American Dream Tax Fairness Equity Act of 1997

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``American Dream Tax Fairness Equity 
Act of 1997''.

SEC. 2. REDUCTION OF MAXIMUM CAPITAL GAINS RATE FOR INDIVIDUALS TO 15 
              PERCENT WITH RESPECT TO ASSETS HELD FOR MORE THAN 3 
              YEARS.

    (a) In General.--Subsection (h) of section 1 of the Internal 
Revenue Code of 1986 (relating to tax imposed) is amended to read as 
follows:
    ``(h) Maximum Capital Gains Rate.--
            ``(1) In general.--If a taxpayer has a net capital gain for 
        any taxable year, then the tax imposed by this section shall 
        not exceed the sum of--
                    ``(A) a tax computed at the rates and in the same 
                manner as if this subsection had not been enacted on 
                the greater of--
                            ``(i) taxable income reduced by the amount 
                        of the net capital gain, or
                            ``(ii) the amount of taxable income taxed 
                        at a rate below 28 percent,
                    ``(B) 15 percent of qualified 3-year capital gain 
                (to the extent not taken into account under 
                subparagraph (A)), and
                    ``(C) 28 percent of the excess (if any) of taxable 
                income over the amounts taken into account under 
                subparagraphs (A) and (B).
            ``(2) Qualified 3-year capital gain.--For purposes of this 
        subsection, the term `qualified 3-year capital gain' means the 
        lesser of--
                    ``(A) net long-term capital gain for the taxable 
                year, determined by substituting `held for more than 3 
                years' for `held for more than 1 year' in paragraphs 
                (3) and (4) of section 1222, or
                    ``(B) net capital gain for such taxable year.
            ``(3) Coordination with investment income election.--For 
        purposes of this subsection, the net capital gain for any 
        taxable year shall be reduced (but not below zero) by the 
        amount which the taxpayer elects to take into account as 
        investment income for the taxable year under section 
        163(d)(4)(B)(iii).''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1997.

SEC. 2. REPLACEMENT OF ESTATE AND GIFT TAX RATE SCHEDULES.

