I

104TH CONGRESS

1ST SESSION H. R. 333

To amend the Internal Revenue Code of 1986 to allow a deduction for

capital gains for middle income taxpayers.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 4, 1995

Mr. NEAL introduced the following bill; which was referred to the Committee

on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to allow a

deduction for capital gains for middle income taxpayers.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Middle Income Tax Relief Act of 1995’’.

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment

9 to, or repeal of, a section or other provision, the reference
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1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986.

3 SEC. 2. REDUCTION IN CAPITAL GAINS TAX FOR INDIVID4 UALS.

5 (a) GENERAL RULE.—Part I of subchapter P of

6 chapter 1 (relating to treatment of capital gains) is

7 amended by adding at the end thereof the following new

8 section:

9 ‘‘SEC. 1203. CAPITAL GAINS DEDUCTION FOR INDIVIDUALS.

10 ‘‘(a) IN GENERAL.—In the case of an individual,

11 there shall be allowed as a deduction for the taxable year

12 the capital gains deduction (if any) determined under sub13 section (b).

14 ‘‘(b) LIFETIME CAPITAL GAINS BANK.—

15 ‘‘(1) IN GENERAL.—For purposes of subsection

16 (a), the capital gains deduction determined under

17 this subsection for any taxable year is 50 percent of

18 the qualified gain for such taxable year.

19 ‘‘(2) LIMITATIONS.—

20 ‘‘(A) LIFETIME LIMIT.—The amount of

21 the qualified gain taken into account under

22 paragraph (1) for any taxable year shall not ex23 ceed $400,000 reduced by the aggregate

24 amount of the qualified gain taken into account
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1 under this subsection by the taxpayer for prior

2 taxable years.

3 ‘‘(B) DEDUCTION NOT AVAILABLE TO TAX4 PAYERS WITH ADJUSTED GROSS INCOME IN EX5 CESS OF $250,000.—In the case of a taxpayer

6 with adjusted gross income of $200,000 or

7 greater, the deduction determined under this

8 subsection shall be reduced (but not below zero)

9 by an amount which bears the same ratio to the

10 amount of such deduction as—

11 ‘‘(i) the adjusted gross income of the

12 taxpayer for the taxable year in excess of

13 $200,000, bears to

14 ‘‘(ii) $50,000.

15 ‘‘(3) QUALIFIED GAIN.—

16 ‘‘(A) IN GENERAL.—For purposes of para17 graph (1), the term ‘qualified gain’ means the

18 lesser of—

19 ‘‘(i) the net capital gain on the sale or

20 exchange of a qualified asset for the tax21 able year, or

22 ‘‘(ii) the net capital gain for the tax23 able year determined by only taking into

24 account gains and losses from sales and
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1 exchanges on or after January 1, 1995, of

2 qualified assets.

3 ‘‘(B) SPECIAL RULES.—

4 ‘‘(i) For purposes of subparagraph

5 (A)(ii), any amount treated as a capital

6 loss for the taxable year under section

7 1212 shall be treated as a loss from a sale

8 or exchange on or after January 1, 1995,

9 of a qualified asset.

10 ‘‘(ii) A taxpayer may elect for any

11 taxable year not to take into account under

12 this subsection all (or any portion) of the

13 qualified gain for such taxable year. Such

14 an election, once made, shall be irrev15 ocable.

16 ‘‘(4) QUALIFIED ASSETS.—For purposes of this

17 subsection, the term ‘qualified asset’ means any cap18 ital asset (within the meaning of section 1221), ex19 cept that such term shall not include any collectible

20 (as defined in section 408(m) without regard to

21 paragraph (3) thereof).

22 ‘‘(5) SUBSECTION NOT TO APPLY IN CERTAIN

23 CASES.—This subsection shall not apply in the case

24 of—
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1 ‘‘(A) sales or exchanges to related persons

2 (within the meaning of section 267(b) or

3 707(b)(1));

4 ‘‘(B)(i) an individual who has not attained

5 the age of 25 before the close of the taxable

6 year;

7 ‘‘(ii) a married individual (within the

8 meaning of section 7703) filing a separate

9 return for the taxable year; or

10 ‘‘(iii) an estate or trust.

11 ‘‘(c) SPECIAL RULES.—

12 ‘‘(1) GAIN ON SALE OR EXCHANGE OF REAL

13 PROPERTY DETERMINED BY REFERENCE TO IN14 DEXED BASIS.—

15 ‘‘(A) IN GENERAL.—For purposes of deter16 mining, under this section, the amount of the

17 qualified gain from the sale or exchange of real

18 property, the indexed basis of the property shall

19 be substituted for its adjusted basis.

