I

103D CONGRESS

2D SESSION H. R. 4792

To amend the Internal Revenue Code of 1986 to provide tax incentives

to encourage small investors, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

JULY 19, 1994

Mr. MANZULLO (for himself, Mr. LIVINGSTON, Mr. LEVY, Mr. SENSENBRENNER, Mr. MCHUGH, Mr. CANADY, and Mr. PACKARD) 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 provide

tax incentives to encourage small investors, 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; AMENDMENT OF 1986 CODE.

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

5 ‘‘Small Investors Tax Relief Act of 1994’’.

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. EXEMPTION OF CERTAIN INTEREST AND DIVIDEND

4 INCOME FROM TAX.

5 (a) IN GENERAL.—Part III of subchapter B of chap6 ter 1 (relating to amounts specifically excluded from gross

7 income) is amended by inserting after section 115 the fol8 lowing new section:

9 ‘‘SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTER10 EST RECEIVED BY INDIVIDUALS.

11 ‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in12 come does not include the sum of the amounts received

13 during the taxable year by an individual as—

14 ‘‘(1) dividends from domestic corporations, or

15 ‘‘(2) interest.

16 ‘‘(b) LIMITATIONS.—

17 ‘‘(1) MAXIMUM AMOUNT.—The aggregate

18 amount excluded under subsection (a) for any tax19 able year shall not exceed $2,000 ($4,000 in the

20 case of a joint return).

21 ‘‘(2) CERTAIN DIVIDENDS EXCLUDED.—Sub22 section (a)(1) shall not apply to any dividend from

23 a corporation which, for the taxable year of the cor24 poration in which the distribution is made, or for the

25 next preceding taxable year of the corporation, is a
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1 corporation exempt from tax under section 501 (re2 lating to certain charitable, etc., organization) or

3 section 521 (relating to farmers’ cooperative associa4 tions).

5 ‘‘(3) INDEXING FOR INFLATION.—In the case of

6 any taxable year beginning after 1995—

7 ‘‘(A) the $2,000 amount under paragraph

8 (1) shall be increased by an amount equal to—

9 ‘‘(i) $2,000, multiplied by

10 ‘‘(ii) the cost-of-living adjustment

11 under section 1(f)(3) for the calendar year

12 in which the taxable year begins, except

13 that subparagraph (B) thereof shall be ap14 plied by substituting ‘1994’ for ‘1992’, and

15 ‘‘(B) the $4,000 amount under paragraph

16 (1) shall be increased to an amount equal to

17 twice the amount determined under subpara18 graph (A) for the taxable year.

19 If the dollar amount determined after the increase

20 under subparagraph (A) is not a multiple of $100,

21 such dollar amount shall be rounded to the next low22 est multiple of $100.

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

24 ‘‘(1) DISTRIBUTIONS FROM REGULATED IN25 VESTMENT COMPANIES AND REAL ESTATE INVEST-
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1 MENT TRUSTS.—Subsection (a) shall apply with re2 spect to distributions by—

3 ‘‘(A) regulated investment companies to

4 the extent provided in section 854(c), and

5 ‘‘(B) real estate investment trusts to the

6 extent provided in section 857(c).

7 ‘‘(2) DISTRIBUTIONS BY A TRUST.—For pur8 poses of subsection (a), the amount of dividends and

9 interest properly allocable to a beneficiary under sec10 tion 652 or 662 shall be deemed to have been re11 ceived by the beneficiary ratably on the same date

12 that the dividends and interest were received by the

13 estate or trust.

14 ‘‘(3) CERTAIN NONRESIDENT ALIENS INELI15 GIBLE FOR EXCLUSION.—In the case of a non16 resident alien individual, subsection (a) shall apply

17 only—

18 ‘‘(A) in determining the tax imposed for

19 the taxable year pursuant to section 871(b)(1)

20 and only in respect of dividends and interest

21 which are effectively connected with the conduct

22 of a trade or business within the United States,

23 or

24 ‘‘(B) in determining the tax imposed for

25 the taxable year pursuant to section 877(b).’’
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1 (b) CLERICAL AND CONFORMING AMENDMENTS.—

2 (1) The table of sections for part III of sub3 chapter B of chapter 1 is amended by inserting after

4 the item relating to section 115 the following new

5 item:

‘‘Sec. 116. Partial exclusion of dividends and interest received by

individuals.’’

