I

103D CONGRESS

2D SESSION H. R. 3739

To amend the Internal Revenue Code of 1986 to provide all taxpayers with

a 50 percent deduction for capital gains, to index the basis of certain

capital assets, and to allow the capital loss deduction for losses on

the sale or exchange of an individual’s principal residence.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 26, 1994

Mr. ARCHER (for himself, Mr. CRANE, Mr. THOMAS of California, Mr. SHAW,

Mr. SUNDQUIST, Mrs. JOHNSON of Connecticut, Mr. HOUGHTON, Mr.

HERGER, Mr. MCCRERY, Mr. HANCOCK, Mr. CAMP, and Mr. ZIMMER)

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

all taxpayers with a 50 percent deduction for capital

gains, to index the basis of certain capital assets, and

to allow the capital loss deduction for losses on the

sale or exchange of an individual’s principal residence.

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 ‘‘Capital Formation and

5 Jobs Creation Act of 1994’’.
2

•HR 3739 IH

1 SEC. 2. 50 PERCENT CAPITAL GAINS DEDUCTION.

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

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

4 to treatment of capital gains) is amended to read as fol5 lows:

6 ‘‘PART I—TREATMENT OF CAPITAL GAINS

‘‘Sec. 1201. Capital gains deduction.

7 ‘‘SEC. 1201. CAPITAL GAINS DEDUCTION.

8 ‘‘(a) GENERAL RULE.—If for any taxable year a tax9 payer has a net capital gain, 50 percent of such gain shall

10 be a deduction from gross income.

11 ‘‘(b) ESTATES AND TRUSTS.—In the case of an es12 tate or trust, the deduction shall be computed by excluding

13 the portion (if any) of the gains for the taxable year from

14 sales or exchanges of capital assets which, under sections

15 652 and 662 (relating to inclusions of amounts in gross

16 income of beneficiaries of trusts), is includible by the in17 come beneficiaries as gain derived from the sale or ex18 change of capital assets.

19 ‘‘(c) COORDINATION WITH TREATMENT OF CAPITAL

20 GAIN UNDER LIMITATION ON INVESTMENT INTEREST.—

21 For purposes of this section, the net capital gain for any

22 taxable year shall be reduced (but not below zero) by the

23 amount which the taxpayer takes into account as invest24 ment income under section 163(d)(4)(B)(iii).

25 ‘‘(d) TRANSITIONAL RULE.—
3

•HR 3739 IH

1 ‘‘(1) IN GENERAL.—In the case of a taxable

2 year which includes February 1, 1994, the amount

3 taken into account as the net capital gain under

4 subsection (a) shall not exceed the net capital gain

5 determined by only taking into account gains and

6 losses properly taken into account for the portion of

7 the taxable year on or after February 1, 1994.

8 ‘‘(2) SPECIAL RULES FOR PASS-THRU ENTI9 TIES.—

10 ‘‘(A) IN GENERAL.—In applying paragraph

11 (1) with respect to any pass-thru entity, the de12 termination of when gains and losses are prop13 erly taken into account shall be made at the en14 tity level.

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

16 purposes of subparagraph (A), the term ‘pass17 thru entity’ means—

18 ‘‘(i) a regulated investment company,

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

20 ‘‘(iii) an S corporation,

21 ‘‘(iv) a partnership,

22 ‘‘(v) an estate or trust, and

23 ‘‘(vi) a common trust fund.’’

24 (b) DEDUCTION ALLOWABLE IN COMPUTING AD25 JUSTED GROSS INCOME.—Subsection (a) of section 62 of
4

•HR 3739 IH

1 such Code is amended by inserting after paragraph (15)

2 the following new paragraph:

3 ‘‘(16) LONG-TERM CAPITAL GAINS.—The de4 duction allowed by section 1201.’’