20 ‘‘(B) INDEXED BASIS.—For purposes of

21 this section—

22 ‘‘(i) INDEXED BASIS.—The indexed

23 basis for any real property described in

24 subparagraph (A) is—
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1 ‘‘(I) the adjusted basis of the

2 property, multiplied by

3 ‘‘(II) the applicable inflation

4 ratio.

5 ‘‘(ii) APPLICABLE INFLATION

6 RATIO.—The applicable inflation ratio for

7 any real property described in subpara8 graph (A) is the percentage derived by di9 viding—

10 ‘‘(I) the CPI for the calendar

11 month in which the disposition takes

12 place, by

13 ‘‘(II) the CPI for the calendar

14 month in which the property was ac15 quired by the taxpayer.

16 The applicable inflation ratio shall not be

17 taken into account unless it is greater than

18 1. The applicable inflation ratio for any

asset shall be rounded to the nearest 1 19 ⁄10

20 of 1 percent.

21 ‘‘(iii) CPI FOR CALENDAR MONTH.—

22 The CPI for any calendar month is the

23 Consumer Price Index (as defined in sec24 tion 1(f)(5)) for such month.
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1 ‘‘(C) REAL PROPERTY.—For purposes of

2 this paragraph, the term ‘real property’ means

3 land and any section 1250 property (within the

4 meaning of section 1250(c)).

5 ‘‘(2) TREATMENT OF CERTAIN SALES OF IN6 TERESTS IN PARTNERSHIPS, ETC.—For purposes of

7 subsection (b), any gain from the sale or exchange

8 of a qualified asset which is an interest in a partner9 ship, S corporation, or trust shall not be treated as

10 gain from the sale or exchange of a qualified asset

11 to the extent such sale gain is attributable to unreal12 ized appreciation in the value of property described

13 in subsection (b)(4) which is held by such entity.

14 Rules similar to the rules of section 751(f) shall

15 apply for purposes of the preceding sentence.

16 ‘‘(3) DEDUCTION ONLY AVAILABLE FOR CER17 TAIN SALES OR EXCHANGES.—

18 ‘‘(A) SALE OR EXCHANGE MUST OCCUR

19 AFTER DECEMBER 31, 1994.—The amount of

20 the net capital gain taken into account under

21 subsection (b)(3)(A) shall not exceed the

22 amount of the net capital gain determined by

23 only taking into account gains and losses from

24 sales and exchanges on or after January 1,

25 1995. For purposes of the preceding sentence,
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1 any amount treated as a capital loss for the

2 taxable year under section 1212 shall be treated

3 as a loss from a sale or exchange on or after

4 such date.

5 ‘‘(B) REQUIRED HOLDING PERIOD MUST

6 BE SATISFIED.—No gain shall be taken into ac7 count under subsection (b)(3)(A) unless the

8 holding period of the property sold or ex9 changed (determined under the principles of

10 section 1223) exceeds 3 years.

11 ‘‘(4) DETERMINATION OF ADJUSTED GROSS IN12 COME.—

13 ‘‘(A) IN GENERAL.—For purposes of sub14 section (b), adjusted gross income shall be de15 termined—

16 ‘‘(i) without regard to the deduction

17 allowed under this section, but

18 ‘‘(ii) after the application of sections

19 86, 135, 219, and 469.

20 ‘‘(B) COORDINATION WITH OTHER AD21 JUSTED GROSS INCOME LIMITATIONS.—For

22 purposes of the sections listed in subparagraph

23 (A)(ii), adjusted gross income shall be deter24 mined without regard to the deduction allowed

25 under this section.
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1 ‘‘(5) SPECIAL RULE FOR PASS-THRU ENTI2 TIES.—

3 ‘‘(A) IN GENERAL.—In applying this sec4 tion with respect to any pass-thru entity, the

5 determination of when the sale or exchange oc6 curs shall be made at the entity level.

7 ‘‘(B) PASS-THRU ENTITY DEFINED.—For

8 purposes of subparagraph (A), the term ‘pass9 thru-entity’ means—

10 ‘‘(i) a regulated investment company,

11 ‘‘(ii) a real estate investment trust,

12 ‘‘(iii) an S corporation,

13 ‘‘(iv) a partnership,

14 ‘‘(v) an estate or trust, and

15 ‘‘(vi) a common trust fund.’’.

16 (b) COORDINATION WITH MINIMUM TAX.—Para17 graph (1) of section 56(b) is amended by adding at the

18 end the following new subparagraph:

19 ‘‘(G) CAPITAL GAINS DEDUCTION NOT AL20 LOWED.—The deduction under section 1203

21 shall not be allowed.’’.