    (a) Estate Tax Rate Schedule Replaced by 15 and 28 Percent Tax 
Rates.--
            (1) In general.--Subsection (b) of section 2001 of the 
        Internal Revenue Code of 1986 (relating to imposition and rate 
        of tax) is amended to read as follows:
    ``(b) Computation of Tax.--The amount imposed by this section shall 
be--
            ``(1) 15 percent of all qualified 3-year capital gain 
        (within the meaning of section 1(h)) included in the taxable 
        estate, and
            ``(2) 28 percent of all capital gain (other than such 
        qualified 3-year capital gain) included in the taxable estate,
determined as if all property included in the taxable estate had been 
sold for its fair market value on the date of the decedent's death (or 
the date applicable with respect to the valuation of such property 
under section 2032, if any).''
            (2) Repeal of rate schedule.--Section 2001 of such Code is 
        amended by striking subsection (c).
            (3) Conforming amendments.--Section 2001 of such Code is 
        amended by striking subsections (d) and (e).
    (b) Reduction of Gift Tax.--Subsection (a) of section 2502 of such 
Code is amended to read as follows:
    ``(a) Computation of Tax.--The tax imposed by section 2501 for each 
calendar year shall be--
            ``(1) 15 percent of all qualified 3-year capital gain (as 
        defined in section 1(h)) contained in the taxable gifts made 
        during such year, and
            ``(2) 28 percent of all capital gain (other than such 
        qualified 3-year capital gain) contained in such taxable gifts,
determined, with respect to each such gift, as if all property 
contained in such gift had been sold by the grantor for its fair market 
value on the date of such gift.''
    (c) Unified Credit Against Estate and Gift Taxes.--
            (1) Unified credit against estate tax.--Subsection (a) of 
        section 2010 of such Code (relating to unified credit against 
        estate tax) is amended to read as follows:
    ``(a) Allowance of credit.--
            ``(1) General rule.--A credit of the amount determined 
        under paragraph (2) shall be allowed to the estate of every 
        decedent against the tax imposed by section 2001.
            ``(2) Amount of credit.--The amount determined under this 
        paragraph is the amount equal to the sum of--
                    ``(A) the tax imposed under section 2001(b)(2) (to 
                the extent that such tax is imposed on so much of the 
                imputed capital gains amount as does not exceed 
                $600,000), and
                    ``(B) the tax imposed under section 2001(b)(1) on 
                the excess (if any) of--
                            ``(i) so much of the imputed capital gains 
                        amount as does not exceed $600,000, over
                            ``(ii) the portion of the imputed capital 
                        gains amount taken into account under 
                        subparagraph (A).
            ``(3) Imputed capital gains amount.--For purposes of this 
        subsection, the term `imputed capital gains amount' means the 
        aggregate amount to which the rates of section 2001(b) apply.
            ``(4) Coordination with unified credit used to reduce gift 
        tax.--
                    ``(A) In general.--The $600,000 amounts referred to 
                in subparagraphs (A) and (B)(i) of paragraph (2) shall 
                each be reduced by the cumulative gift tax credit 
                amount.
                    ``(B) Cumulative gift tax credit amount.--For 
                purposes of this paragraph, the term `cumulative gift 
                tax credit amount' means the sum of the capital gains 
                gift amounts (as defined in section 2505(a)(3)) with 
                respect to which a credit was allowed under section 
                2505 (relating to unified credit against gift tax), 
                determined by not taking into account any gift included 
                in the taxable estate.''
            (2) Unified credit against gift tax.--Subsection (a) of 
        section 2505 of such Code (relating to unified credit against 
        gift tax) is amended to read as follows:-
    ``(a) Allowance of Credit.--
            ``(1) General rule.--In the case of a citizen or resident 
        of the United States, there shall be allowed as a credit 
        against the tax imposed by section 2501 for each calendar year 
        an amount equal to--
                    ``(A) the amount determined under paragraph (2), 
                reduced by--
                    ``(B) the sum of the amounts allowable as a credit 
                to the individual under this section for all preceding 
                calendar periods with respect to gifts made before the 
                gift tax change date, as determined under paragraph 
                (4).
            ``(2) Amount.--The amount determined under this paragraph 
        is the amount equal to the sum of--
                    ``(A) the tax imposed under section 2502(a)(2) for 
                the year on the capital gains gift amount, and
                    ``(B) the tax imposed under section 2502(a)(1) for 
                the year on the excess (if any) of--
                            ``(i) the capital gains gift amount for the 
                        year, over
                            ``(ii) the portion of such capital gains 
                        gift amount taken into account under 
                        subparagraph (A).
            ``(3) Capital gains gift amount.--For purposes of this 
        subsection, the term `capital gains gift amount' means, for any 
        year, the amount to which the rates of section 2502(b) apply 
        with respect to such year, but not more than the excess (if 
        any) of--
                    ``(A) $600,000, over
                    ``(B) the sum of the capital gains gift amounts for 
                all preceding years (determined without taking into 
                account any gift made before the date of the enactment 
                of this paragraph).
            ``(4) Gifts made before gift tax change date.--
                    ``(A) In general.--For purposes of paragraph 
                (1)(B), the amount allowable as a credit to an 
                individual under this section for a preceding calendar 
                period with respect to any gift made before the gift 
                tax change date shall be the amount which would have 
                been allowable to the individual as a credit under this 
                section with respect to such gift--
                            ``(i) if this section and section 2001(b), 
                        as in effect on the day after the date of the 
                        enactment of this paragraph, had been in effect 
                        for the year of such gift and all preceding 
                        calendar periods, and
                            ``(ii) without regard to the parenthetical 
                        contained in paragraph (3)(B).
                    ``(B) Gift made before gift tax change date.--For 
                purposes of this section, the term `gift made before 
                gift tax change date' means a gift made before the date 
                of the enactment of this paragraph (other than a gift 
                taken into account under subsection (b)).''
            (3) Conforming amendment.--Subsection (b) of section 2502 
        of such Code is amended by adding at the end the following new 
        flush sentence:
``In connection with the gift tax imposed by this chapter for the 
calendar year in which this sentence is enacted with respect to gifts 
made on or after the date of such enactment, the term `preceding 
calendar period' shall include the portion of such calendar year which 
precedes such date of enactment.''
    (d) Estates of Nonresident Aliens.--
            (1) Rate change.--
                    (A) In general.--Subsection (b) of section 2101 of 
                such Code (relating to tax imposed on estates of 
                nonresident aliens) is amended to read as follows:
    ``(b) Computation of Tax.--The tax imposed by this section shall be 
the amount equal to the tax computed under section 2001(b) (determined 
as if section 2001 applied to the decedent).''
                    (B) Conforming amendment.--Section 2101 of such 
                Code is amended by striking subsection (c).
            (2) Credits against tax.--Section 2102 of such Code 
        (relating to credits against estate tax for nonresidents not 
        citizens) is amended by adding at the end the following new 
        subsection:
    ``(d) Adjustment of Amounts To Reflect Unified Credit Changes.--The 
Secretary shall by regulation adjust the dollar amounts provided in 
this section to reflect, in a proportionate manner, the changes made to 
sections 2010 and 2505 on the date of the enactment of this 
subsection.''
    (e) Effective Date.--The amendments made by this section shall 
apply to estates of decedents dying on or after, and gifts made on or 
after, the date of the enactment of this Act.

