the Internal Revenue Code of 1986 to 
encourage investment in the United States by reforming the taxation of 
capital gains, and for other purposes; to the Committee on Finance.


                     CAPITAL GAINS TAX LEGISLATION

  Mr. HATCH. Mr. President, I rise today to introduce two pieces of 
capital gains tax legislation that will significantly change and 
improve America's capital formation, tax fairness, and saving rate. 
These bills are alternative solutions to reform a tax code that 
discourages investment and unfairly taxes investors on gains caused 
solely by inflation. Enactment of either of these bills would 
strengthen this Nation's precarious economic condition by stimulating 
economic growth and creating new jobs.
  These bills are the Small Investors Tax Relief Act of 1995 and the 
Capital Formation and Jobs Creation Act of 1995.
  Mr. President, the first bill, the Small Investors Tax Relief Act of 
1995 [SITRA], features three simple provisions that solve several 
problems that face America's small investors. First, it gives every 
individual an annual exemption from capital gains of $10,000 
[[Page S672]] per year. This amount is doubled on a joint return and 
the thresholds are indexed for inflation. This provision will encourage 
lower- and middle-income taxpayers to save and invest in stocks, real 
estate, or a new business. It will also unlock billions of dollars of 
unrealized capital gains in this country and put it to work creating 
new jobs.
  Second, SITRA provides an annual exemption from tax for the first 
$1,000 of interest and dividends earned by individuals each year. The 
exemption threshold is $2,000 for joint returns and is also indexed for 
inflation. This provision will provide a tremendous incentive for 
taxpayers to invest, rather than spend, their dollars. Our current tax 
law actually discourages savings by taxing every cent of earnings from 
interest and dividends. The result is a miserably low saving rate for 
the United States. All of our major trading partners enjoy a higher 
saving rate than does than the United States. Yet, our long-term 
prosperity demands a higher rate of savings, according to practically 
every economist. This bill will go a long way toward providing the 
encouragement that is now lacking for taxpayers to save money.
  Finally, SITRA would provide for indexing the bases of most capital 
assets to eventually eliminate the unfair taxation of gains caused 
solely by inflation. There is nothing fair about having to pay tax on 
inflationary gains. The tax on inflationary capital gains is not a tax 
on income or even on the increase in the real value of the asset. It is 
purely a tax on capital very much like the property tax, but only 
assessed when the property is sold.

  Mr. President, I am also introducing today the Capital Formation and 
Jobs Creation Act of 1995. This bill is identical to the capital gains 
tax bill included in H.R. 9, which is part of the Contract With 
America, introduced last week by Congressman Bill Archer. I commend 
Congressman Archer, the new chairman of the Ways and Means Committee, 
for his expertise and many years of leadership in the area of capital 
gains taxation and I look forward to working with him on this issue.
  This bill is also very simple. First, it would provide a deduction of 
50 percent of net capital gains realized. Thus, only half of a 
taxpayer's capital gains would be subject to taxation. Second, it would 
also index the bases of capital assets to ensure that inflationary 
gains are eliminated. Finally, it would allow a capital loss deduction 
for losses suffered on a sale or exchange of a taxpayer's principal 
residence.
  Mr. President, the debate about whether to cut the tax on capital 
gains has been very loud, long, and partisan. Our colleagues have heard 
much from both sides of the issue for many years. For the first time in 
several years, however, there is a realistic possibility that Congress 
will pass legislation this year to lower the tax on capital gains.
  The two bills I am introducing today offer different approaches to 
increasing economic growth, creating jobs, and enhancing fairness to 
taxpayers. I urge my colleagues to take a look at these bills as we 
consider how to best improve our Tax Code this year. I will have more 
to say on the need for capital gains tax reductions and the different 
approaches of these two bills in the days to come. My main purpose in 
introducing these bills today is to get these ideas before my 
colleagues and before the Nation. I ask unanimous consent that the text 
of the Small Investors Tax Relief Act of 1995 and the Capital Formation 
and Jobs Creation Act of 1995 be printed in the Record.
  There being no objection, the bills were ordered to be printed in the 
Record, as follows:

                                 S. 181

       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 ``Small 
     Investors Tax Relief Act of 1995''.
       (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.

