To amend the Internal Revenue Code of 1986 to provide that no capital gains tax shall apply to individuals or corporations.

SECTION 1. 100 PERCENT CAPITAL GAINS DEDUCTION.

    (a) General Rule.--Section 1201 of the Internal Revenue Code of 
1986 is amended to read as follows:

``SEC. 1201. CAPITAL GAINS DEDUCTION.

    ``(a) General Rule.--If for any taxable year a taxpayer has a net 
capital gain, 100 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 Rules.--
            ``(1) In general.--In the case of a taxable year which 
        includes January 1, 1997--
                    ``(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, 
                1997, 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.--
Subsection (a) of section 62 of such Code is amended by inserting after 
paragraph (16) the following new paragraph:
            ``(17) Long-term capital gains.--The deduction allowed by 
        section 1201.''
    (c) Technical and Conforming Changes.--
            (1) Section 1 of such Code is amended by striking 
        subsection (h).
            (2) Section 12 of such Code is amended by striking 
        paragraph (4) and redesignating the following paragraphs 
        accordingly.
            (3)(A) Subsection (a) of section 57 of such Code is amended 
        by striking paragraph (7).
            (B) Subclause (II) of section 53(d)(1)(B)(ii) of such Code 
        is amended by striking ``, (5), and (7)'' and inserting ``and 
        (5)''.
            (4) The first sentence of paragraph (1) of section 170(e) 
        of such Code is amended by striking ``reduced by the sum of--'' 
        and all that follows and inserting ``reduced by the amount of 
        gain which would not have been long-term capital gain if the 
        property contributed had been sold by the taxpayer at its fair 
        market value (determined at the time of such contribution).''
            (5) Paragraph (2) of section 172(d) of such Code 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 for capital gains.--The deduction 
                under section 1201 shall not be allowed.''
            (6) 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 deduction under section 1201 shall 
        be taken into account.''
            (7) Paragraph (2) of section 468B(b) of such Code is 
        amended by inserting ``the deduction allowed by section 1201 
        and by'' after ``reduced by''.
            (8) Paragraph (2) of section 527(b) of such Code is hereby 
        repealed.
            (9) Subparagraph (A) of section 641(d)(2) of such Code is 
        amended by striking ``Except as provided in section 1(h), the'' 
        and inserting ``The''.
            (10) Paragraph (4) of section 642(c) 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 1201 (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).''
            (11) The last sentence of section 643(a)(3) of such Code is 
        amended to read as follows: ``The deduction under section 1201 
        (relating to capital gains deduction) shall not be taken into 
        account.''
            (12) Subparagraph (C) of section 643(a)(6) of such Code is 
        amended by inserting ``(i)'' before ``there shall'' and by 
        inserting before the period ``, and (ii) the deduction under 
        section 1201 (relating to capital gains deduction) shall not be 
        taken into account''.
            (13) Paragraph (4) of section 691(c) of such Code is 
        amended by striking ``1(h),''.
            (14) Paragraph (2) of section 801(a) of such Code is hereby 
        repealed.
            (15) Subsection (c) of section 831 of such Code is amended 
        by striking paragraph (1) and redesignating the following 
        paragraphs accordingly.
            (16)(A) Paragraph (3) of section 852(b) of such Code is 
        amended by striking subparagraph (A).
            (B) Subparagraph (D) of section 852(b)(3) of such Code is 
        amended--
                    (i) in clause (i) by striking ``shall not exceed'' 
                and all that follows and inserting ``shall not exceed 
                that part of the excess (if any) of the net capital 
                gain over the deduction for dividends paid (as defined 
                in section 561 and determined with reference to capital 
                gain dividends only) which he would have received if 
                all of such amount had been distributed as capital gain 
                dividends by the company to the holders of such shares 
                at the close of its taxable year.'', and
                    (ii) by striking clauses (ii), (iii), and (iv) and 
