I

103D CONGRESS

2D SESSION H. R. 4269

To amend the Internal Revenue Code of 1986 to reduce the tax on capital

gains of individuals, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

APRIL 20, 1994

Mr. SMITH of Texas 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 reduce

the tax on capital gains of individuals, and for other

purposes.

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.

4 This Act may be cited as the ‘‘Economic Investment

5 and Savings Incentive Act’’.

6 SEC. 2. REDUCTION IN CAPITAL GAINS TAX FOR INDIVID7 UALS.

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

9 chapter 1 of the Internal Revenue Code of 1986 (relating
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1 to treatment of capital gains) is amended by adding at

2 the end thereof the following new section:

3 ‘‘SEC. 1203. DEDUCTION FOR CAPITAL GAINS.

4 ‘‘(a) ALLOWANCE OF DEDUCTION.—If, for any tax5 able year, a taxpayer other than a corporation has a net

6 capital gain, there shall be allowed as a deduction from

7 gross income for such taxable year an amount equal to

8 the sum of—

9 ‘‘(1) 60 percent of the 3-year capital gain,

10 ‘‘(2) 40 percent of the 2-year capital gain, and

11 ‘‘(3) 20 percent of the 1-year capital gain.

12 ‘‘(b) TRANSITIONAL RULES.—

13 ‘‘(1) YEARS BEGINNING IN 1994.—In the case of

14 a taxable year beginning in 1994, the deduction

15 under subsection (a) shall be 60 percent of the net

16 capital gain.

17 ‘‘(2) YEARS BEGINNING IN 1995.—In the case of

18 a taxable year beginning in 1995, the deduction

19 under subsection (a) shall be the sum of—

20 ‘‘(A) 60 percent of the 3-year capital gain

21 and the 2-year capital gain, and

22 ‘‘(B) 40 percent of the 1-year capital gain.

23 ‘‘(c) DEFINITIONS.—For purposes of this section:

24 ‘‘(1) 3-YEAR CAPITAL GAIN.—The term ‘3-year

25 capital gain’ means the lesser of—
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1 ‘‘(A) the net capital gain for the taxable

2 year, or

3 ‘‘(B) the long-term capital gain determined

4 by only taking into account gain from the sale

5 or exchange of assets held for more than 3

6 years.

7 ‘‘(2) 2-YEAR CAPITAL GAIN.—The term ‘2-year

8 capital gain’ means the lesser of—

9 ‘‘(A) the net capital gain for the taxable

10 year reduced by the 3-year capital gain, or

11 ‘‘(B) the long-term capital gain determined

12 by only taking into account gain from the sale

13 or exchange of assets held for more than 2

14 years but not more than 3 years.

15 ‘‘(3) 1-YEAR CAPITAL GAIN.—The term ‘1-year

16 capital gain’ means the net capital gains for the tax17 able year reduced by the 3-year capital gain and the

18 2-year capital gain.

19 ‘‘(4) RECAPTURE OF NET ORDINARY LOSS

20 UNDER SECTION 1231.—For purposes of this sub21 section, if any amount is treated as ordinary income

22 under section 1231(c) for any taxable year—

23 ‘‘(A) the amount so treated shall be allo24 cated proportionately among the section 1231
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1 gains (as defined in section 1231(a)) for such

2 taxable year, and

3 ‘‘(B) the amount so allocated to any such

4 gain shall reduce the amount of such gain.

5 ‘‘(c) ESTATE AND TRUSTS.—In the case of an estate

6 or trust, the deduction under this section shall be com7 puted by excluding the portion (if any) of the gains for

8 the taxable year from sales or exchanges of capital assets

9 which, under sections 652 and 662 (relating to inclusions

10 of amounts in gross income of beneficiaries of trusts), is

11 includable by the income beneficiaries as gain derived from

12 the sale or exchange of capital assets.’’

