I

103D CONGRESS

2D SESSION H. R. 5202

To amend the Internal Revenue Code of 1986 to index the basis of certain

capital assets for purposes of determining gain or loss.

IN THE HOUSE OF REPRESENTATIVES

OCTOBER 6, 1994

Mr. WYDEN 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 index

the basis of certain capital assets for purposes of determining gain or loss.

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 ‘‘Family Savings and

5 Investors Protection Act of 1994’’.

6 SEC. 2. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF

7 DETERMINING GAIN OR LOSS.

8 (a) IN GENERAL.—Part II of subchapter O of chap9 ter 1 of the Internal Revenue Code of 1986 (relating to
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1 basis rules of general application) is amended by inserting

2 after section 1021 the following new section:

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

4 OF DETERMINING GAIN OR LOSS.

5 ‘‘(a) GENERAL RULE.—

6 ‘‘(1) INDEXED BASIS SUBSTITUTED FOR AD7 JUSTED BASIS.—Except as otherwise provided in

8 this subsection, if an indexed asset which has been

9 held for more than 1 year is sold or otherwise dis10 posed of, for purposes of this title the indexed basis

11 of the asset shall be substituted for its adjusted

12 basis.

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

14 The deduction for depreciation, depletion, and amor15 tization shall be determined without regard to the

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

17 other person.

18 ‘‘(b) INDEXED ASSET.—

19 ‘‘(1) IN GENERAL.—For purposes of this sec20 tion, the term ‘indexed asset’ means—

21 ‘‘(A) stock in a corporation, and

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

23 therein),

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

25 or business (as defined in section 1231(b)).
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1 ‘‘(2) CERTAIN PROPERTY EXCLUDED.—For

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

3 does not include:

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

5 in property which is in the nature of a credi6 tor’s interest.

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

8 to acquire an interest in property.

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

10 of a lessor, net lease property (within the mean11 ing of subsection (i)(3)).

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

13 which is fixed and preferred as to dividends and

14 does not participate in corporate growth to any

15 significant extent.

16 ‘‘(E) STOCK IN FOREIGN CORPORA17 TIONS.—Stock in a foreign corporation.

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

19 in an S corporation.

20 ‘‘(3) EXCEPTION FOR STOCK IN FOREIGN COR21 PORATION WHICH IS REGULARLY TRADED ON NA22 TIONAL OR REGIONAL EXCHANGE.—Paragraph

23 (2)(E) shall not apply to stock in a foreign corpora24 tion the stock of which is listed on the New York

25 Stock Exchange, the American Stock Exchange, the
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1 national market system operated by the National As2 sociation of Securities Dealers, or any domestic re3 gional exchange for which quotations are published

4 on a regular basis other than—

5 ‘‘(A) stock of a foreign investment com6 pany (within the meaning of section 1246(b)),

7 ‘‘(B) stock in a passive foreign investment

8 company (as defined in section 1296), and

9 ‘‘(C) stock in a foreign corporation held by

10 a United States person who meets the require11 ments of section 1248(a)(2).

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

13 ‘‘(1) GENERAL RULE.—Except as provided in

14 paragraph (2), the indexed basis for any asset is—

15 ‘‘(A) the adjusted basis of the asset, multi16 plied by

17 ‘‘(B) the applicable inflation ratio.

18 ‘‘(2) APPLICABLE INFLATION RATIO.—The ap19 plicable inflation ratio for any asset is the percent20 age arrived at by dividing—

21 ‘‘(A) the gross national product deflator

22 the calendar quarter in which the disposition

23 takes place, by

24 ‘‘(B) the gross national product deflator

25 for the calendar quarter in which the asset was
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1 acquired by the taxpayer (or, if later, the cal2 endar quarter ending on December 31, 1994).

3 The applicable inflation ratio shall not be taken into

4 account unless it is greater than 1. The applicable

5 inflation ratio for any asset shall be rounded to the

6 nearest one-tenth of 1 percent.