5 (c) TECHNICAL AND CONFORMING CHANGES.—

6 (1) Section 13113 of the Revenue Reconcili7 ation Act of 1993 (relating to 50-percent exclusion

8 for gain from certain small business stock), and the

9 amendments made by such section, are hereby re10 pealed; and the Internal Revenue Code of 1986 shall

11 be applied as if such section (and amendments) had

12 never been enacted.

13 (2) Section 1 of such Code is amended by strik14 ing subsection (h).

15 (3) Paragraph (1) of section 170(e) of such

16 Code is amended by striking ‘‘the amount of gain’’

17 in the material following subparagraph (B)(ii) and

18 inserting ‘‘50 percent of the amount of gain’’.

19 (4)(A) Paragraph (2) of section 172(d) of such

20 Code is amended to read as follows:

21 ‘‘(2) CAPITAL GAINS AND LOSSES.—

22 ‘‘(A) LOSSES OF TAXPAYERS OTHER THAN

23 CORPORATIONS.—In the case of a taxpayer

24 other than a corporation, the amount deductible

25 on account of losses from sales or exchanges of
5

•HR 3739 IH

1 capital assets shall not exceed the amount in2 cludible on account of gains from sales or ex3 changes of capital assets.

4 ‘‘(B) DEDUCTION UNDER SECTION 1201.—

5 The deduction under section 1201 shall not be

6 allowed.’’

7 (B) Subparagraph (B) of section 172(d)(4) of

8 such Code is amended by striking ‘‘paragraphs (1)

9 and (3)’’ and inserting ‘‘paragraphs (1), (2)(B), and

10 (3)’’.

11 (5) Paragraph (4) of section 642(c) of such

12 Code is amended to read as follows:

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

14 amount otherwise allowable as a deduction under

15 this subsection consists of gain from the sale or ex16 change of capital assets held for more than 1 year,

17 proper adjustment shall be made for any deduction

18 allowable to the estate or trust under section 1201

19 (relating to deduction for excess of capital gains over

20 capital losses). In the case of a trust, the deduction

21 allowed by this subsection shall be subject to section

22 681 (relating to unrelated business income).’’

23 (6) Paragraph (3) of section 643(a) of such

24 Code is amended by adding at the end thereof the

25 following new sentence: ‘‘The deduction under sec-
6

•HR 3739 IH

1 tion 1201 (relating to deduction of excess of capital

2 gains over capital losses) shall not be taken into ac3 count.’’

4 (7) Paragraph (4) of section 691(c) of such

5 Code is amended by striking ‘‘sections 1(h), 1201,

6 and 1211’’ and inserting ‘‘sections 1201 and 1211’’.

7 (8) The second sentence of section 871(a)(2) of

8 such Code is amended by inserting ‘‘such gains and

9 losses shall be determined without regard to section

10 1201 (relating to deduction for capital gains) and’’

11 after ‘‘except that’’.

12 (9) Subsection (d) of section 1044 of such Code

13 is amended by striking the last sentence.

14 (10)(A) Paragraph (2) of section 1211(b) of

15 such Code is amended to read as follows:

16 ‘‘(2) the sum of—

17 ‘‘(A) the excess of the net short-term cap18 ital loss over the net long-term capital gain, and

19 ‘‘(B) one-half of the excess of the net long20 term capital loss over the net short-term capital

21 gain.’’

22 (B) So much of paragraph (2) of section

23 1212(b) of such Code as precedes subparagraph (B)

24 thereof is amended to read as follows:

25 ‘‘(2) SPECIAL RULES.—
7

•HR 3739 IH

1 ‘‘(A) ADJUSTMENTS.—

2 ‘‘(i) For purposes of determining the

3 excess referred to in paragraph (1)(A),

4 there shall be treated as short-term capital

5 gain in the taxable year an amount equal

6 to the lesser of—

7 ‘‘(I) the amount allowed for the

8 taxable year under paragraph (1) or

9 (2) of section 1211(b), or

10 ‘‘(II) the adjusted taxable income

11 for such taxable year.