     SEC. 2. EXEMPTION OF CERTAIN INTEREST AND DIVIDEND INCOME 
                   FROM TAX.

       (a) In General.--Part III of subchapter B of chapter 1 
     (relating to amounts specifically excluded from gross income) 
     is amended by inserting after section 115 the following new 
     section:

     ``SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTEREST 
                   RECEIVED BY INDIVIDUALS.

       ``(a) Exclusion From Gross Income.--Gross income does not 
     include the sum of the amounts received during the taxable 
     year by an individual as--
       ``(1) dividends from domestic corporations, or
       ``(2) interest.
       ``(b) Limitations.--
       ``(1) Maximum amount.--The aggregate amount excluded under 
     subsection (a) for any taxable year shall not exceed $1,000 
     ($2,000 in the case of a joint return).
       ``(2) Certain dividends excluded.--Subsection (a)(1) shall 
     not apply to any dividend from a corporation which, for the 
     taxable year of the corporation in which the distribution is 
     made, or for the next preceding taxable year of the 
     corporation, is a corporation exempt from tax under section 
     501 (relating to certain charitable, etc., organization) or 
     section 521 (relating to farmers' cooperative associations).
       ``(3) Indexing for inflation.--In the case of any taxable 
     year beginning after 1995--
       ``(A) the $1,000 amount under paragraph (1) shall be 
     increased by an amount equal to--
       ``(i) $1,000, multiplied by
       ``(ii) the cost-of-living adjustment under section 1(f)(3) 
     for the calendar year in which the taxable year begins, 
     except that subparagraph (B) thereof shall be applied by 
     substituting `1994' for `1992', and
       ``(B) the $2,000 amount under paragraph (1) shall be 
     increased to an amount equal to twice the amount to which the 
     $1,000 amount is increased to under subparagraph (a).

     .If the dollar amount determined after the increase under 
     subparagraph (A) is not a multiple of $100, such dollar 
     amount shall be rounded to the next lowest multiple of $100.
       ``(c) Special Rules.--For purposes of this section--
       ``(1) Distributions from regulated investment companies and 
     real estate investment trusts.--Subsection (a) shall apply 
     with respect to distributions by--
       ``(A) regulated investment companies to the extent provided 
     in section 854(c), and
       ``(B) real estate investment trusts to the extent provided 
     in section 857(c).
       ``(2) Distributions by a trust.--For purposes of subsection 
     (a), the amount of dividends and interest properly allocable 
     to a beneficiary under section 652 or 662 shall be deemed to 
     have been received by the beneficiary ratably on the same 
     date that the dividends and interest were received by the 
     estate or trust.
       ``(3) Certain nonresident aliens ineligible for 
     exclusion.--In the case of a nonresident alien individual, 
     subsection (a) shall apply only--
       ``(A) in determining the tax imposed for the taxable year 
     pursuant to section 871(b)(1) and only in respect of 
     dividends and interest which are effectively connected with 
     the conduct of a trade or business within the United States, 
     or
       ``(B) in determining the tax imposed for the taxable year 
     pursuant to section 877(b).''
       (b) Clerical and Conforming Amendments.--
       (1) The table of sections for part III of subchapter B of 
     chapter 1 is amended by inserting after the item relating to 
     section 115 the following new item:

``Sec. 116. Partial exclusion of dividends and interest received by 
              individuals.''
       (2) Paragraph (2) of section 265(a) is amended by inserting 
     before the period at the end thereof the following: ``, or to 
     purchase or carry obligations or shares, or to make deposits, 
     to the extent the interest thereon is excludable from gross 
     income under section 116''.
       (3) Subsection (c) of section 584 is amended by adding at 
     the end the following new sentence:
     ``The proportionate share of each participant in the amount 
     of dividends or interest received by the common trust fund 
     and to which section 116 applies shall be considered for 
     purposes of such section as having been received by such 
     participant.''
       (4) Subsection (a) of section 643 is amended by inserting 
     after paragraph (6) the following new paragraph:
       ``(7) Dividends or interest.--There shall be included the 
     amount of any dividends or interest excluded from gross 
     income pursuant to section 116.''
       (5) Section 854 is amended by adding at the end the 
     following new subsection:
       ``(c) Treatment Under Section 116.--
       ``(1) In general.--For purposes of section 116, in the case 
     of any dividend (other than a dividend described in 
     subsection (a)) received from a regulated investment company 
     which meets the requirements of section 852 for the taxable 
     year in which it paid the dividend--
       ``(A) the entire amount of such dividend shall be treated 
     as a dividend if the aggregate dividends and interest 
     received by such company during the taxable year equal or 
     exceed 75 percent of its gross income, or
       ``(B) if subparagraph (A) does not apply, a portion of such 
     dividend shall be treated as a dividend (and a portion of 
     such dividend shall be treated as interest) based on the 
     portion of the company's gross income which consists of 
     aggregate dividends or aggregate interest, as the case may 
     be.

      [[Page S673]] For purposes of the preceding sentence, gross 
     income and aggregate interest received shall each be reduced 
     by so much of the deduction allowable by section 163 for the 
     taxable year as does not exceed aggregate interest received 
     for the taxable year.
       ``(2) Notice to shareholders.--The amount of any 
     distribution by a regulated investment company which may be 
     taken into account as a dividend for purposes of the 
     exclusion under section 116 shall not exceed the amount so 
     designated by the company in a written notice to its 
     shareholders mailed not later than 45 days after the close of 
     its taxable year.
       ``(3) Definitions.--For purposes of this subsection--
       ``(A) the term `gross income' does not include gain from 
     the sale or other disposition of stock or securities, and
       ``(B) the term `aggregate dividends received' includes only 
     dividends received from domestic corporations other than 
     dividends described in section 116(b)(2).

     In determining the amount of any dividend for purposes of 
     subparagraph (B), the rules provided in section 116(c)(1) 
     (relating to certain distributions) shall apply.''
       (6) Subsection (c) of section 857 of such Code is amended 
     to read as follows:
       ``(c) Limitations Applicable to Dividends Received From 
     Real Estate Investment Trusts.--
       ``(1) In general.--For purposes of section 116 (relating to 
     an exclusion for dividends and interest received by 
     individuals) and section 243 (relating to deductions for 
     dividends received by corporations), a dividend received from 
     a real estate investment trust which meets the requirements 
     of this part shall not be considered as a dividend.
       ``(2) Treatment as interest.--In the case of a dividend 
     (other than a capital gain dividend, as defined in subsection 
     (b)(3)(C)) received from a real estate investment trust which 
     meets the requirements of this part for the taxable year in 
     which it paid the dividend--
       ``(A) such dividend shall be treated as interest if the 
     aggregate interest received by the real estate investment 
     trust for the taxable year equals or exceeds 75 percent of 
     its gross income, or
       ``(B) if subparagraph (A) does not apply, the portion of 
     such dividend which bears the same ratio to the amount of 
     such dividend as the aggregate interest received bears to 
     gross income shall be treated as interest.
       ``(3) Adjustments to gross income and aggregate interest 
     received.--For purposes of paragraph (2)--
       ``(A) gross income does not include the net capital gain,
       ``(B) gross income and aggregate interest received shall 
     each be reduced by so much of the deduction allowable by 
     section 163 for the taxable year (other than for interest on 
     mortgages on real property owned by the real estate 
     investment trust) as does not exceed aggregate interest 
     received by the taxable year, and
       ``(C) gross income shall be reduced by the sum of the taxes 
     imposed by paragraphs (4), (5), and (6) of section 857(b).
       ``(4) Notice to shareholders.--The amount of any 
     distribution by a real estate investment trust which may be 
     taken into account as interest for purposes of the exclusion 
     under section 116 shall not exceed the amount so designated 
     by the trust in a written notice to its shareholders mailed 
     not later than 45 days after the close of its taxable year.''
       (c) Effective Date.--The amendments made by this section 
     shall apply with respect to amounts received after December 
     31, 1994, in taxable years ending after such date.