13 (b) TREATMENT OF COLLECTIBLES.—

14 (1) IN GENERAL.—Section 1222 of such Code

15 is amended by inserting after paragraph (11) the

16 following new paragraph:

17 ‘‘(12) SPECIAL RULE FOR COLLECTIBLES.—

18 ‘‘(A) IN GENERAL.—Any gain or loss from

19 the sale or exchange of a collectible shall be

20 treated as a short-term capital gain or loss (as

21 the case may be), without regard to the period

22 such asset was held. The preceding sentence

23 shall apply only to the extent the gain or loss

24 is taken into account in computing taxable in25 come.
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1 ‘‘(B) TREATMENT OF CERTAIN SALES OF

2 INTEREST IN PARTNERSHIP, ETC.—For pur3 poses of subparagraph (A), any gain from the

4 sale or exchange of an interest in a partnership,

5 S corporation, or trust which is attributable to

6 unrealized appreciation in the value of collect7 ibles held by such entity shall be treated as gain

8 from the sale or exchange of a collectible. Rules

9 similar to the rules of section 751(f) shall apply

10 for purposes of the preceding sentence.

11 ‘‘(C) COLLECTIBLE.—For purposes of this

12 paragraph, the term ‘collectible’ means any cap13 ital asset which is a collectible (as defined in

14 section 408(m) without regard to paragraph (3)

15 thereof).’’

16 (2) CHARITABLE DEDUCTION NOT AF17 FECTED.—

18 (A) Paragraph (1) of section 170(e) is

19 amended by adding at the end thereof the fol20 lowing new sentence: ‘‘For purposes of this

21 paragraph, section 1222 shall be applied with22 out regard to paragraph (12) thereof (relating

23 to special rule for collectibles).’’

24 (B) Clause (iv) of section 170(b)(1)(C) is

25 amended by inserting before the period at the
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1 end thereof the following: ‘‘and section 1222

2 shall be applied without regard to paragraph

3 (12) thereof (relating to special rule for collect4 ibles)’’.

5 (c) MINIMUM TAX.—Section 56(b) of such Code is

6 amended by adding at the end thereof the following new

7 paragraph:

8 ‘‘(4) CAPITAL GAINS DEDUCTION ALLOWED.—

9 The deduction under section 1203 shall be allowed.’’

10 (d) CONFORMING AMENDMENTS.—

11 (1) Subsection (h) of section 1 of such Code is

12 hereby repealed.

13 (2) Section 62(a) of such Code is amended by

14 inserting after paragraph (15) the following new

15 paragraph:

16 ‘‘(16) CAPITAL GAINS DEDUCTION.—The deduc17 tion allowed by section 1203.’’

18 (3) Subparagraph (B) of section 163(d)(4) is

19 amended by striking clauses (i), (ii), and (iii) and in20 serting the following:

21 ‘‘(i) gross income from property held

22 for investment (other than any gain taken

23 into account under clause (ii)), and

24 ‘‘(ii) any net gain attributable to the

25 disposition of property held for investment
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1 reduced by any deduction allowable under

2 section 1203 attributable to gain from

3 such property.’’

4 (4)(A) Section 170(e)(1)(B) of such Code is

5 amended by inserting ‘‘(or, in the case of a taxpayer

6 other than a corporation, the nondeductible percent7 age of the amount of gain)’’ after ‘‘the amount of

8 gain’’.

9 (B) Section 170(e)(1) of such Code is amended

10 by adding at the end thereof the following new sen11 tence: ‘‘For purposes of subparagraph (B), the term

12 ‘nondeductible percentage’ means 100 percent minus

13 the applicable percentage with respect to such prop14 erty under section 1203(c).’’

15 (5) Subparagraph (B) of section 172(d)(2) of

16 such Code is amended by inserting ‘‘, and the deduc17 tion provided by section 1203,’’ after ‘‘section

18 1202’’.

19 (6)(A) Section 220 of such Code (relating to

20 cross reference) is amended to read as follows:

21 ‘‘SEC. 220. CROSS REFERENCES.

‘‘(1) For deduction for net capital gain, see section

1203.

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

section 691.’’

22 (B) The table of sections for part VII of sub23 chapter B of chapter 1 of such Code is amended by
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1 striking ‘‘reference’’ in the item relating to section

2 220 and inserting ‘‘references’’.

3 (7) Paragraph (4) of section 642(c) of such

4 Code is amended to read as follows:

5 ‘‘(4) ADJUSTMENTS.—To the extent that the

6 amount otherwise allowable as a deduction under

7 this subsection consists of gain from the sale or ex8 change of capital assets held for more than 1 year,

9 proper adjustment shall be made for any exclusion

10 allowable to the estate or trust under section 1202

11 and for any deduction allowable to the estate or

12 trust under section 1203. In the case of a trust, the

13 deduction allowed by this subsection shall be subject

14 to section 681 (relating to unrelated business in15 come).’’

