Capital Gains Tax Simplification Act of 1998

Summary: Capital Gains Tax Simplification Act of 1998 - Amends the Internal Revenue Code to provide that, if for any taxable year a non-corporate taxpayer has a net capital gain, 38 percent of such gain shall be a deduction from gross income regardless of whether or not the taxpayer itemizes other deductions.  Makes such deduction inapplicable to the alternative minimum tax.  Revises provisions concerning the maximum and the regular tax on net capital gain for purposes of the alternative minimum tax. 
Repeals the tax preference for exclusion for gains on the sale of certain small business stock. 
Treats, as a general rule, any gain or loss from the sale or exchange of a collectible as a short-term gain or loss without regard to the period the asset was held. 
Amends the Taxpayer Relief Act of 1997, with respect to maximum capital gains rates for individuals, to repeal the allowance of an election to recognize gain on assets held on January 1, 2001.

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Capital Gains Tax 
Simplification Act of 1998''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. REDUCTION AND SIMPLIFICATION OF CAPITAL GAINS TAX.

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

``SEC. 1203. CAPITAL GAINS DEDUCTION.

    ``If for any taxable year a taxpayer other than a corporation has a 
net capital gain, 38 percent of such gain shall be a deduction from 
gross income.''
    (b) Deduction Allowable Whether or Not Taxpayer Itemizes Other 
Deductions.--
            (1) Subsection (b) of section 63 is amended by striking 
        ``and'' at the end of paragraph (1), by striking the period at 
        the end of paragraph (2) and inserting ``, and'', and by adding 
        at the end the following new paragraph:
            ``(3) the deduction allowed by section 1203.''
            (2) Subsection (d) of section 63 is amended by striking 
        ``and'' at the end of paragraph (1), by striking the period at 
        the end of paragraph (2) and inserting ``, and'', and by adding 
        at the end the following new paragraph:
            ``(3) the deduction allowed by section 1203.''
    (c) Minimum Tax Treatment.--
            (1) Paragraph (1) of section 56(b) is amended by adding at 
        the end the following new subparagraph:
                    ``(G) Capital gain deduction not applicable.--
                Section 1203 shall not apply.''
            (2) Subsection (b) of section 55 is amended by striking 
        paragraph (3) and inserting the following new paragraphs:
            ``(3) Maximum tax on net capital gain.--The amount of tax 
        determined under the first sentence of paragraph (1)(A)(i) 
        shall not exceed the sum of--
                    ``(A) the amount determined under such first 
                sentence computed at the rates and in the same manner 
                as if this paragraph had not been enacted on the 
                taxable excess reduced by the net capital gain, plus
                    ``(B) a tax on the net capital gain determined by 
                using the regular tax capital gains tax rates.
            ``(4) Regular tax on net capital gain.--For purposes of 
        paragraph (3), the tax on the net capital gain determined by 
        using the regular tax capital gains tax rates is the excess 
        of--
                    ``(A) the tax that would be computed under section 
                1 if net capital gain were determined with the 
                adjustments under this part, over
                    ``(B) the tax that would be so computed under 
                section 1 if the taxable income were reduced by 62 
                percent of the net capital gain as so determined.''
    (d) Repeal of Tax Preference for Exclusion on Small Business 
Stock.--
            (1) Subsection (a) of section 57 is amended by striking 
        paragraph (7).
            (2) Subclause (II) of section 53(d)(1)(B)(ii) is amended by 
        striking ``, (5), and (7)'' and inserting ``and (5)''.
    (e) Treatment of Collectibles.--
            (1) In general.--Section 1222 is amended by inserting after 
        paragraph (11) the following new paragraph:
            ``(12) Special rule for collectibles.--
                    ``(A) In general.--Any gain or loss from the sale 
                or exchange of a collectible shall be treated as a 
                short-term capital gain or loss (as the case may be), 
                without regard to the period such asset was held. The 
                preceding sentence shall apply only to the extent the 
                gain or loss is taken into account in computing taxable 
                income.
                    ``(B) Treatment of certain sales of interests in 
                partnerships, etc.--For purposes of subparagraph (A), 
                any gain from the sale or exchange of an interest in a 
                partnership, S corporation, or trust which is 
                attributable to unrealized appreciation in the value of 
                collectibles held by such entity shall be treated as 
                gain from the sale or exchange of a collectible. Rules 
                similar to the rules of section 751(f) shall apply for 
                purposes of the preceding sentence.
                    ``(C) Collectible.--For purposes of this paragraph, 
                the term `collectible' means any capital asset which is 
                a collectible (as defined in section 408(m) without 
                regard to paragraph (3) thereof).''
            (2) Charitable deduction not affected.--
                    (A) Paragraph (1) of section 170(e) is amended by 
                adding at the end thereof the following new sentence: 
                ``For purposes of this paragraph, section 1222 shall be 