     SEC. 3. 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,
       ``(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)), and
       ``(C) the principal residence of the taxpayer (within the 
     meaning of section 1034).
       ``(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) Indexed basis.--The indexed basis for any asset is--
       ``(A) the adjusted basis of the asset, multiplied by
       ``(B) the applicable inflation ratio.
       ``(2) Applicable inflation ratio.--The applicable inflation 
     ratio for any asset is the percentage arrived at by 
     dividing--
       ``(A) the CPI for the calendar year preceding the calendar 
     year in which the disposition takes place, by
       ``(B) the CPI for the calendar year preceding the calendar 
     year in which the asset was acquired by the taxpayer (or, in 
     the case of an asset acquired before 1995, the CPI for 1993).

     The applicable inflation ratio shall not be taken into 
     account unless it is greater than 1. The applicable inflation 
     ratio for any asset shall be rounded to the nearest one-tenth 
     of 1 percent.
       ``(3) CPI.--The CPI for any calendar year shall be 
     determined under section 1(f)(4).
       ``(4) Secretary to publish tables.--The Secretary shall 
     publish tables specifying the applicable inflation ratio for 
     each calendar year.
       ``(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.
       ``(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 [[Page S674]] 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) 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, 1994, see section 
1022(a)(1).''

       (c) Clerical Amendment.--The table of sections for part II 
     of subchapter O of such 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.''

       (d) Effective Date.--The amendments made by this section 
     shall apply to dispositions after December 31, 1994.

     SEC. 4. REDUCTION IN CAPITAL GAINS TAX FOR INDIVIDUALS.

       (a) General Rule.--Part I of subchapter P of chapter 1 
     (relating to treatment of capital gains) is amended by adding 
     at the end thereof the following new section:

     ``SEC. 1203. CAPITAL GAINS DEDUCTION FOR INDIVIDUALS.

       ``(a) In General.--In the case of an individual, there 
     shall be allowed as a deduction for the taxable year an 
     amount equal to the annual capital gains deduction (if any) 
     determined under subsection (b).
       ``(b) Annual Capital Gains Deduction.--
       ``(1) In general.--For purposes of subsection (a), the 
     annual capital gains deduction determined under this 
     subsection is the lesser of--
       ``(A) the net capital gain for the taxable year, or
       ``(B) $10,000 ($20,000 in the case of a joint return).
       ``(2) Coordination with exclusion for gain from small 
     business stock.--For purposes of paragraph (1)(A), net 
     capital gain shall be determined without regard to any gain 
     from the sale or exchange of qualified small business stock 
     (as defined in section 1202(c)) held for more than 5 years.
       ``(3) Certain individuals not eligible.--This subsection 
     shall not apply to any individual with respect to whom a 
     deduction under section 151 is allowable to another taxpayer 
     for a taxable year beginning in the calendar year in which 
     such individual's taxable year begins.
       ``(4) Annual deduction not available for sales to related 
     persons.--The amount of the net capital gain taken into 
     account under paragraph (1)(A) shall not exceed the amount of 
     the net capital gain determined by not taking into account 
     gains and losses from sales and exchanges to any related 
     person (as defined in section 267(f)).
       ``(5) Indexing for inflation.--In the case of any taxable 
     year beginning after 1995--
       ``(A) the $10,000 amount under paragraph (1)(B) shall be 
     increased by an amount equal to--
       ``(i) $10,000, multiplied by
       ``(ii) the cost-of-living adjustment under section 1(f)(3) 
     for the calendar year in which the taxable year begins, 
     except that subparagraph (B) thereof shall be applied by 
     substituting `1994' for `1992', and
       ``(B) the $20,000 amount under paragraph (1)(B) shall be 
     increased to an amount equal to twice the amount determined 
     under subparagraph (A) for the taxable year.