16 (8) Paragraph (3) of section 643(a) of such

17 Code is amended by inserting ‘‘, and the deduction

18 under section 1203,’’ after ‘‘section 1202’’.

19 (9) Paragraph (6)(C) of section 643(a) of such

20 Code is amended—

21 (A) by inserting ‘‘(i)’’ before ‘‘there’’, and

22 (B) by inserting ‘‘, and (ii) the deduction

23 under section 1203 (relating to deduction for

24 excess of capital gains over capital losses) shall
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1 not be taken into account’’ before the period at

2 the end thereof.

3 (10) Paragraph (4) of section 691(c) of such

4 Code is amended—

5 (A) by striking ‘‘1(h),’’ , and

6 (B) by inserting ‘‘1203,’’ after ‘‘1202,’’.

7 (11) The second sentence of paragraph (2) of

8 section 871(a) of such Code is amended by striking

9 ‘‘section 1202’’ and inserting ‘‘sections 1202 and

10 1203’’.

11 (12)(A) Subparagraph (B) of section 904(b)(2)

12 of such Code is amended by striking out so much of

13 such subparagraph as precedes clause (i) and insert14 ing the following:

15 ‘‘(B) SPECIAL RULES WHERE CORPORATE

16 CAPITAL RATE GAIN DIFFERENTIAL.—In the

17 case of a corporation, for any taxable

18 year for which there is a capital gain rate dif19 ferential—’’.

20 (B) Subparagraphs (D) and (E) of section

21 904(b)(3) of such Code are amended to read as fol22 lows:

23 ‘‘(D) CAPITAL GAIN RATE DIFFEREN24 TIAL.—There is a capital gain rate differential

25 for any taxable year if any rate of tax imposed
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1 by section 11, 511, or 831(a) or (b) (whichever

2 applies) exceeds the alternative rate of tax

3 under section 1201(a) (determined without re4 gard to the last sentence of section 11(b)(1)).

5 ‘‘(E) RATE DIFFERENTIAL PORTION.—The

6 rate differential portion of foreign source net

7 capital gain, net capital, or the excess of net

8 capital gain from sources within the United

9 States over net capital gain, as the case may

10 be, is the same proportion of such amount as—

11 ‘‘(i) the excess of the highest rate of

12 tax specified in section 11(b)(1) over the

13 alternative rate of tax under section

14 1201(a), bears to

15 ‘‘(ii) the highest rate of tax specified

16 in section 11(b)(1).’’

17 (13) Section 1402(i)(1) is amended to read as

18 follows:

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

20 earnings from self-employment of any options dealer

21 or commodities dealer—

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

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

24 the normal course of the taxpayer’s activity of

25 dealing in or trading section 1256 contracts)
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1 from section 1256 contracts or property related

2 to such contracts, and

3 ‘‘(B) the deduction provided by section

4 1203 shall not apply.’’

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

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

7 adding at the end thereof the following new item:

‘‘Sec. 1203. Deduction for capital gains.’’

8 (f) EFFECTIVE DATE.—The amendments made by

9 this section shall apply to taxable years beginning after

10 December 31, 1993.

11 SEC. 3. INDEXING OF CERTAIN ASSETS ACQUIRED ON OR

12 AFTER JANUARY 1, 1997, FOR PURPOSES OF

13 DETERMINING GAIN.

14 (a) IN GENERAL.—Part II of subchapter O of chap15 ter 1 of the Internal Revenue Code of 1986 (relating to

16 basis rules of general application) is amended by inserting

17 after section 1021 the following new section:

18 ‘‘SEC. 1022. INDEXING OF CERTAIN ASSETS ACQUIRED ON

19 OR AFTER JANUARY 1, 1997, FOR PURPOSES

20 OF DETERMINING GAIN.

21 ‘‘(a) GENERAL RULE.—

22 ‘‘(1) INDEXED BASIS SUBSTITUTED FOR AD23 JUSTED BASIS.—Solely for purposes of determining

24 gain on the sale or other disposition by a taxpayer

25 (other than a corporation) of an indexed asset which
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1 has been held for more than 1 year, the indexed

2 basis of the asset shall be substituted for its ad3 justed basis.

