To amend the Internal Revenue Code of 1986 to index the basis of certain assets for purposes of determining gain.

SECTION 1. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF DETERMINING GAIN.

    (a) In General.--Part II of subchapter O of chapter 1 of the 
Internal Revenue Code of 1986 (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.

    ``(a) General Rule.--
            ``(1) Indexed basis substituted for adjusted basis.--Solely 
        for purposes of determining gain on the sale or other 
        disposition by an individual of an indexed asset which has been 
        held for more than 1 year, the indexed basis of the asset shall 
        be substituted for its adjusted basis.
            ``(2) Special rule for recapture gain.--
                    ``(A) In general.--Paragraph (1) shall not apply 
                for purposes of determining the amount of recapture 
                gain on the sale or other disposition of an indexed 
                asset, but the amount of any such recapture gain shall 
                increase the adjusted basis of the asset for purposes 
                of applying paragraph (1) to determine the amount of 
                other gain on such sale or other disposition.
                    ``(B) Recapture gain.--For purposes of subparagraph 
                (A), the term `recapture gain' means any gain treated 
                as ordinary income under section 1245 or 1254 or which 
                would be treated as ordinary income under section 1250 
                if such section applied to all depreciation adjustments 
                instead of only additional depreciation.
    ``(b) Indexed Asset.--
            ``(1) In general.--For purposes of this section, the term 
        `indexed asset' means--
                    ``(A) any stock in a corporation, and
                    ``(B) any 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) Collectibles.--Any collectible (as defined in 
                section 408(m)(2) without regard to section 408(m)(3)).
                    ``(C) Options.--Any option or other right to 
                acquire an interest in property.
                    ``(D) Net lease property.--In the case of a lessor, 
                net lease property (within the meaning of subsection 
                (i)(3)).
                    ``(E) Certain preferred stock.--Stock which is 
                fixed and preferred as to dividends and does not 
                participate in corporate growth to any significant 
                extent.
                    ``(F) Stock in foreign corporations.--Stock in a 
                foreign corporation.
                    ``(G) 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)(F) 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 or is 
        authorized for trading on the national market system operated 
        by the National Association of Securities Dealers 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).
    ``(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 shall be determined 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 taxpayer's holding period 
                for such asset began (or, if later, for calendar year 
                1992).
        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-hundredth.
            ``(3) Conventions.--For purposes of paragraph (2), if any 
        asset is disposed of during any calendar year--
                    ``(A) such disposition shall be treated as 
                occurring on the last day of such calendar year, and
                    ``(B) the taxpayer's holding period for such asset 
                shall be treated as beginning in the same calendar year 
                as would be determined for an asset actually disposed 
                of on such last day with a holding period of the same 
                length as the actual holding period of the asset 
                involved.
            ``(4) CPI.--For purposes of this subsection, the CPI for 
        any calendar year shall be determined under section 1(f)(4).
    ``(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 on which the holding period for the asset 
        begins 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 corporate shareholders.--Under 
                regulations--
                            ``(i) in the case of a distribution by a 
                        qualified investment entity (directly or 
                        indirectly) to a corporation--
                                    ``(I) the determination of whether 
                                such distribution is a dividend shall 
                                be made without regard to this section, 
                                and
                                    ``(II) the amount treated as gain 
                                by reason of the receipt of any capital 
                                gain dividend shall be increased by the 
                                percentage by which the entity's net 
                                capital gain for the taxable year 
                                determined without regard to this 
                                section exceeds the entity's net 
                                capital gain for such year determined 
                                with regard to this section, and
                            ``(ii) there shall be other appropriate 
                        adjustments (including deemed distributions) so 
                        as to ensure that the benefits of this section 
                        are not allowed (directly or indirectly) to 
                        corporate shareholders of qualified investment 
                        entities.
                For purposes of the preceding sentence, any amount 
                includible in gross income under section 852(b)(3)(D) 
                shall be treated as a capital gain dividend and an S 
                corporation shall not be treated as a corporation.
                    ``(C) Exception for qualification purposes.--This 
                section shall not apply for purposes of sections 851(b) 
                and 856(c).
                    ``(D) Exception for certain taxes imposed at entity 
                level.--
                            ``(i) Tax on failure to distribute entire 
                        gain.--If any amount is subject to tax under 
                        section 852(b)(3)(A) for any taxable year, the 
                        amount on which tax is imposed under such 
                        section shall be increased by the percentage 
                        determined under subparagraph (B)(i)(II). A 
                        similar rule shall apply in the case of any 
                        amount subject to tax under paragraph (2) or 
                        (3) of section 857(b) to the extent 
                        attributable to the excess of the net capital 
                        gain over the deduction for dividends paid 
                        determined with reference to capital gain 
                        dividends only. The first sentence of this 
                        clause shall not apply to so much of the amount 
                        subject to tax under section 852(b)(3)(A) as is 
                        designated by the company under section 
                        852(b)(3)(D).
                            ``(ii) Other taxes.--This section shall not 
                        apply for purposes of determining the amount of 
                        any tax imposed by paragraph (4), (5), or (6) 
                        of section 857(b).
            ``(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.--
                    ``(A) In general.--In the case of a partnership, 
                the adjustment made under subsection (a) at the 
                partnership level shall be passed through to the 
                partners (but only for purposes of determining the 
                income of partners who are individuals).
                    ``(B) Special rule in the case of section 754 
                elections.--In the case of a transfer of an interest in 
                a partnership with respect to which the election 
                provided in section 754 is in effect--
                            ``(i) the adjustment under section 
                        743(b)(1) shall, with respect to the transferor 
                        partner, be treated as a sale of the 
                        partnership assets for purposes of applying 
                        this section, and
                            ``(ii) with respect to the transferee 
                        partner, the partnership's holding period for 
                        purposes of this section in such assets shall 
                        be treated as beginning on the date of such 
                        adjustment.
            ``(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. This section shall 
        not apply for purposes of determining the amount of any tax 
        imposed by section 1374 or 1375.
            ``(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 (but only for 
        purposes of determining the income of participants who are 
        individuals).
    ``(g) Dispositions Between Related Persons.--This section shall not 
apply to any sale or other disposition of property between related 
persons (within the meaning of section 465(b)(3)(C)) if such property, 
in the hands of the transferee, is of a character subject to the 
allowance for depreciation provided in section 167.
    ``(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.
    ``(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 
                                        acquired after 1991 for 
                                        purposes of determining gain.''
    (c) Effective Date.--The amendments made by this section shall 
apply to dispositions of any property after the date of the enactment 
of this Act.

Summary: Amends the Internal Revenue Code to require indexing, based on the consumer price index, of the adjusted basis of certain assets that have been held for more than one year at the time of sale or other transfer, solely for the purpose of determining gain or loss.