SEC. 3. TAX ON TRUSTS WHEN GRANTOR DIES.

    (a) In General.--Subpart A of part I of subchapter J of chapter 1 
of the Internal Revenue Code of 1986 is amended by adding at the end 
the following new section:

``SEC. 646. ASSETS MARKED TO MARKET WHEN GRANTOR DIES.

    ``(a) In General.--For purposes of this title, on the death of any 
individual who has contributed property to a trust--
            ``(1) the trust shall recognize gain or loss as if all 
        property so contributed by the decedent which is contained in 
        the trust were sold for its fair market value on the date of 
        such death,
            ``(2) such gain or loss shall be taken into account for the 
        taxable year of the trust in which such death occurs, and
            ``(3) proper adjustment shall be made in the amount of any 
        gain or loss subsequently realized for gain or loss taken into 
        account under paragraph (2).
    ``(b) Property Contributed by Partnership or Corporation.--For 
purposes of this section, the Secretary may by regulations provide that 
property contributed to a trust by a partnership or corporation shall 
be treated as contributed by the individual having a greater than 50 
percent interest in such partnership or owning more than 50 percent of 
the stock of such corporation. For purposes of this subsection, rules 
similar to the rules of section 318 (relating to constructive ownership 
of stock) shall apply.
    ``(c) Proportionate Application.--If any property was contributed 
to a trust partially by the decedent and partially by another person, 
the portion of such property so contributed by the decedent shall be 
treated as a separate asset for purposes of this title and subsection 
(a) shall apply to such portion.
    ``(d) Coordination With Inclusion in Taxable Estate.--This section 
shall not apply to the portion of any trust which is included in the 
taxable estate of any individual.''
    (b) Clerical Amendment.--The table of sections for subpart A of 
part I of subchapter J of chapter 1 of such Code is amended by adding 
at the end the following new item:

                              ``Sec. 646. Assets marked to market when 
                                        grantor dies.''
    (c) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply with respect to 
        decedents dying on or after the date of the enactment of this 
        Act.
            (2) Trusts containing property contributed by decedents 
        dying before date of enactment.--For purposes of section 646 of 
        the Internal Revenue Code of 1986 (as added by subsection (b)), 
        any individual dying before the date of the enactment of this 
        Act shall be treated as dying on the date of the enactment of 
        this Act.

Summary: American Dream Tax Fairness Equity Act of 1997 - Amends the Internal Revenue Code to reduce the three-year capital gains rate to 15 percent. Revises provisions regulating the computation of estate and gift taxes and credits, basing the taxes and credits on capital gains. Requires a trust, on the death of any individual who contributed property to the trust, to recognize gain or loss as if that property was sold for its fair market value on the death date. Provides for the treatment of contributions by partnerships or corporations.