4 ‘‘(2) SPECIAL RULE FOR RECAPTURE GAIN.—

5 ‘‘(A) IN GENERAL.—Paragraph (1) shall

6 not apply for purposes of determining the

7 amount of recapture gain on the sale or other

8 disposition of an indexed asset, but the amount

9 of any such recapture gain shall increase the

10 adjusted basis of the asset for purposes of ap11 plying paragraph (1) to determine the amount

12 of other gain on such sale or other disposition.

13 ‘‘(B) RECAPTURE GAIN.—For purposes of

14 subparagraph (A), the term ‘recapture gain’

15 means any gain treated as ordinary income

16 under section 1245, 1250, or 1254 and any

17 gain which would have been treated as ordinary

18 income under section 1250 if such section ap19 plied to all depreciation adjustments instead of

20 only additional depreciation.

21 ‘‘(b) INDEXED ASSET.—

22 ‘‘(1) IN GENERAL.—For purposes of this sec23 tion, the term ‘indexed asset’ means—

24 ‘‘(A) any stock in a corporation, and
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1 ‘‘(B) any tangible property (or any interest

2 therein),

3 which is a capital asset or property used in the trade

4 or business (as defined in section 1231(b)) and the

5 holding period of which begins on or after January

6 1, 1997.

7 ‘‘(2) CERTAIN PROPERTY EXCLUDED.—For

8 purposes of this section, the term ‘indexed asset’

9 does not include—

10 ‘‘(A) CREDITOR’S INTEREST.—Any interest

11 in property which is in the nature of a credi12 tor’s interest.

13 ‘‘(B) COLLECTIBLES.—Any collectible (as

14 defined in section 408(m)(2) without regard to

15 section 408(m)(3)).

16 ‘‘(C) OPTIONS.—Any option or other right

17 to acquire an interest in property.

18 ‘‘(D) NET LEASE PROPERTY.—In the case

19 of a lessor, net lease property (within the mean20 ing of subsection (i)(3)).

21 ‘‘(E) STOCK IN FOREIGN CORPORA22 TIONS.—Stock in a foreign corporation.

23 ‘‘(F) STOCK IN S CORPORATIONS.—Stock

24 in an S corporation.
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1 ‘‘(3) EXCEPTION FOR STOCK IN FOREIGN COR2 PORATION WHICH IS REGULARLY TRADED ON NA3 TIONAL OR REGIONAL EXCHANGE.—Paragraph

4 (2)(E) shall not apply to stock in a foreign corpora5 tion the stock of which is listed on the New York

6 Stock Exchange, the American Stock Exchange, or

7 any domestic regional exchange for which quotations

8 are published on a regular basis or is authorized for

9 trading on the national market system operated by

10 the National Association of Securities Dealers other

11 than—

12 ‘‘(A) a passive foreign corporation (as de13 fined in section 1296), and

14 ‘‘(B) stock in a foreign corporation held by

15 a United States person who meets the require16 ments of section 1248(a)(2).

17 ‘‘(c) INDEXED BASIS.—For purposes of this section:

18 ‘‘(1) INDEXED BASIS.—The indexed basis for

19 any asset is—

20 ‘‘(A) the adjusted basis of the asset, multi21 plied by

22 ‘‘(B) the applicable inflation ratio.

23 ‘‘(2) APPLICABLE INFLATION RATIO.—The ap24 plicable inflation ratio for any asset shall be deter25 mined by dividing—
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1 ‘‘(A) the CPI for the calendar year preced2 ing the calendar year in which the disposition

3 takes place, by

4 ‘‘(B) the CPI for the calendar year preced5 ing the calendar year in which the taxpayer’s

6 holding period for such asset began.

7 The applicable inflation ratio shall not be taken into

8 account unless it is greater than 1. The applicable

9 inflation ratio for any asset shall be rounded to the

10 nearest one-thousandth.