6 (2) Paragraph (2) of section 265(a) is amended

7 by inserting before the period at the end thereof the

8 following: ‘‘, or to purchase or carry obligations or

9 shares, or to make deposits, to the extent the inter10 est thereon is excludable from gross income under

11 section 116’’.

12 (3) Subsection (c) of section 584 is amended by

13 adding at the end the following new sentence: ‘‘The

14 proportionate share of each participant in the

15 amount of dividends or interest received by the com16 mon trust fund and to which section 116 applies

17 shall be considered for purposes of such section as

18 having been received by such participant.’’

19 (4) Subsection (a) of section 643 is amended by

20 inserting after paragraph (6) the following new

21 paragraph:

22 ‘‘(7) DIVIDENDS OR INTEREST.—There shall be

23 included the amount of any dividends or interest ex24 cluded from gross income pursuant to section 116.’’
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1 (5) Section 854 is amended by adding at the

2 end the following new subsection:

3 ‘‘(c) TREATMENT UNDER SECTION 116.—

4 ‘‘(1) IN GENERAL.—For purposes of section

5 116, in the case of any dividend (other than a divi6 dend described in subsection (a)) received from a

7 regulated investment company which meets the re8 quirements of section 852 for the taxable year in

9 which it paid the dividend—

10 ‘‘(A) the entire amount of such dividend

11 shall be treated as a dividend if the aggregate

12 dividends and interest received by such com13 pany during the taxable year equal or exceed 75

14 percent of its gross income, or

15 ‘‘(B) if subparagraph (A) does not apply,

16 a portion of such dividend shall be treated as

17 a dividend (and a portion of such dividend shall

18 be treated as interest) based on the portion of

19 the company’s gross income which consists of

20 aggregate dividends or aggregate interest, as

21 the case may be.

22 For purposes of the preceding sentence, gross in23 come and aggregate interest received shall each be

24 reduced by so much of the deduction allowable by
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1 section 163 for the taxable year as does not exceed

2 aggregate interest received for the taxable year.

3 ‘‘(2) NOTICE TO SHAREHOLDERS.—The amount

4 of any distribution by a regulated investment com5 pany which may be taken into account as a dividend

6 for purposes of the exclusion under section 116 shall

7 not exceed the amount so designated by the com8 pany in a written notice to its shareholders mailed

9 not later than 45 days after the close of its taxable

10 year.

11 ‘‘(3) DEFINITIONS.—For purposes of this sub12 section—

13 ‘‘(A) the term ‘gross income’ does not in14 clude gain from the sale or other disposition of

15 stock or securities, and

16 ‘‘(B) the term ‘aggregate dividends re17 ceived’ includes only dividends received from do18 mestic corporations other than dividends de19 scribed in section 116(b)(2).

20 In determining the amount of any dividend for pur21 poses of subparagraph (B), the rules provided in sec22 tion 116(c)(1) (relating to certain distributions)

23 shall apply.’’

24 (6) Subsection (c) of section 857 of such Code

25 is amended to read as follows:
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1 ‘‘(c) LIMITATIONS APPLICABLE TO DIVIDENDS RE2 CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—

3 ‘‘(1) IN GENERAL.—For purposes of section

4 116 (relating to an exclusion for dividends and inter5 est received by individuals) and section 243 (relating

6 to deductions for dividends received by corpora7 tions), a dividend received from a real estate invest8 ment trust which meets the requirements of this

9 part shall not be considered as a dividend.

10 ‘‘(2) TREATMENT AS INTEREST.—In the case of

11 a dividend (other than a capital gain dividend, as de12 fined in subsection (b)(3)(C)) received from a real

13 estate investment trust which meets the require14 ments of this part for the taxable year in which it

15 paid the dividend—

16 ‘‘(A) such dividend shall be treated as in17 terest if the aggregate interest received by the

18 real estate investment trust for the taxable year

19 equals or exceeds 75 percent of its gross in20 come, or

21 ‘‘(B) if subparagraph (A) does not apply,

22 the portion of such dividend which bears the

23 same ratio to the amount of such dividend as

24 the aggregate interest received bears to gross

25 income shall be treated as interest.
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1 ‘‘(3) ADJUSTMENTS TO GROSS INCOME AND AG2 GREGATE INTEREST RECEIVED.—For purposes of

3 paragraph (2)—

4 ‘‘(A) gross income does not include the net

5 capital gain,

6 ‘‘(B) gross income and aggregate interest

7 received shall each be reduced by so much of

8 the deduction allowable by section 163 for the

9 taxable year (other than for interest on mort10 gages on real property owned by the real estate

11 investment trust) as does not exceed aggregate

12 interest received by the taxable year, and

13 ‘‘(C) gross income shall be reduced by the

14 sum of the taxes imposed by paragraphs (4),

15 (5), and (6) of section 857(b).