12 ‘‘(ii) For purposes of determining the

13 excess referred to in paragraph (1)(B),

14 there shall be treated as short-term capital

15 gain in the taxable year an amount equal

16 to the sum of—

17 ‘‘(I) the amount allowed for the

18 taxable year under paragraph (1) or

19 (2) of section 1211(b) or the adjusted

20 taxable income for such taxable year,

21 whichever is the least, plus

22 ‘‘(II) the excess of the amount

23 described in subclause (I) over the net

24 short-term capital loss (determined
8

•HR 3739 IH

1 without regard to this subsection) for

2 such year.’’

3 (11) Paragraph (1) of section 1402(i) of such

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

5 provided by section 1201 shall not apply’’ before the

6 period at the end thereof.

7 (12) Section 12 of such Code is amended by

8 striking paragraph (4) and redesignating the follow9 ing paragraphs accordingly.

10 (13) Paragraph (2) of section 527(b) of such

11 Code is hereby repealed.

12 (14) Subparagraph (D) of section 593(b)(2) of

13 such Code is amended by adding ‘‘and’’ at the end

14 of clause (iii), by striking ‘‘, and’’ at the end of

15 clause (iv) and inserting a period, and by striking

16 clause (v).

17 (15) Paragraph (2) of section 801(a) of such

18 Code is hereby repealed.

19 (16) Subsection (c) of section 831 of such Code

20 is amended by striking paragraph (1) and redesig21 nating the following paragraphs accordingly.

22 (17)(A) Subparagraph (A) of section 852(b)(3)

23 of such Code is amended by striking ‘‘, determined

24 as provided in section 1201(a), on’’ and inserting

25 ‘‘of 17.5 percent of’’.
9

•HR 3739 IH

1 (B) Clause (iii) of section 852(b)(3)(D) of such

2 Code is amended—

3 (i) by striking ‘‘65 percent’’ and inserting

4 ‘‘82.5 percent’’, and

5 (ii) by striking ‘‘section 1201(a)’’ and in6 serting ‘‘subparagraph (A)’’.

7 (18) Clause (ii) of section 857(b)(3)(A) of such

8 Code is amended by striking ‘‘determined at the rate

9 provided in section 1201(a) on’’ and inserting ‘‘of

10 17.5 percent of’’.

11 (19) Paragraph (1) of section 882(a) of such

12 Code is amended by striking ‘‘section 11, 55, or

13 1201(a)’’ and inserting ‘‘section 11 or 55’’.

14 (20) Subsection (b) of section 904 of such Code

15 is amended by striking paragraphs (2)(B), (3)(B),

16 (3)(D), and (3)(E).

17 (21) Subsection (b) of section 1374 of such

18 Code is amended by striking paragraph (4).

19 (22) Subsection (b) of section 1381 is amended

20 by striking ‘‘or 1201’’.

21 (23) Paragraph (1) of section 1445(e) of such

22 Code is amended by striking ‘‘35 percent (or, to the

23 extent provided in regulations, 28 percent)’’ and in24 serting ‘‘17.5 percent (or, to the extent provided in

25 regulations, 19.8 percent)’’.
10

•HR 3739 IH

1 (24) Clause (i) of section 6425(c)(1)(A) of such

2 Code is amended by striking ‘‘or 1201(a)’’.

3 (25) Clause (i) of section 6655(g)(1)(A) of such

4 Code is amended by striking ‘‘or 1201(a)’’.

5 (26)(A) The second sentence of section

6 7518(g)(6)(A) of such Code is amended—

7 (i) by striking ‘‘during a taxable year to

8 which section 1(h) or 1201(a) applies’’, and

9 (ii) by striking ‘‘28 percent (34 percent’’

10 and inserting ‘‘19.8 percent (17.5 percent’’.