11 ‘‘(3) CONVENTIONS.—For purposes of para12 graph (2), if any asset is disposed of during any cal13 endar year—

14 ‘‘(A) such disposition shall be treated as

15 occurring on the last day of such calendar year,

16 and

17 ‘‘(B) the taxpayer’s holding period for such

18 asset shall be treated as beginning in the same

19 calendar year as would be determined for an

20 asset actually disposed of on such last day with

21 a holding period of the same length as the ac22 tual holding period of the asset involved.

23 ‘‘(4) CPI.—For purposes of this subsection, the

24 CPI for any calendar year shall be determined under

25 section 1(f)(4).
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1 ‘‘(d) SHORT SALES.—

2 ‘‘(1) IN GENERAL.—In the case of a short sale

3 of an indexed asset with a short sale period in excess

4 of 1 year, for purposes of this title, the amount real5 ized shall be an amount equal to the amount realized

6 (determined without regard to this paragraph) mul7 tiplied by the applicable inflation ratio. In applying

8 subsection (c)(2) for purposes of the preceding sen9 tence, the date on which the property is sold short

10 shall be treated as the date on which the holding pe11 riod for the asset begins and the closing date for the

12 sale shall be treated as the date of disposition.

13 ‘‘(2) SHORT SALE OF SUBSTANTIALLY IDEN14 TICAL PROPERTY.—If the taxpayer or the taxpayer’s

15 spouse sells short property substantially identical to

16 an asset held by the taxpayer, the asset held by the

17 taxpayer and the substantially identical property

18 shall not be treated as indexed assets for the short

19 sale period.

20 ‘‘(3) SHORT SALE PERIOD.—For purposes of

21 this subsection, the short sale period begins on the

22 day after property is sold and ends on the closing

23 date for the sale.

24 ‘‘(e) TREATMENT OF REGULATED INVESTMENT

25 COMPANIES AND REAL ESTATE INVESTMENT TRUSTS.—
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1 ‘‘(1) ADJUSTMENTS AT ENTITY LEVEL.—

2 ‘‘(A) IN GENERAL.—Except as otherwise

3 provided in this paragraph, the adjustment

4 under subsection (a) shall be allowed to any

5 qualified investment entity (including for pur6 poses of determining the earnings and profits of

7 such entity).

8 ‘‘(B) EXCEPTION FOR CORPORATE SHARE9 HOLDERS.—Under regulations—

10 ‘‘(i) in the case of a distribution by a

11 qualified investment entity (directly or in12 directly) to a corporation—

13 ‘‘(I) the determination of whether

14 such distribution is a dividend shall be

15 made without regard to this section,

16 and

17 ‘‘(II) the amount treated as gain

18 by reason of the receipt of any capital

19 gain dividend shall be increased by the

20 percentage by which the entity’s net

21 capital gain for the taxable year deter22 mined without regard to this section

23 exceeds the entity’s net capital gain

24 for such year determined with regard

25 to this section, and
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1 ‘‘(ii) there shall be other appropriate

2 adjustments (including deemed distribu3 tions) so as to ensure that the benefits of

4 this section are not allowed (directly or in5 directly) to corporate shareholders of quali6 fied investment entities.

7 For purposes of the preceding sentence, any

8 amount includible in gross income under section

9 852(b)(3)(D) shall be treated as a capital gain

10 dividend and an S corporation shall not be

11 treated as a corporation.

12 ‘‘(C) EXCEPTION FOR QUALIFICATION

13 PURPOSES.—This section shall not apply for

14 purposes of sections 851(b) and 856(c).

15 ‘‘(D) EXCEPTION FOR CERTAIN TAXES IM16 POSED AT ENTITY LEVEL.—

17 ‘‘(i) TAX ON FAILURE TO DISTRIBUTE

18 ENTIRE GAIN.—If any amount is subject to

19 tax under section 852(b)(3)(A) for any

20 taxable year, the amount on which tax is

21 imposed under such section shall be in22 creased by the percentage determined

23 under subparagraph (B)(i)(II). A similar

24 rule shall apply in the case of any amount

25 subject to tax under paragraph (2) or (3)
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1 of section 857(b) to the extent attributable

2 to the excess of the net capital gain over

3 the deduction for dividends paid deter4 mined with reference to capital gain divi5 dends only. The first sentence of this

6 clause shall not apply to so much of the

7 amount subject to tax under section

8 852(b)(3)(A) as is designated by the com9 pany under section 852(b)(3)(D).