22 (c) COORDINATION WITH MAXIMUM CAPITAL GAINS

23 RATE.—Subsection (h) of section 1 (relating to maximum

24 capital gains rate) is amended to read as follows:

25 ‘‘(h) MAXIMUM CAPITAL GAINS RATE.—
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1 ‘‘(1) IN GENERAL.—If a taxpayer has a net

2 capital gain for any taxable year, then the tax im3 posed by this section shall not exceed the sum of—

4 ‘‘(A) a tax computed at the rates and in

5 the same manner as if this subsection had not

6 been enacted on the greater of—

7 ‘‘(i) taxable income reduced by the

8 amount of the net capital gain, or

9 ‘‘(ii) the amount of taxable income

10 taxed at a rate below 28 percent, plus

11 ‘‘(B) a tax of 28 percent of the amount of

12 taxable income in excess of the amount deter13 mined under subparagraph (A).

14 For purposes of the preceding sentence, the net cap15 ital gain for any taxable year shall be reduced (but

16 not below zero) by the amount which the taxpayer

17 elects to take into account as investment income for

18 the taxable year under section 163(d)(4)(B)(iii).

19 ‘‘(2) COORDINATION WITH SECTION 1203 DE20 DUCTION.—For purposes of paragraph (1), the

21 amount of the net capital gain shall be reduced by

22 the amount allowable as a deduction under section

23 1203(a).’’.

24 (d) CONFORMING AMENDMENTS.—
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1 (1) Subsection (a) of section 62 is amended by

2 inserting after paragraph (15) the following new

3 paragraph:

4 ‘‘(16) CAPITAL GAINS DEDUCTION.—The deduc5 tion allowed by section 1203.’’

6 (2) Subclause (I) of section 163(d)(4)(B)(i) is

7 amended by inserting ‘‘, reduced by the amount of

8 any deduction allowable under section 1203 attrib9 utable to gain for such property’’ after ‘‘invest10 ment’’.

11 (3)(A) Paragraph (2) of section 172(d) is

12 amended to read as follows:

13 ‘‘(2) CAPITAL GAINS AND LOSSES OF TAX14 PAYERS OTHER THAN CORPORATIONS.—In the case

15 of a taxpayer other than a corporation—

16 ‘‘(A) the amount deductible on account of

17 losses from sales or exchanges of capital assets

18 shall not exceed the amount includible on ac19 count of gains from sales or exchanges of cap20 ital assets;

21 ‘‘(B) the exclusion provided by section

22 1202 shall not be allowed; and

23 ‘‘(C) the deduction provided by section

24 1203 shall not be allowed.’’.
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1 (B) Subparagraph (B) of section 172(d)(4)

2 is amended by inserting ‘‘(2)(C),’’ after

3 ‘‘(2)(B),’’.

4 (4)(A) Section 220 (relating to cross reference)

5 is amended to read as follows:

6 ‘‘SEC. 220. CROSS REFERENCES.

‘‘(1) For deduction for net capital gains in the case

of a taxpayer other than a corporation, see section

1203.

‘‘(2) For deductions in respect of a decedent, see

section 691.’’

7 (B) The table of sections for part VII of sub8 chapter B of chapter 1 is amended by striking ‘‘ref9 erence’’ in the item relating to section 220 and in10 serting ‘‘references’’.

11 (5) Paragraph (4) of section 691(c) is amended

12 by inserting ‘‘1203,’’ after ‘‘1202,’’.

13 (6) The second sentence of paragraph (2) of

14 section 871(a) is amended by striking ‘‘section

15 1202’’ and inserting ‘‘sections 1202 and 1203’’.

16 (7) Paragraph (1) of section 1402(i) is amend17 ed to read as follows:

18 ‘‘(1) IN GENERAL.—In determining the net

19 earnings from self-employment of any options dealer

20 or commodities dealer—

21 ‘‘(A) notwithstanding subsection (a)(3)(A),

22 there shall not be excluded any gain or loss (in

23 the normal course of the taxpayer’s activity of
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1 dealing in or trading section 1256 contracts)

2 from section 1256 contracts or property related

3 to such contracts, and

4 ‘‘(B) the deduction provided by section

5 1203 shall not apply.’’.

6 (e) CLERICAL AMENDMENT.—The table of sections

7 for part I of subchapter P of chapter 1 is amended by

8 adding at the end thereof the following new item:

‘‘Sec. 1203. Capital gains deduction for individuals.’’

9 (f) EFFECTIVE DATES.—The amendments made by

10 this section shall apply to taxable years ending after De11 cember 31, 1994.

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