                applied without regard to paragraph (12) thereof 
                (relating to special rule for collectibles).''
                    (B) Clause (iv) of section 170(b)(1)(C) is amended 
                by inserting before the period at the end thereof the 
                following: ``and section 1222 shall be applied without 
                regard to paragraph (12) thereof (relating to special 
                rule for collectibles)''.
    (f) Technical and Conforming Changes.--
            (1) Section 1 is amended by striking subsection (h).
            (2) Subparagraph (E) of section 163(d)(4) is amended to 
        read as follows:
                    ``(E) Coordination with capital gains deduction.--
                The net capital gain taken into account under section 
                1203 for any taxable year shall be reduced (but not 
                below zero) by the amount which the taxpayer takes into 
                account as investment income under subparagraph 
                (B)(iii) for such year.''
            (3) Paragraph (1) of section 170(e) is amended by striking 
        ``the amount of gain'' in the material following subparagraph 
        (B)(ii) and inserting ``62 percent (100 percent in the case of 
        a corporation) of the amount of gain''.
            (4) Subparagraph (B) of section 172(d)(2) is amended to 
        read as follows:
                    ``(B) the exclusion under section 1202 and the 
                deduction under section 1203 shall not be allowed.''
            (5) 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 1203 (whichever is 
        appropriate) shall be taken into account.''
            (6)(A) Section 641(d)(2)(A) is amended by striking ``Except 
        as provided in section 1(h), the'' and inserting ``The''.
            (B) Section 641(d)(2)(C) is amended by inserting after 
        clause (iii) the following new clause:
                            ``(iv) The deduction under section 1203.''
            (7) 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 exclusion 
        allowable under section 1202 and any deduction allowable under 
        section 1203 to the estate or trust. In the case of a trust, 
        the deduction allowed by this subsection shall be subject to 
        section 681 (relating to unrelated business income).''
            (8) Section 642 is amended by adding at the end the 
        following new subsection:
    ``(j) Capital Gains Deduction.--The deduction under section 1203 to 
an estate or trust shall be computed by excluding the portion (if any) 
of the gains for the taxable year which is includible by the income 
beneficiaries under sections 652 and 662 (relating to inclusions of 
amounts in gross income of beneficiaries of trusts) as gain derived 
from the sale or exchange of capital assets.''
            (9) The last sentence of section 643(a)(3) is amended to 
        read as follows: ``The exclusion under section 1202 and the 
        deduction under section 1203 shall not be taken into account.''
            (10) Subparagraph (C) of section 643(a)(6) is amended by 
        inserting ``(i)'' before ``there shall'' and by inserting 
before the period ``, and (ii) the deduction under section 1203 
(relating to capital gains deduction) shall not be taken into 
account''.
            (11) Paragraph (4) of section 691(c) is amended by striking 
        ``1(h),'' and by inserting ``1203,'' after ``1202,''.
            (12) The second sentence of paragraph (2) of section 871(a) 
        is amended by striking ``section 1202'' and inserting 
        ``sections 1202 and 1203''.
            (13)(A) Paragraph (2) of section 904(b) is amended by 
        striking subparagraphs (A) and (C), by redesignating 
        subparagraph (B) as subparagraph (A), and by inserting after 
        subparagraph (A) (as so redesignated) the following new 
        subparagraph:
                    ``(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) Subparagraph (A) of section 904(b)(2), 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) Paragraph (3) of section 904(b) is amended by striking 
        subparagraphs (D) and (E) and inserting the following new 
        subparagraph:
                    ``(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).''
            (14) Paragraph (1) of section 1402(i) is amended by 
        inserting ``, and the deduction provided by section 1203 shall 
        not apply'' before the period at the end thereof.
            (15) Paragraph (1) of section 1445(e) is amended by 
        striking ``20 percent'' and inserting ``24.5 percent''.
            (16)(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 ``20 percent'' and inserting 
                ``24.5 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 ``20 percent'' and inserting 
                ``24.5 percent''.
    (g) Clerical Amendment.--The table of sections for part I of 
subchapter P of chapter 1 is amended by adding at the end the following 
new item:

                              ``Sec. 1203. Capital gains deduction.''
    (h) Effective Dates.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years beginning after December 31, 1998.
            (2) Withholding.--The amendments made by subsection (f)(15) 
        shall apply only to amounts paid after December 31, 1998.
            (3) Repeal of election.--Section 311 of the Taxpayer Relief 
        Act of 1997 is amended by striking subsection (e).
            (4) Coordination with prior transition rule.--Any amount 
        treated as long-term capital gain by reason of paragraph (3) of 
        section 1122(h) of the Tax Reform Act of 1986 shall not be 
        taken into account for purposes of applying section 1203 of the 
        Internal Revenue Code of 1986 (as added by this section).