10 ‘‘(ii) OTHER TAXES.—This section

11 shall not apply for purposes of determining

12 the amount of any tax imposed by para13 graph (4), (5), or (6) of section 857(b).

14 ‘‘(2) ADJUSTMENTS TO INTERESTS HELD IN

15 ENTITY.—

16 ‘‘(A) IN GENERAL.—Stock in a qualified

17 investment entity shall be an indexed asset for

18 any calendar month in the same ratio as the

19 fair market value of the assets held by such en20 tity at the close of such month which are in21 dexed assets (determined without regard to the

22 requirement that the holding period begin on or

23 after January 1, 1997) bears to the fair market

24 value of all assets of such entity at the close of

25 such month.
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1 ‘‘(B) RATIO OF 90 PERCENT OR MORE.—If

2 the ratio for any calendar month determined

3 under subparagraph (A) would (but for this

4 subparagraph) be 90 percent or more, such

5 ratio for such month shall be 100 percent.

6 ‘‘(C) RATIO OF 10 PERCENT OR LESS.—If

7 the ratio for any calendar month determined

8 under subparagraph (A) would (but for this

9 subparagraph) be 10 percent or less, such ratio

10 for such month shall be zero.

11 ‘‘(D) VALUATION OF ASSETS IN CASE OF

12 REAL ESTATE INVESTMENT TRUSTS.—Nothing

13 in this paragraph shall require a real estate in14 vestment trust to value its assets more fre15 quently than once each 36 months (except

16 where such trust ceases to exist). The ratio

17 under subparagraph (A) for any calendar

18 month for which there is no valuation shall be

19 the trustee’s good faith judgment as to such

20 valuation.

21 ‘‘(3) QUALIFIED INVESTMENT ENTITY.—For

22 purposes of this subsection, the term ‘qualified in23 vestment entity’ means—

24 ‘‘(A) a regulated investment company

25 (within the meaning of section 851), and
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1 ‘‘(B) a real estate investment trust (within

2 the meaning of section 856).

3 ‘‘(f) OTHER PASS-THRU ENTITIES.—

4 ‘‘(1) PARTNERSHIPS.—

5 ‘‘(A) IN GENERAL.—In the case of a part6 nership, the adjustment made under subsection

7 (a) at the partnership level shall be passed

8 through to the partners (but only for purposes

9 of determining the income of partners who are

10 not corporations).

11 ‘‘(B) SPECIAL RULE IN THE CASE OF SEC12 TION 754 ELECTIONS.—In the case of a transfer

13 of an interest in a partnership with respect to

14 which the election provided in section 754 is in

15 effect—

16 ‘‘(i) the adjustment under section

17 743(b)(1) shall, with respect to the trans18 feror partner, be treated as a sale of the

19 partnership assets for purposes of applying

20 this section, and

21 ‘‘(ii) with respect to the transferee

22 partner, the partnership’s holding period

23 for purposes of this section in such assets

24 shall be treated as beginning on the date

25 of such adjustment.
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1 ‘‘(2) S CORPORATIONS.—In the case of an S

2 corporation, the adjustment made under subsection

3 (a) at the corporate level shall be passed through to

4 the shareholders. This section shall not apply for

5 purposes of determining the amount of any tax im6 posed by section 1374 or 1375.

7 ‘‘(3) COMMON TRUST FUNDS.—In the case of a

8 common trust fund, the adjustment made under sub9 section (a) at the trust level shall be passed through

10 to the participants (but only for purposes of deter11 mining the income of participants who are not cor12 porations).

13 ‘‘(g) DISPOSITIONS BETWEEN RELATED PERSONS.—

14 This section shall not apply to any sale or other disposition

15 of property between related persons (within the meaning

16 of section 465(b)(3)(C)) if such property, in the hands of

17 the transferee, is of a character subject to the allowance

18 for depreciation provided in section 167.

19 ‘‘(h) TRANSFERS TO INCREASE INDEXING ADJUST20 MENT.—If any person transfers cash, debt, or any other

21 property to another person and the principal purpose of

22 such transfer is to secure or increase an adjustment under

23 subsection (a), the Secretary may disallow part or all of

24 such adjustment or increase.