16 ‘‘(4) NOTICE TO SHAREHOLDERS.—The amount

17 of any distribution by a real estate investment trust

18 which may be taken into account as interest for pur19 poses of the exclusion under section 116 shall not

20 exceed the amount so designated by the trust in a

21 written notice to its shareholders mailed not later

22 than 45 days after the close of its taxable year.’’

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

24 this section shall apply with respect to amounts received
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1 after December 31, 1994, in taxable years ending after

2 such date.

3 SEC. 3. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF

4 DETERMINING GAIN OR LOSS.

5 (a) IN GENERAL.—Part II of subchapter O of chap6 ter 1 (relating to basis rules of general application) is

7 amended by inserting after section 1021 the following new

8 section:

9 ‘‘SEC. 1022. INDEXING OF CERTAIN ASSETS FOR PURPOSES

10 OF DETERMINING GAIN OR LOSS.

11 ‘‘(a) GENERAL RULE.—

12 ‘‘(1) INDEXED BASIS SUBSTITUTED FOR AD13 JUSTED BASIS.—Except as provided in paragraph

14 (2), if an indexed asset which has been held for

15 more than 1 year is sold or otherwise disposed of,

16 then, for purposes of this title, the indexed basis of

17 the asset shall be substituted for its adjusted basis.

18 ‘‘(2) EXCEPTION FOR DEPRECIATION, ETC.—

19 The deduction for depreciation, depletion, and amor20 tization shall be determined without regard to the

21 application of paragraph (1) to the taxpayer or any

22 other person.

23 ‘‘(b) INDEXED ASSET.—

24 ‘‘(1) IN GENERAL.—For purposes of this sec25 tion, the term ‘indexed asset’ means—
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1 ‘‘(A) stock in a corporation,

2 ‘‘(B) tangible property (or any interest

3 therein), which is a capital asset or property

4 used in the trade or business (as defined in sec5 tion 1231(b)), and

6 ‘‘(C) the principal residence of the tax7 payer (within the meaning of section 1034).

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

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

10 does not include—

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

12 in property which is in the nature of a credi13 tor’s interest.

14 ‘‘(B) OPTIONS.—Any option or other right

15 to acquire an interest in property.

16 ‘‘(C) NET LEASE PROPERTY.—In the case

17 of a lessor, net lease property (within the mean18 ing of subsection (h)(1)).

19 ‘‘(D) CERTAIN PREFERRED STOCK.—Stock

20 which is preferred as to dividends and does not

21 participate in corporate growth to any signifi22 cant extent.

23 ‘‘(E) STOCK IN CERTAIN CORPORATIONS.—

24 Stock in—
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1 ‘‘(i) an S corporation (within the

2 meaning of section 1361),

3 ‘‘(ii) a personal holding company (as

4 defined in section 542), and

5 ‘‘(iii) a foreign corporation.

6 ‘‘(3) EXCEPTION FOR STOCK IN FOREIGN COR7 PORATION WHICH IS REGULARLY TRADED ON NA8 TIONAL OR REGIONAL EXCHANGE.—Clause (iii) of

9 paragraph (2)(E) shall not apply to stock in a for10 eign corporation the stock of which is listed on the

11 New York Stock Exchange, the American Stock Ex12 change, or any domestic regional exchange for which

13 quotations are published on a regular basis other

14 than—

15 ‘‘(A) stock of a foreign investment com16 pany (within the meaning of section 1246(b)),

17 and

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

19 a United States person who meets the require20 ments of section 1248(a)(2).

21 ‘‘(c) INDEXED BASIS.—For purposes of this sec22 tion—

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

24 any asset is—
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1 ‘‘(A) the adjusted basis of the asset, multi2 plied by

3 ‘‘(B) the applicable inflation ratio.