     If the dollar amount determined after the increase under this 
     paragraph is not a multiple of $100, such dollar amount shall 
     be rounded to the next lowest multiple of $100.
       ``(c) Section Not To Apply to Estates or Trusts.--No 
     deduction shall be allowed under this section to an estate or 
     trust.
       ``(d) Special Rules.--
       ``(1) Deduction available only for sales or exchanges after 
     december 31, 1994.--The amount of the net capital gain taken 
     into account under subsection (b)(1)(A) shall not exceed the 
     amount of the net capital gain determined by only taking into 
     account gains and losses from sales and exchanges after 
     December 31, 1994.
       ``(2) Special rule for pass-thru entities.--
       ``(A) In general.--In applying this section with respect to 
     any pass-thru entity, the determination of when the sale or 
     exchange occurs 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) Conforming Amendments.--
       (1) Subsection (a) of section 62 is amended by inserting 
     after paragraph (15) the following new paragraph:
       ``(16) Capital gains deduction.--The deduction allowed by 
     section 1203.''
       (2) Paragraph (2) of section 172(d) is amended by inserting 
     ``and the deduction provided by section 1203'' after 
     ``1202''.
       (3)(A) Section 220 (relating to cross reference) is amended 
     to read as follows:

     ``SEC. 220. CROSS REFERENCES.

  ``(1) For deduction for net capital gains in the case of a taxpayer 
other than a corporation, see section 1203.
  ``(2) For deductions in respect of a decedent, see section 691.''

       (B) The table of sections for part VII of subchapter B of 
     chapter 1 is amended by striking ``reference'' in the item 
     relating to section 220 and inserting ``references''.
       (4) Paragraph (4) of section 691(c) is amended by inserting 
     ``1203,'' after ``1202,''.
       (5) The second sentence of paragraph (2) of section 871(a) 
     is amended by inserting ``or 1203'' after ``1202''.
       (c) Clerical Amendment.--The table of sections for part I 
     of subchapter P of chapter 1 is amended by adding at the end 
     thereof the following new item:


``Sec. 1203. Capital gains deduction for individuals.''

       (d) Effective Date.--The amendments made by this section 
     shall apply to sales or exchanges after December 31, 1994, in 
     taxable years ending after such date.
                                                                    ____


                                 S. 182

       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 and Job Creation Act of 1995''.
       (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.

     SEC. 2. 50 PERCENT CAPITAL GAINS DEDUCTION.

       (a) General Rule.--Part I of subchapter P of chapter 1 
     (relating to treatment of capital gains) is amended to read 
     as follows:

                  ``PART I--TREATMENT OF CAPITAL GAINS

``Sec. 1201. Capital gains deduction.

     ``SEC. 1201. CAPITAL GAINS DEDUCTION.