25 ‘‘(i) SPECIAL RULES.—For purposes of this section:
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1 ‘‘(1) TREATMENT AS SEPARATE ASSET.—In the

2 case of any asset, the following shall be treated as

3 a separate asset:

4 ‘‘(A) A substantial improvement to prop5 erty.

6 ‘‘(B) In the case of stock of a corporation,

7 a substantial contribution to capital.

8 ‘‘(C) Any other portion of an asset to the

9 extent that separate treatment of such portion

10 is appropriate to carry out the purposes of this

11 section.

12 ‘‘(2) ASSETS WHICH ARE NOT INDEXED ASSETS

13 THROUGHOUT HOLDING PERIOD.—The applicable in14 flation ratio shall be appropriately reduced for peri15 ods during which the asset was not an indexed asset.

16 ‘‘(3) NET LEASE PROPERTY DEFINED.—The

17 term ‘net lease property’ means leased property

18 where—

19 ‘‘(A) the term of the lease (taking into ac20 count options to renew) was 50 percent or more

21 of the useful life of the property, and

22 ‘‘(B) for the period of the lease, the sum

23 of the deductions with respect to such property

24 which are allowable to the lessor solely by rea25 son of section 162 (other than rents and reim-
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1 bursed amounts with respect to such property)

2 is 15 percent or less of the rental income pro3 duced by such property.

4 ‘‘(j) REGULATIONS.—The Secretary shall prescribe

5 such regulations as may be necessary or appropriate to

6 carry out the purposes of this section.’’

7 (b) GAINS AND LOSSES FROM INDEXED ASSETS NOT

8 TAKEN INTO ACCOUNT UNDER LIMITATION ON INVEST9 MENT INTEREST.—Subparagraph (B) of section

10 163(d)(4) of such Code (defining investment income) is

11 amended by adding at the end thereof the following new

12 sentences:

13 ‘‘Gain from the sale or other disposition of an in14 dexed asset (as defined in section 1022) held for

15 more than 1 year shall not be taken into account for

16 purposes of the preceding sentence. The preceding

17 sentence shall not apply to gain from the sale or

18 other disposition of any such asset if the taxpayer

19 elects to waive the benefits of section 1022 in deter20 mining the amount of such gain.’’

21 (c) CLERICAL AMENDMENT.—The table of sections

22 for part II of subchapter O of chapter 1 of such Code

23 is amended by inserting after the item relating to section

24 1021 the following new item:

‘‘Sec. 1022. Indexing of certain assets acquired on or after January 1, 1997, for purposes of determining gain.’’
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1 (d) EFFECTIVE DATE.—

2 (1) IN GENERAL.—The amendments made by

3 this section shall apply to the disposition of any

4 property the holding period of which begins on or

5 after January 1, 1997.

6 (2) CERTAIN TRANSACTIONS BETWEEN RELAT7 ED PERSONS.—The amendments made by this sec8 tion shall not apply to the disposition of any prop9 erty acquired on or after January 1, 1997, from a

10 related person (as defined in section 465(b)(3)(C) of

11 the Internal Revenue Code of 1986) if—

12 (A) such property was so acquired for a

13 price less than the property’s fair market value,

14 and

15 (B) the amendments made by this section

16 did not apply to such property in the hands of

17 such related person.

18 (e) ELECTION TO RECOGNIZE GAIN ON READILY

19 TRADABLE SECURITIES HELD ON JANUARY 1, 1997.—

20 (1) IN GENERAL.—If a taxpayer other than a

21 corporation holds any readily tradable security on

22 January 1, 1997, the taxpayer may elect to treat

23 such security as having been sold on the last busi24 ness day before such date for an amount equal to its

25 closing market price on such last business day (and
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1 as having been reacquired on such last business day

2 for an amount equal to such closing market price).

3 (2) TREATMENT OF GAIN OR LOSS.—

4 (A) Any gain resulting from an election

5 under paragraph (1) shall be treated as received

6 or accrued on the last business day referred to

7 in paragraph (1).

8 (B) Any loss resulting from an election

9 under paragraph (1) shall not be allowed for

10 any taxable year.

11 (3) ELECTION.—An election under paragraph

12 (1) shall be made in such manner as the Secretary

13 may prescribe and shall specify the readily tradable

14 securities for which such election is made. Such an

15 election, once made with respect to any readily

16 tradable security, shall be irrevocable.