4 ‘‘(2) APPLICABLE INFLATION RATIO.—The ap5 plicable inflation ratio for any asset is the percent6 age arrived at by dividing—

7 ‘‘(A) the CPI for the calendar year preced8 ing the calendar year in which the disposition

9 takes place, by

10 ‘‘(B) the CPI for the calendar year preced11 ing the calendar year in which the asset was ac12 quired by the taxpayer (or, in the case of an

13 asset acquired before 1995, the CPI for 1993).

14 The applicable inflation ratio shall not be taken into

15 account unless it is greater than 1. The applicable

16 inflation ratio for any asset shall be rounded to the

17 nearest one-tenth of 1 percent.

18 ‘‘(3) CPI.—The CPI for any calendar year shall

19 be determined under section 1(f)(4).

20 ‘‘(4) SECRETARY TO PUBLISH TABLES.—The

21 Secretary shall publish tables specifying the applica22 ble inflation ratio for each calendar year.

23 ‘‘(d) SPECIAL RULES.—For purposes of this sec24 tion—
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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.—

14 ‘‘(A) IN GENERAL.—The applicable infla15 tion ratio shall be appropriately reduced for cal16 endar months at any time during which the

17 asset was not an indexed asset.

18 ‘‘(B) CERTAIN SHORT SALES.—For pur19 poses of applying subparagraph (A), an asset

20 shall be treated as not an indexed asset for any

21 short sale period during which the taxpayer or

22 the taxpayer’s spouse sells short property sub23 stantially identical to the asset. For purposes of

24 the preceding sentence, the short sale period be25 gins on the day after the substantially identical
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1 property is sold and ends on the closing date

2 for the sale.

3 ‘‘(3) TREATMENT OF CERTAIN DISTRIBU4 TIONS.—A distribution with respect to stock in a

5 corporation which is not a dividend shall be treated

6 as a disposition.

7 ‘‘(4) SECTION CANNOT INCREASE ORDINARY

8 LOSS.—To the extent that (but for this paragraph)

9 this section would create or increase a net ordinary

10 loss to which section 1231(a)(2) applies or an ordi11 nary loss to which any other provision of this title

12 applies, such provision shall not apply. The taxpayer

13 shall be treated as having a long-term capital loss in

14 an amount equal to the amount of the ordinary loss

15 to which the preceding sentence applies.

16 ‘‘(5) ACQUISITION DATE WHERE THERE HAS

17 BEEN PRIOR APPLICATION OF SUBSECTION (a)(1)

18 WITH RESPECT TO THE TAXPAYER.—If there has

19 been a prior application of subsection (a)(1) to an

20 asset while such asset was held by the taxpayer, the

21 date of acquisition of such asset by the taxpayer

22 shall be treated as not earlier than the date of the

23 most recent such prior application.

24 ‘‘(6) COLLAPSIBLE CORPORATIONS.—The appli25 cation of section 341(a) (relating to collapsible
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1 corporations) shall be determined without regard to

2 this section.

3 ‘‘(e) CERTAIN CONDUIT ENTITIES.—

4 ‘‘(1) REGULATED INVESTMENT COMPANIES;

5 REAL ESTATE INVESTMENT TRUSTS; COMMON TRUST

6 FUNDS.—

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

8 investment entity shall be an indexed asset for

9 any calendar month in the same ratio as the

10 fair market value of the assets held by such en11 tity at the close of such month which are in12 dexed assets bears to the fair market value of

13 all assets of such entity at the close of such

14 month.

15 ‘‘(B) RATIO OF 90 PERCENT OR MORE.—If

16 the ratio for any calendar month determined

17 under subparagraph (A) would (but for this

18 subparagraph) be 90 percent or more, such

19 ratio for such month shall be 100 percent.

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

21 the ratio for any calendar month determined

22 under subparagraph (A) would (but for this

23 subparagraph) be 10 percent or less, such ratio

24 for such month shall be zero.
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1 ‘‘(D) VALUATION OF ASSETS IN CASE OF

2 REAL ESTATE INVESTMENT TRUSTS.—Nothing

3 in this paragraph shall require a real estate in4 vestment trust to value its assets more fre5 quently than once each 36 months (except

6 where such trust ceases to exist). The ratio

7 under subparagraph (A) for any calendar

8 month for which there is no valuation shall be

9 the trustee’s good faith judgment as to such

10 valuation.

11 ‘‘(E) QUALIFIED INVESTMENT ENTITY.—

12 For purposes of this paragraph, the term

13 ‘qualified investment entity’ means—

14 ‘‘(i) a regulated investment company

15 (within the meaning of section 851),

16 ‘‘(ii) a real estate investment trust

17 (within the meaning of section 856), and

18 ‘‘(iii) a common trust fund (within the

19 meaning of section 584).