7 ‘‘(3) GROSS NATIONAL PRODUCT DEFLATOR.—

8 The gross national product deflator for any calendar

9 quarter is the implicit price deflator for the gross

10 national product for such quarter (as shown in the

11 first revision thereof).

12 ‘‘(d) SHORT SALES.—

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

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

15 of 1 year, for purposes of this title, the amount real16 ized shall be an amount equal to the amount realized

17 (determined without regard to this paragraph) mul18 tiplied by the applicable inflation ratio. In applying

19 subsection (c)(3) for purposes of the preceding sen20 tence, the date on which the property is sold short

21 shall be treated as the date on which the holding pe22 riod for the asset begins and the closing date for the

23 sale shall be treated as the date of disposition.

24 ‘‘(2) SHORT SALE OF SUBSTANTIALLY IDEN25 TICAL PROPERTY.—If the taxpayer or the taxpayer’s
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1 spouse sells short property substantially identical to

2 an asset held by the taxpayer, the asset held by the

3 taxpayer and the substantially identical property

4 shall not be treated as indexed assets for the short

5 sale period.

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

7 this subsection, the short sale period begins on the

8 day after property is sold and ends on the closing

9 date for the sale.

10 ‘‘(e) TREATMENT OF REGULATED INVESTMENT

11 COMPANIES AND REAL ESTATE INVESTMENT TRUSTS.—

12 ‘‘(1) ADJUSTMENTS AT ENTITY LEVEL.—

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

14 provided in this paragraph, the adjustment

15 under subsection (a) shall be allowed to any

16 qualified investment entity (including for pur17 poses of determining the earnings and profits of

18 such entity).

19 ‘‘(B) EXCEPTION FOR QUALIFICATION

20 PURPOSES.—This section shall not apply for

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

22 ‘‘(2) ADJUSTMENTS TO INTERESTS HELD IN

23 ENTITY.—

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

25 investment entity shall be an indexed asset for
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1 any calendar month in the same ratio as the

2 fair market value of the assets held by such en3 tity at the close of such month which are in4 dexed assets bears to the fair market value of

5 all assets of such entity at the close of such

6 month.

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

8 the ratio for any calendar month determined

9 under subparagraph (A) would (but for this

10 subparagraph) be 90 percent or more, such

11 ratio for such month shall be 100 percent.

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

13 the ratio for any calendar month determined

14 under subparagraph (A) would (but for this

15 subparagraph) be 10 percent or less, such ratio

16 for such month shall be zero.

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

18 REAL ESTATE INVESTMENT TRUSTS.—Nothing

19 in this paragraph shall require a real estate in20 vestment trust to value its assets more fre21 quently than once each 36 months (except

22 where such trust ceases to exist). The ratio

23 under subparagraph (A) for any calendar

24 month for which there is no valuation shall be
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1 the trustee’s good faith judgment as to such

2 valuation.

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

4 purposes of this subsection, the term ‘qualified in5 vestment entity’ means—

6 ‘‘(A) a regulated investment company

7 (within the meaning of section 851), and

8 ‘‘(B) a real estate investment trust (within

9 the meaning of section 856).

10 ‘‘(f) OTHER PASS-THRU ENTITIES.—

11 ‘‘(1) PARTNERSHIPS.—

12 ‘‘(A) IN GENERAL.—In the case of a part13 nership, the adjustment made under subsection

14 (a) at the partnership level shall be passed

15 through to the partners.

16 ‘‘(B) SPECIAL RULE IN THE CASE OF SEC17 TION 754 ELECTIONS.—In the case of a transfer

18 of an interest in a partnership with respect to

19 which the election provided in section 754 is in

20 effect—

21 ‘‘(i) the adjustment under section

22 743(b)(1) shall, with respect to the trans23 feror partner, be treated as a sale of the

24 partnership assets for purposes of applying

25 this section, and
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1 ‘‘(ii) with respect to the transferee

2 partner, the partnership’s holding period

3 for purposes of this section in such assets

4 shall be treated as beginning on the date

5 of such adjustment.