17 (4) READILY TRADABLE SECURITY.—For pur18 poses of this subsection, the term ‘‘readily tradable

19 security’’ means any stock or other security which,

20 as of January 1, 1997, is readily tradable on an es21 tablished securities market or otherwise.

22 SEC. 4. MIDDLE INCOME SAVINGS INCENTIVES.

23 (a) GENERAL RULE.—Part III of subchapter B of

24 chapter 1 of the Internal Revenue Code of 1986 (relating

25 to items specifically excluded from gross income) is
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1 amended by inserting after section 115 the following new

2 section:

3 ‘‘SEC. 116. MIDDLE INCOME EXCLUSION FOR INVESTMENT

4 INCOME.

5 ‘‘(a) GENERAL RULE.—In the case of an eligible indi6 vidual, gross income does not include qualified investment

7 income.

8 ‘‘(b) LIMITATION.—

9 ‘‘(1) IN GENERAL.—The amount excluded from

10 gross income under subsection (a) for any taxable

11 year shall not exceed $500 ($1,000 in the case of a

12 joint return).

13 ‘‘(2) PHASEOUT.—If the modified adjusted

14 gross income of the individuals exceeds $40,000

15 ($20,000 in the case of a separate return by a mar16 ried individual), the amount determined under para17 graph (1) shall be reduced by an amount equal to

18 10 percent of such excess.

19 ‘‘(c) DEFINITIONS.—For purposes of this section:

20 ‘‘(1) QUALIFIED INDIVIDUAL.—The term ‘quali21 fied individual’ means any individual if—

22 ‘‘(A) such individual’s modified adjusted

23 gross income for the taxable year does not ex24 ceed $50,000 ($25,000 in the case of a separate

25 return by a married individual), and
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1 ‘‘(B) at least 50 percent of such individ2 uals modified adjusted gross income for the tax3 able year is attributable to earned income (as

4 defined in section 911(d)(2)).

5 For purposes of this section, marital status shall be

6 determined under section 7703.

7 ‘‘(2) QUALIFIED INVESTMENT INCOME.—The

8 term ‘qualified investment income’ means gross in9 come from property held for investment except that

10 such term shall not include—

11 ‘‘(A) any gain on the sale or other disposi12 tion of property held for investment, and

13 ‘‘(B) any income taken into account under

14 section 469 in computing income or loss from

15 a passive activity.

16 ‘‘(3) MODIFIED ADJUSTED GROSS INCOME.—

17 The term ‘modified adjusted gross income’ means

18 adjusted gross income determined—

19 ‘‘(A) without regard to this section and

20 sections 135, 911, 931, and 933, and

21 ‘‘(B) after the application of sections 86,

22 469, and 219.

23 ‘‘(d) SPECIAL RULE.—This section shall not apply in

24 the case of an estate or trust.’’
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1 (b) MINIMUM TAX.—Subsection (b) of section 56 of

2 such Code is amended by adding at the end thereof the

3 following new paragraph:

4 ‘‘(4) MIDDLE EXCLUSION ALLOWED.—The ex5 clusion provided by section 116 shall be allowed.’’

6 (c) CONFORMING AMENDMENTS.—

7 (1) Subparagraph (A) of section 86(b)(2) of

8 such Code is amended by inserting ‘‘116,’’ before

9 ‘‘135’’.

10 (2) Subparagraph (A) of section 135(c)(4) of

11 such Code is amended by inserting ‘‘116,’’ before

12 ‘‘911’’.

13 (3) Clause (ii) of section 469(i)(3)(E) if such

14 Code is amended by striking ‘‘section 135’’ and in15 serting ‘‘sections 116 and 135’’.

16 (4) Clause (ii) of section 219(g)(3)(A) of such

17 Code is amended by striking ‘‘section 135’’ and in18 serting ‘‘sections 116, 135,’’.

19 (d) CLERICAL AMENDMENT.—The table of sections

20 for part III of subchapter B of chapter 1 of such Code

21 is amended by inserting after the item relating to section

22 115 the following new item:

‘‘Sec. 116. Middle income exclusion for investment income.’’

23 (e) EFFECTIVE DATE.—The amendments made by

24 this section shall apply to taxable years beginning after

25 December 31, 1993.
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