       ``(a) General Rule.--If for any taxable year a taxpayer has 
     a net capital gain, 50 [[Page S675]] 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, 1995--
       ``(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, 1995, 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.--Subsection (a) of section 62 is amended by inserting 
     after paragraph (15) the following new paragraph:
       ``(16) Long-term capital gains.--The deduction allowed by 
     section 1201.''
       (c) Technical and Conforming Changes.--
       (1) Section 13113 of the Revenue Reconciliation Act of 1993 
     (relating to 50-percent exclusion for gain from certain small 
     business stock), and the amendments made by such section, are 
     hereby repealed; and the Internal Revenue Code of 1986 shall 
     be applied as if such section (and amendments) had never been 
     enacted.
       (2) Section 1 is amended by striking subsection (h).
       (3) Paragraph (1) of section 170(e) is amended by striking 
     ``the amount of gain'' in the material following subparagraph 
     (B)(ii) and inserting ``50 percent of the amount of gain''.
       (4)(A) Paragraph (2) of section 172(d) is amended to read 
     as follows:
       ``(2) Capital gains and losses.--
       ``(A) Losses of taxpayers other than corporations.--In the 
     case of a taxpayer other than a corporation, the amount 
     deductible on account of losses from sales or exchanges of 
     capital assets shall not exceed the amount includible on 
     account of gains from sales or exchanges of capital assets.
       ``(B) Deduction under section 1201.--The deduction under 
     section 1201 shall not be allowed.''
       (B) Subparagraph (B) of section 172(d)(4) is amended by 
     striking ``paragraphs (1) and (3)'' and inserting 
     ``paragraphs (1), (2)(B), and (3)''.
       (5) Paragraph (4) of section 642(c) is amended to read as 
     follows:
       ``(4) Adjustments.--To the extent that the amount otherwise 
     allowable as a deduction under this subsection consists of 
     gain from the sale or exchange of capital assets held for 
     more than 1 year, proper adjustment shall be made for any 
     deduction allowable to the estate or trust under section 1201 
     (relating to deduction for excess of capital gains over 
     capital losses). In the case of a trust, the deduction 
     allowed by this subsection shall be subject to section 681 
     (relating to unrelated business income).''
       (6) Paragraph (3) of section 643(a) is amended by adding at 
     the end the following new sentence: ``The deduction under 
     section 1201 (relating to deduction of excess of capital 
     gains over capital losses) shall not be taken into account.''
       (7) Paragraph (4) of section 691(c) is amended by striking 
     ``sections 1(h), 1201, and 1211'' and inserting ``sections 
     1201 and 1211''.
       (8) The second sentence of section 871(a)(2) is amended by 
     inserting ``such gains and losses shall be determined without 
     regard to section 1201 (relating to deduction for capital 
     gains) and'' after ``except that''.
       (9) Subsection (d) of section 1044 is amended by striking 
     the last sentence.
       (10)(A) Paragraph (2) of section 1211(b) is amended to read 
     as follows:
       ``(2) the sum of--
       ``(A) the excess of the net short-term capital loss over 
     the net long-term capital gain, and
       ``(B) one-half of the excess of the net long-term capital 
     loss over the net short-term capital gain.''
       (B) So much of paragraph (2) of section 1212(b) 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.''

       (11) Paragraph (1) of section 1402(i) is amended by 
     inserting ``, and the deduction provided by section 1201 
     shall not apply'' before the period at the end thereof.
       (12) Section 12 is amended by striking paragraph (4) and 
     redesignating the following paragraphs accordingly.
       (13) Paragraph (2) of section 527(b) is hereby repealed.
       (14) Subparagraph (D) of section 593(b)(2) is amended by 
     adding ``and'' at the end of clause (iii), by striking ``, 
     and'' at the end of clause (iv) and inserting a period, and 
     by striking clause (v).
       (15) Paragraph (2) of section 801(a) is hereby repealed.
       (16) Subsection (c) of section 831 is amended by striking 
     paragraph (1) and redesignating the following paragraphs 
     accordingly.
       (17)(A) Subparagraph (A) of section 852(b)(3) is amended by 
     striking ``, determined as provided in section 1201(a), on'' 
     and inserting ``of 17.5 percent of''.
       (B) Clause (iii) of section 852(b)(3)(D) is amended--
       (i) by striking ``65 percent'' and inserting ``82.5 
     percent'', and
       (ii) by striking ``section 1201(a)'' and inserting 
     ``subparagraph (A)''.
       (18) Clause (ii) of section 857(b)(3)(A) is amended by 
     striking ``determined at the rate provided in section 1201(a) 
     on'' and inserting ``of 17.5 percent of''.
       (19) Paragraph (1) of section 882(a) is amended by striking 
     ``section 11, 55, 59A, or 1201(a)'' and inserting ``section 
     11, 55, or 59A''.
       (20) Subsection (b) of section 904 is amended by striking 
     paragraphs (2)(B), (3)(B), (3)(D), and (3)(E).
       (21) Subsection (b) of section 1374 is amended by striking 
     paragraph (4).
       (22) Subsection (b) of section 1381 is amended by striking 
     ``or 1201''.
       (23) Subsection (e) of section 1445 is amended--
       (A) in paragraph (1) by striking ``35 percent (or, to the 
     extent provided in regulations, 28 percent)'' and inserting 
     ``17.5 percent (or, to the extent provided in regulations, 
     19.8 percent)'', and
       (B) in paragraph (2) by striking ``35 percent'' and 
     inserting ``17.5 percent''.
       (24) Clause (i) of section 6425(c)(1)(A) is amended by 
     striking ``or 1201(a)''.
       (25) Clause (i) of section 6655(g)(1)(A) is amended by 
     striking ``or 1201(a)''.
       (26)(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 (17.5 percent''.
       (B) The second sentence of section 607(h)(6)(A) of the 
     Merchant Marine Act, 1936 is amended--
       (i) by striking ``during a taxable year to which section 
     1(h) or 1201(a) of such Code applies'', and
       (ii) by striking ``28 percent (34 percent'' and inserting 
     ``19.8 percent (17.5 percent''.
       (d) Effective Date.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to taxable years ending after December 31, 1994.
       (2) Contributions.--The amendment made by subsection (c)(3) 
     shall apply only to contributions on or after January 1, 
     1995.
       (3) Withholding.--The amendment made by subsection (c)(23) 
     shall apply only to amounts paid after the date of the 
     enactment of this Act.