11 (B) The second sentence of section

12 607(h)(6)(A) of the Merchant Marine Act, 1936 is

13 amended—

14 (i) by striking ‘‘during a taxable year to

15 which section 1(h) or 1201(a) of such Code ap16 plies’’, and

17 (ii) by striking ‘‘28 percent (34 percent’’

18 and inserting ‘‘19.8 percent (17.5 percent’’.

19 (d) EFFECTIVE DATE.—

20 (1) IN GENERAL.—Except as otherwise pro21 vided in this subsection, the amendments made by

22 this section shall apply to taxable years ending after

23 the date of the enactment of this Act.

24 (2) TRANSITIONAL RULE.—The amendments

25 made by subsection (c) (other than paragraph (3))
11

•HR 3739 IH

1 shall not apply to gains and losses properly taken

2 into account for the portion of the taxable year be3 fore February 1, 1994.

4 (3) CONTRIBUTIONS.—The amendment made

5 by subsection (c)(3) shall apply only to contributions

6 on or after February 1, 1994.

7 (4) WITHHOLDING.—The amendment made by

8 subsection (c)(23) shall apply only to amounts paid

9 after the date of the enactment of this Act.

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

11 DETERMINING GAIN OR LOSS.

12 (a) IN GENERAL.—Part II of subchapter O of chap13 ter 1 of the Internal Revenue Code of 1986 (relating to

14 basis rules of general application) is amended by inserting

15 after section 1021 the following new section:

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

17 OF DETERMINING GAIN OR LOSS.

18 ‘‘(a) GENERAL RULE.—

19 ‘‘(1) INDEXED BASIS SUBSTITUTED FOR AD20 JUSTED BASIS.—Except as otherwise provided in

21 this subsection, if an indexed asset which has been

22 held for more than 1 year is sold or otherwise dis23 posed of, for purposes of this title the indexed basis

24 of the asset shall be substituted for its adjusted

25 basis.
12

•HR 3739 IH

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

2 The deduction for depreciation, depletion, and amor3 tization shall be determined without regard to the

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

5 other person.

6 ‘‘(b) INDEXED ASSET.—

7 ‘‘(1) IN GENERAL.—For purposes of this sec8 tion, the term ‘indexed asset’ means—

9 ‘‘(A) stock in a corporation, and

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

11 therein),

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

13 or business (as defined in section 1231(b)).

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

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

16 does not include—

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

18 in property which is in the nature of a credi19 tor’s interest.

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

21 to acquire an interest in property.

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

23 of a lessor, net lease property (within the mean24 ing of subsection (i)(3)).
13

•HR 3739 IH

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

2 which is fixed and preferred as to dividends and

3 does not participate in corporate growth to any

4 significant extent.

5 ‘‘(E) STOCK IN FOREIGN CORPORA6 TIONS.—Stock in a foreign corporation.

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

8 in an S corporation.

9 ‘‘(3) EXCEPTION FOR STOCK IN FOREIGN COR10 PORATION WHICH IS REGULARLY TRADED ON NA11 TIONAL OR REGIONAL EXCHANGE.—Paragraph

12 (2)(E) shall not apply to stock in a foreign corpora13 tion the stock of which is listed on the New York

14 Stock Exchange, the American Stock Exchange, the

15 national market system operated by the National As16 sociation of Securities Dealers, or any domestic re17 gional exchange for which quotations are published

18 on a regular basis other than—

19 ‘‘(A) stock of a foreign investment com20 pany (within the meaning of section 1246(b)),

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

22 company (as defined in section 1296), and

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

24 a United States person who meets the require25 ments of section 1248(a)(2).
14

•HR 3739 IH

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

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

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

4 ‘‘(A) the adjusted basis of the asset, multi5 plied by

6 ‘‘(B) the applicable inflation ratio.