20 ‘‘(2) PARTNERSHIPS.—In the case of a partner21 ship, the adjustment made under subsection (a) at

22 the partnership level shall be passed through to the

23 partners.

24 ‘‘(3) SUBCHAPTER S CORPORATIONS.—In the

25 case of an electing small business corporation, the
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1 adjustment under subsection (a) at the corporate

2 level shall be passed through to the shareholders.

3 ‘‘(f) DISPOSITIONS BETWEEN RELATED PERSONS.—

4 ‘‘(1) IN GENERAL.—This section shall not apply

5 to any sale or other disposition of property between

6 related persons except to the extent that the basis

7 of such property in the hands of the transferee is a

8 substituted basis.

9 ‘‘(2) RELATED PERSONS DEFINED.—For pur10 poses of this section, the term ‘related persons’

11 means—

12 ‘‘(A) persons bearing a relationship set

13 forth in section 267(b), and

14 ‘‘(B) persons treated as single employer

15 under subsection (b) or (c) of section 414.

16 ‘‘(g) TRANSFERS TO INCREASE INDEXING ADJUST17 MENT OR DEPRECIATION ALLOWANCE.—If any person

18 transfers cash, debt, or any other property to another per19 son and the principal purpose of such transfer is—

20 ‘‘(1) to secure or increase an adjustment under

21 subsection (a), or

22 ‘‘(2) to increase (by reason of an adjustment

23 under subsection (a)) a deduction for depreciation,

24 depletion, or amortization,
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1 the Secretary may disallow part or all of such adjustment

2 or increase.

3 ‘‘(h) DEFINITIONS.—For purposes of this section:

4 ‘‘(1) NET LEASE PROPERTY DEFINED.—The

5 term ‘net lease property’ means leased real property

6 where—

7 ‘‘(A) the term of the lease (taking into ac8 count options to renew) was 50 percent or more

9 of the useful life of the property, and

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

11 of the deductions with respect to such property

12 which are allowable to the lessor solely by rea13 son of section 162 (other than rents and reim14 bursed amounts with respect to such property)

15 is 15 percent or less of the rental income pro16 duced by such property.

17 ‘‘(2) STOCK INCLUDES INTEREST IN COMMON

18 TRUST FUND.—The term ‘stock in a corporation’ in19 cludes any interest in a common trust fund (as de20 fined in section 584(a)).

21 ‘‘(i) REGULATIONS.—The Secretary shall prescribe

22 such regulations as may be necessary or appropriate to

23 carry out the purposes of this section.’’

24 (b) ADJUSTMENT TO APPLY FOR PURPOSES OF DE25 TERMINING EARNINGS AND PROFITS.—Subsection (f) of
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1 section 312 (relating to effect on earnings and profits of

2 gain or loss and of receipt of tax-free distributions) is

3 amended by adding at the end thereof the following new

4 paragraph:

5 ‘‘(3) EFFECT ON EARNINGS AND PROFITS OF

6 INDEXED BASIS.—

‘‘For substitution of indexed basis for adjusted

basis in the case of the disposition of certain assets

after December 31, 1994, see section 1022(a)(1).’’

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

8 for part II of subchapter O of such chapter 1 is amended

9 by inserting after the item relating to section 1021 the

10 following new item:

‘‘Sec. 1022. Indexing of certain assets for purposes of determining

gain or loss.’’

11 (d) EFFECTIVE DATE.—The amendments made by

12 this section shall apply to dispositions after December 31,

13 1994.

14 SEC. 4. REDUCTION IN CAPITAL GAINS TAX FOR INDIVID15 UALS.

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

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

18 amended by adding at the end thereof the following new

19 section:

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

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

22 there shall be allowed as a deduction for the taxable year
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1 an amount equal to the annual capital gains deduction (if

2 any) determined under subsection (b).

3 ‘‘(b) ANNUAL CAPITAL GAINS DEDUCTION.—

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

5 (a), the annual capital gains deduction determined

6 under this subsection is the lesser of—

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

8 year, or

9 ‘‘(B) $50,000 ($100,000 in the case of a

10 joint return).