6 ‘‘(2) S CORPORATIONS.—In the case of an S

7 corporation, the adjustment made under subsection

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

9 the shareholders.

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

11 common trust fund, the adjustment made under sub12 section (a) at the trust level shall be passed through

13 to the participants.

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

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

16 to any sale or other disposition of property between

17 related persons except to the extent that the basis

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

19 substituted basis.

20 ‘‘(2) RELATED PERSONS DEFINED.—For pur21 poses of this section, the term ‘related persons’

22 means—

23 ‘‘(A) persons bearing a relationship set

24 forth in section 267(b), and
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1 ‘‘(B) persons treated as single employer

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

3 ‘‘(h) TRANSFERS TO INCREASE INDEXING ADJUST4 MENT.—If any person transfers cash, debt, or any other

5 property to another person and the principal purpose of

6 such transfer is to secure or increase an adjustment under

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

8 such adjustment or increase.

9 ‘‘(i) SPECIAL RULES.—For purposes of this section:

10 ‘‘(1) TREATMENT AS SEPARATE ASSET.—In the

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

12 a separate asset:

13 ‘‘(A) A substantial improvement to prop14 erty.

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

16 a substantial contribution to capital.

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

18 extent that separate treatment of such portion

19 is appropriate to carry out the purposes of this

20 section.

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

22 THROUGHOUT HOLDING PERIOD.—The applicable in23 flation ratio shall be appropriately reduced for peri24 ods during which the asset was not an indexed asset.
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1 ‘‘(3) NET LEASE PROPERTY DEFINED.—The

2 term ‘net lease property’ means leased property

3 where—

4 ‘‘(A) the term of the lease (taking into ac5 count options to renew) was 50 percent or more

6 of the useful life of the property, and

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

8 of the deductions with respect to such property

9 which are allowable to the lessor solely by rea10 son of section 162 (other than rents and reim11 bursed amounts with respect to such property)

12 is 15 percent or less of the rental income pro13 duced by such property.

14 ‘‘(4) TREATMENT OF CERTAIN DISTRIBU15 TIONS.—A distribution with respect to stock in a

16 corporation which is not a dividend shall be treated

17 as a disposition.

18 ‘‘(5) SECTION CANNOT INCREASE ORDINARY

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

20 this section would create or increase a net ordinary

21 loss to which section 1231(a)(2) applies or an ordi22 nary loss to which any other provision of this title

23 applies, such provision shall not apply. The taxpayer

24 shall be treated as having a long-term capital loss in
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1 an amount equal to the amount of the ordinary loss

2 to which the preceding sentence applies.

3 ‘‘(6) ACQUISITION DATE WHERE THERE HAS

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

5 WITH RESPECT TO THE TAXPAYER.—If there has

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

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

8 date of acquisition of such asset by the taxpayer

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

10 most recent such prior application.

11 ‘‘(7) COLLAPSIBLE CORPORATIONS.—The appli12 cation of section 341(a) (relating to collapsible cor13 porations) shall be determined without regard to this

14 section.

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

16 such regulations as may be necessary or appropriate to

17 carry out the purposes of this section.’’

18 (b) CLERICAL AMENDMENT.—The table of sections

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

20 is amended by inserting after the item relating to section

21 1021 the following new item:

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

gain or loss.’’

22 (c) ADJUSTMENT TO APPLY FOR PURPOSES OF DE23 TERMINING EARNINGS AND PROFITS.—Subsection (f) of

24 section 312 of such Code (relating to effect on earnings
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1 and profits of gain or loss and of receipt of tax-free dis2 tributions) is amended by adding at the end thereof the

3 following new paragraph:

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

5 INDEXED BASIS.—

For substitution of indexed basis for adjusted

basis in the case of the disposition of certain assets,

see section 1022(a)(1).’’

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

7 this section shall apply to dispositions after December 31,

8 1994, in taxable years ending after such date.

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