     SEC. 3. 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 otherwise provided in this subsection, if an indexed asset 
     which has been held for more than 1 year is sold or otherwise 
     disposed of, for purposes of this title the indexed basis of 
     the asset shall be substituted for its adjusted basis.
       ``(2) Exception for depreciation, etc.--The 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.-- [[Page S676]] 
       ``(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 (i)(3)).
       ``(D) Certain preferred stock.--Stock which is fixed and 
     preferred as to dividends and does not participate in 
     corporate growth to any significant extent.
       ``(E) Stock in foreign corporations.--Stock in a foreign 
     corporation.
       ``(F) Stock in s corporations.--Stock in an S corporation.
       ``(3) Exception for stock in foreign corporation which is 
     regularly traded on national or regional exchange.--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, the national market system operated 
     by the National Association of Securities Dealers, 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)),
       ``(B) stock in a passive foreign investment company (as 
     defined in section 1296), and
       ``(C) stock in a foreign corporation held by a United 
     States person who meets the requirements of section 
     1248(a)(2).
       ``(4) Treatment of american depository receipts.--For 
     purposes of this section, an American depository receipt for 
     stock in a foreign corporation shall be treated as stock in 
     such corporation.
       ``(c) Indexed Basis.--For purposes of this section--
       ``(1) General rule.--The indexed basis for any asset is--
       ``(A) the adjusted basis of the asset, multiplied by
       ``(B) the applicable inflation ratio.
       ``(2) Applicable inflation ratio.--The applicable inflation 
     ratio for any asset is the percentage arrived at by 
     dividing--
       ``(A) the gross domestic product deflator for the calendar 
     quarter in which the disposition takes place, by
       ``(B) the gross domestic product deflator for the calendar 
     quarter in which the asset was acquired by the taxpayer (or, 
     if later, the calendar quarter ending on December 31, 1994).

