Capital Gains Reform Act of 1997

Summary: Capital Gains Reform Act of 1997 - Amends the Internal Revenue Code to revise rules concerning capital gain for taxpayers other than corporations to establish a new general rule which provides that if for any taxable year a taxpayer other than a corporation has a capital gain, 70 percent of such gain shall be a deduction from gross income. 
Reduces the alternative capital gain tax for corporations.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Capital Gains Reform Act of 1997''.

SEC. 2. 70-PERCENT CAPITAL GAINS DEDUCTION FOR TAXPAYERS OTHER THAN 
              CORPORATIONS.

    (a) In General.--Section 1202 of the Internal Revenue Code of 1986 
is amended to read as follows:

``SEC. 1202. CAPITAL GAINS DEDUCTION.

    ``(a) General Rule.--If for any taxable year a taxpayer other than 
a corporation has a net capital gain, 70 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 of the year following the date of enactment 
        of this section--
                    ``(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 such January 1, 
                and
                    ``(B) the amount of the net capital gain taken into 
                account in applying section 1(h) for such year shall be 
                reduced by the amount taken into account under 
                subparagraph (A) for such year.
            ``(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) of the Internal Revenue Code of 1986 (defining adjusted 
gross income) is amended by inserting after paragraph (15) the 
following new paragraph:
            ``(16) Long-term capital gains.--The deduction allowed by 
        section 1202.''.
    (c) Conforming Amendments.--
            (1) Section 1 of the Internal Revenue Code of 1986 is 
        amended by striking subsection (h).
            (2) Section 170(e)(1) of such Code is amended by striking 
        ``the amount of gain'' in the material following subparagraph 
        (B)(ii) and inserting ``30 percent (100 percent in the case of 
        a corporation) of the amount of gain''.
            (3) Section 172(d)(2)(B) of such Code is amended to read as 
        follows:
                    ``(B) the deduction under section 1202 shall not be 
                allowed.''.
            (4) The last sentence of section 453A(c)(3) of such Code 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) of such Code 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 1202 (relating 
        to capital gains deduction). 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) of such Code is 
        amended to read as follows: ``The deduction under section 1202 
        (relating to capital gains deduction) shall not be taken into 
        account.''.
            (7) Section 643(a)(6)(C) of such Code 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) shall not be taken into 
        account''.
            (8)(A) Section 904(b)(2) of such Code 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) of such Code, 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) in clause (i), by striking ``in lieu of 
                applying subparagraph (A),''.
            (C) Section 904(b)(3) of such Code 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) of such Code 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)''.
            (9) Section 1044(d) of such Code is amended by striking the 
        last sentence.
            (10)(A) Section 1211(b)(2) of such Code 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) of such Code 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) of such Code is amended by adding at 
        the end of the following:
            ``(3) Transitional rule.--In the case of any amount which, 
        under this subsection and section 1211(b) (as in effect for 
        taxable year 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.''.
            (11) Section 1402(i)(1) of such Code is amended by 
        inserting``, and the deduction provided by section 1202 shall 
        not apply'' before the period at the end thereof.
            (12) Section 1445(e) of such Code is amended--
                    (A) in paragraph (1), by striking ``35 percent (or, 
                to the extent provided in regulations, 28 percent)'' 
and inserting ``22 percent (or, to the extent provided in regulation, 
15.6 percent)'', and
                    (B) in paragraph (2), by striking ``35 percent'' 
                and inserting ``22 percent''.
            (13)(A) The second sentence of section 7518(g)(6)(A) of 
        such Code 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 ``15.6 percent (22 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 ``15.6 percent (22 percent''.
            (14) The item relating to section 1202 in the table of 
        sections for part I of subchapter P of chapter 1 of such Code 
        is amended to read as follows:

                              ``Sec. 1202, Capital gains deduction.''.
    (d) 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 of the year which 
        includes the date of enactment of this Act.
            (2) Repeal of section 1(h).--The amendment made by 
        subsection (c)(1) applies to taxable years beginning on or 
        after January 1 of the year following the date of enactment of 
        this Act.
            (3) Contributions.--The amendment made by subsection (c)(2) 
        applies to contributions on or after January 1 of the year 
        following the date of enactment of this Act.
            (4) Use of long-term losses.--The amendments made by 
        subsection (c)(10) apply to taxable years beginning on or after 
        January 1 of the second year following the date of enactment of 
        this Act.
            (5) Withholding.--The amendments made by subsection (c)(12) 
        apply only to amounts paid on or after January 1 of the year 
        following the date of enactment of this Act.

SEC. 3. REDUCTION OF ALTERNATIVE CAPITAL GAIN TAX FOR CORPORATIONS.

    (a) In General.--Section 1201(a)(2) of the Internal Revenue Code of 
1986 (relating to alternative tax for corporations) is amended by 
striking ``35 percent'' and inserting ``22 percent''.
    (b) Transitional Rule.--Section 1201(b) of the Internal Revenue 
Code of 1986 is amended to read as follows:
    ``(b) Transitional Rule.--
            ``(1) In general.--In applying this section, net capital 
        gain for any taxable year shall not exceed the net capital gain 
        determined by taking into account only gains and losses 
        properly taken into account for the portion of the taxable year 
        on or after January 1 of the year following the date of 
        enactment of this subsection.
            ``(2) Special rule for pass-thru entities.--Section 
        1202(d)(2) shall apply for purposes of paragraph (1).''.
    (c) Conforming Amendment.--Section 852(b)(3)(D)(iii) of the 
Internal Revenue Code of 1986 is amended by striking ``65 percent'' and 
inserting ``78 percent''.
    (d) Effective Date.--The amendments made by this section apply to 
taxable years ending after December 31 of the year which includes the 
date of enactment of this Act.