11 ‘‘(2) COORDINATION WITH EXCLUSION FOR

12 GAIN FROM SMALL BUSINESS STOCK.—For purposes

13 of paragraph (1)(A), net capital gain shall be deter14 mined without regard to any gain from the sale or

15 exchange of qualified small business stock (as de16 fined in section 1202(c)) held for more than 5 years.

17 ‘‘(3) CERTAIN INDIVIDUALS NOT ELIGIBLE.—

18 This subsection shall not apply to any individual

19 with respect to whom a deduction under section 151

20 is allowable to another taxpayer for a taxable year

21 beginning in the calendar year in which such individ22 ual’s taxable year begins.

23 ‘‘(4) ANNUAL DEDUCTION NOT AVAILABLE FOR

24 SALES TO RELATED PERSONS.—The amount of the

25 net capital gain taken into account under paragraph
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1 (1)(A) shall not exceed the amount of the net capital

2 gain determined by not taking into account gains

3 and losses from sales and exchanges to any related

4 person (as defined in section 267(f)).

5 ‘‘(5) INDEXING FOR INFLATION.—In the case of

6 any taxable year beginning after 1995—

7 ‘‘(A) the $50,000 amount under paragraph

8 (1)(B) shall be increased by an amount equal

9 to—

10 ‘‘(i) $50,000, multiplied by

11 ‘‘(ii) the cost-of-living adjustment

12 under section 1(f)(3) for the calendar year

13 in which the taxable year begins, except

14 that subparagraph (B) thereof shall be ap15 plied by substituting ‘1994’ for ‘1992’, and

16 ‘‘(B) the $100,000 amount under para17 graph (1)(B) shall be increased to an amount

18 equal to twice the amount determined under

19 subparagraph (A) for the taxable year.

20 If the dollar amount determined after the increase

21 under this paragraph is not a multiple of $1,000,

22 such dollar amount shall be rounded to the next low23 est multiple of $1,000.
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1 ‘‘(c) SECTION NOT TO APPLY TO ESTATES OR

2 TRUSTS.—No deduction shall be allowed under this sec3 tion to an estate or trust.

4 ‘‘(d) SPECIAL RULES.—

5 ‘‘(1) DEDUCTION AVAILABLE ONLY FOR SALES

6 OR EXCHANGES AFTER DECEMBER 31, 1994.—The

7 amount of the net capital gain taken into account

8 under subsection (b)(1)(A) shall not exceed the

9 amount of the net capital gain determined by only

10 taking into account gains and losses from sales and

11 exchanges after December 31, 1994.

12 ‘‘(2) SPECIAL RULE FOR PASS-THRU ENTI13 TIES.—

14 ‘‘(A) IN GENERAL.—In applying this sec15 tion with respect to any pass-thru entity, the

16 determination of when the sale or exchange oc17 curs shall be made at the entity level.

18 ‘‘(B) PASS-THRU ENTITY DEFINED.—For

19 purposes of subparagraph (A), the term ‘pass20 thru entity’ means—

21 ‘‘(i) a regulated investment company,

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

23 ‘‘(iii) an S corporation,

24 ‘‘(iv) a partnership,

25 ‘‘(v) an estate or trust, and
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1 ‘‘(vi) a common trust fund.’’

2 (b) CONFORMING AMENDMENTS.—

3 (1) Subsection (a) of section 62 is amended by

4 inserting after paragraph (15) the following new

5 paragraph:

6 ‘‘(16) CAPITAL GAINS DEDUCTION.—The deduc7 tion allowed by section 1203.’’

8 (2) Paragraph (2) of section 172(d) is amended

9 by inserting ‘‘and the deduction provided by section

10 1203’’ after ‘‘1202’’.

11 (3)(A) Section 220 (relating to cross reference)

12 is amended to read as follows:

13 ‘‘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.’’

14 (B) The table of sections for part VII of sub15 chapter B of chapter 1 is amended by striking ‘‘ref16 erence’’ in the item relating to section 220 and in17 serting ‘‘references’’.

18 (4) Paragraph (4) of section 691(c) is amended

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

20 (5) The second sentence of paragraph (2) of

21 section 871(a) is amended by inserting ‘‘or 1203’’

22 after ‘‘1202’’.
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1 (c) CLERICAL AMENDMENT.—The table of sections

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

3 adding at the end thereof the following new item:

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

4 (d) EFFECTIVE DATE.—The amendments made by

5 this section shall apply to sales or exchanges after Decem6 ber 31, 1994, in taxable years ending after such date.

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