                redesignating clause (v) as clause (ii).
            (17)(A) Paragraph (2) of section 857(b) of such Code is 
        amended by adding at the end the following new subparagraph:
                    ``(G) There shall be excluded the amount of the net 
                capital gain, if any.''
            (B) Paragraph (3) of section 857(b) of such Code is amended 
        by striking subparagraph (A).
            (C) Subparagraph (C) of section 857(b)(3) of such Code is 
        amended by striking ``the excess described in subparagraph 
        (A)(ii) of this paragraph'' and inserting ``the excess (if any) 
        of the net capital gain over the deduction for dividends paid 
        (as defined in section 561 and determined with reference to 
        capital gain dividends only)''.
            (18) The second sentence of section 871(a)(2) of such Code 
        is amended by striking ``1202'' and inserting ``1201''.
            (19) Paragraph (1) of section 882(a) of such Code is 
        amended by striking ``section 11, 55, 59A, or 1201(a)'' and 
        inserting ``section 11, 55, or 59A''.
            (20)(A) Paragraph (2) of section 904(b) of such Code is 
        amended to read as follows:
            ``(2) Capital gains.--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) Paragraph (3) of section 904(b) of such Code is amended 
        by striking subparagraphs (B), (D), and (E) and by 
        redesignating subparagraph (C) as subparagraph (B).
            (21) Section 1202 of such Code is hereby repealed.
            (22) Subsection (b) of section 1374 of such Code is amended 
        by striking paragraph (4).
            (23) Subsection (b) of section 1381 of such Code is amended 
        by striking ``or 1201''.
            (24) Paragraph (1) of section 1402(i) of such Code is 
        amended by inserting ``, and the deduction provided by section 
        1201 shall not apply'' before the period at the end thereof.
            (25) Subsection (e) of section 1445 of such Code is 
        amended--
                    (A) in paragraph (1) by striking ``35 percent (or, 
                to the extent provided in regulations, 28 percent)'' 
                and inserting ``the rate specified by the Secretary'', 
                and
                    (B) in paragraph (2) by striking ``35 percent'' and 
                inserting ``the rate specified by the Secretary''.
            (26) Clause (i) of section 6425(c)(1)(A) of such Code is 
        amended by striking ``or 1201(a)''.
            (27) Clause (i) of section 6655(g)(1)(A) of such Code is 
        amended by striking ``or 1201(a)''.
            (28)(A) The second sentence of section 7518(g)(6)(A) of 
        such Code is amended to read as follows:
                ``No tax shall be imposed under the preceding sentence 
                with respect to the portion of any nonqualified 
                withdrawal made out of the capital gain account.''
            (B) The second sentence of section 607(h)(6)(A) of the 
        Merchant Marine Act, 1936, is amended to read as follows:
                ``No tax shall be imposed under the preceding sentence 
                with respect to the portion of any nonqualified 
                withdrawal made out of the capital gain account.''
            (29) The table of sections for part I of subchapter P of 
        chapter 1 of such Code is amended to read as follows:

                              ``Sec. 1201. Capital gains deduction.''
    (d) Effective Dates.--
            (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, 1996.
            (2) Repeal of section 1(h).--The amendment made by 
        subsection (c)(1) shall apply to taxable years beginning after 
        January 1, 1997.
            (3) Contributions.--The amendment made by subsection (c)(4) 
        shall apply only to contributions on or after January 1, 1997.
            (4) Withholding.--The amendment made by subsection (c)(25) 
        shall apply only to amounts paid after the date of the 
        enactment of this Act.
            (5) 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 1201 of the 
        Internal Revenue Code of 1986 (as added by this section).

Summary: Amends the Internal Revenue Code to replace provisions relating to an alternative tax for corporations on capital gains with provisions making 100 percent of the net capital gain of a taxpayer a deduction from gross income. Provides for the treatment of estates and trusts. Requires reducing net capital gain by the amount the taxpayer takes into account as investment income under specified provisions.