     The applicable inflation ratio shall never be less than 1. 
     The applicable inflation ratio for any asset shall be rounded 
     to the nearest \1/1000\.
       ``(3) Gross domestic product deflator.--The gross domestic 
     product deflator for any calendar quarter is the implicit 
     price deflator for the gross domestic product for such 
     quarter (as shown in the first revision thereof).
       ``(d) Short Sales.--
       ``(1) In general.--In the case of a short sale of an 
     indexed asset with a short sale period in excess of 1 year, 
     for purposes of this title, the amount realized shall be an 
     amount equal to the amount realized (determined without 
     regard to this paragraph) multiplied by the applicable 
     inflation ratio. In applying subsection (c)(2) for purposes 
     of the preceding sentence, the date on which the property is 
     sold short shall be treated as the date of acquisition and 
     the closing date for the sale shall be treated as the date of 
     disposition.
       ``(2) Short sale of substantially identical property.--If 
     the taxpayer or the taxpayer's spouse sells short property 
     substantially identical to an asset held by the taxpayer, the 
     asset held by the taxpayer and the substantially identical 
     property shall not be treated as indexed assets for the short 
     sale period.
       ``(3) Short sale period.--For purposes of this subsection, 
     the short sale period begins on the day after property is 
     sold and ends on the closing date for the sale.
       ``(e) Treatment of Regulated Investment Companies and Real 
     Estate Investment Trusts.--
       ``(1) Adjustments at entity level.--
       ``(A) In general.--Except as otherwise provided in this 
     paragraph, the adjustment under subsection (a) shall be 
     allowed to any qualified investment entity (including for 
     purposes of determining the earnings and profits of such 
     entity).
       ``(B) Exception for qualification purposes.--This section 
     shall not apply for purposes of sections 851(b) and 856(c).
       ``(2) Adjustments to interests held in entity.--
       ``(A) 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.
       ``(3) Qualified investment entity.--For purposes of this 
     subsection, the term `qualified investment entity' means--
       ``(A) a regulated investment company (within the meaning of 
     section 851), and
       ``(B) a real estate investment trust (within the meaning of 
     section 856).
       ``(f) Other Pass-Thru Entities.--
       ``(1) Partnerships.--In the case of a partnership, the 
     adjustment made under subsection (a) at the partnership level 
     shall be passed through to the partners.
       ``(2) S corporations.--In the case of an S corporation, the 
     adjustment made under subsection (a) at the corporate level 
     shall be passed through to the shareholders.
       ``(3) Common trust funds.--In the case of a common trust 
     fund, the adjustment made under subsection (a) at the trust 
     level shall be passed through to the participants.
       ``(g) Dispositions Between Related Persons.--
       ``(1) In general.--This section shall not apply to any sale 
     or other disposition of property between related persons 
     except to the extent that the basis of such property in the 
     hands of the transferee is a substituted basis.
       ``(2) Related persons defined.--For purposes of this 
     section, the term `related persons' means--
       ``(A) persons bearing a relationship set forth in section 
     267(b), and
       ``(B) persons treated as single employer under subsection 
     (b) or (c) of section 414.
       ``(h) Transfers To Increase Indexing Adjustment.--If any 
     person transfers cash, debt, or any other property to another 
     person and the principal purpose of such transfer is to 
     secure or increase an adjustment under subsection (a), the 
     Secretary may disallow part or all of such adjustment or 
     increase.
       ``(i) Special Rules.--For purposes of this section:
       ``(1) Treatment 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.
       ``(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.--The applicable inflation ratio shall be 
     appropriately reduced for periods during which the asset was 
     not an indexed asset.
       ``(3) Net lease property defined.--The term `net lease 
     property' means leased 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.
       ``(4) Treatment of certain distributions.--A distribution 
     with respect to stock in a corporation which is not a 
     dividend shall be treated as a disposition.
       ``(5) 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.
       ``(6) 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.
       ``(7) Collapsible corporations.--The application of section 
     341(a) (relating to collapsible corporations) shall be 
     determined without regard to this section.
       ``(j) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.''
       (b) Clerical Amendment.--The table of sections for part II 
     of subchapter O of chapter 1 is amended by inserting after 
     the item relating to section 1021 the following new item:

``Sec. 1022. Indexing of certain assets for purposes of determining 
              gain or loss.''


[[Page S677]]

       (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, see section 1022(a)(1).''

       (d) Effective Date.--The amendments made by this section 
     shall apply to dispositions after December 31, 1994, in 
     taxable years ending after such date.

     SEC. 4. CAPITAL LOSS DEDUCTION ALLOWED WITH RESPECT TO SALE 
                   OR EXCHANGE OF PRINCIPAL RESIDENCE.

       (a) In General.--Subsection (c) of section 165 (relating to 
     limitation on losses of individuals) is amended by striking 
     ``and'' at the end of paragraph (2), by striking the period 
     at the end of paragraph (3) and inserting ``; and'', and by 
     adding at the end the following new paragraph:
       ``(4) losses arising from the sale or exchange of the 
     principal residence (within the meaning of section 1034) of 
     the taxpayer.''
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to sales and exchanges after December 31, 1994, 
     in taxable years ending after such date.
                                 ______