7 ‘‘(2) APPLICABLE INFLATION RATIO.—The ap8 plicable inflation ratio for any asset is the percent9 age arrived at by dividing—

10 ‘‘(A) the gross national product deflator

11 the calendar quarter in which the disposition

12 takes place, by

13 ‘‘(B) the gross national product deflator

14 for the calendar quarter in which the asset was

15 acquired by the taxpayer (or, if later, the cal16 endar quarter ending on December 31, 1994).

17 The applicable inflation ratio shall not be taken into

18 account unless it is greater than 1. The applicable

19 inflation ratio for any asset shall be rounded to the

20 nearest one-tenth of 1 percent.

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

22 The gross national product deflator for any calendar

23 quarter is the implicit price deflator for the gross

24 national product for such quarter (as shown in the

25 first revision thereof).
15

•HR 3739 IH

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)(3) 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.—
16

•HR 3739 IH

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 QUALIFICATION

9 PURPOSES.—This section shall not apply for

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

11 ‘‘(2) ADJUSTMENTS TO INTERESTS HELD IN

12 ENTITY.—

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

14 investment entity shall be an indexed asset for

15 any calendar month in the same ratio as the

16 fair market value of the assets held by such en17 tity at the close of such month which are in18 dexed assets bears to the fair market value of

19 all assets of such entity at the close of such

20 month.

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

22 the ratio for any calendar month determined

23 under subparagraph (A) would (but for this

24 subparagraph) be 90 percent or more, such

25 ratio for such month shall be 100 percent.
17

•HR 3739 IH

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

2 the ratio for any calendar month determined

3 under subparagraph (A) would (but for this

4 subparagraph) be 10 percent or less, such ratio

5 for such month shall be zero.

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

7 REAL ESTATE INVESTMENT TRUSTS.—Nothing

8 in this paragraph shall require a real estate in9 vestment trust to value its assets more fre10 quently than once each 36 months (except

11 where such trust ceases to exist). The ratio

12 under subparagraph (A) for any calendar

13 month for which there is no valuation shall be

14 the trustee’s good faith judgment as to such

15 valuation.

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

17 purposes of this subsection, the term ‘qualified in18 vestment entity’ means—

19 ‘‘(A) a regulated investment company

20 (within the meaning of section 851), and

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

22 the meaning of section 856).

23 ‘‘(f) OTHER PASS-THRU ENTITIES.—

24 ‘‘(1) PARTNERSHIPS.—
18

•HR 3739 IH

1 ‘‘(A) IN GENERAL.—In the case of a part2 nership, the adjustment made under subsection

3 (a) at the partnership level shall be passed

4 through to the partners.

5 ‘‘(B) SPECIAL RULE IN THE CASE OF SEC6 TION 754 ELECTIONS.—In the case of a transfer

7 of an interest in a partnership with respect to

8 which the election provided in section 754 is in

9 effect—

10 ‘‘(i) the adjustment under section

11 743(b)(1) shall, with respect to the trans12 feror partner, be treated as a sale of the

13 partnership assets for purposes of applying

14 this section, and

15 ‘‘(ii) with respect to the transferee

16 partner, the partnership’s holding period

17 for purposes of this section in such assets

18 shall be treated as beginning on the date

19 of such adjustment.

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

21 corporation, the adjustment made under subsection

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

23 the shareholders.

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

25 common trust fund, the adjustment made under sub-
19

•HR 3739 IH

1 section (a) at the trust level shall be passed through

2 to the participants.

3 ‘‘(g) 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 ‘‘(h) TRANSFERS TO INCREASE INDEXING ADJUST17 MENT.—If any person transfers cash, debt, or any other

18 property to another person and the principal purpose of

19 such transfer is to secure or increase an adjustment under

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

21 such adjustment or increase.

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

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

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

25 a separate asset:
20

•HR 3739 IH

1 ‘‘(A) A substantial improvement to prop2 erty.

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

4 a substantial contribution to capital.

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

6 extent that separate treatment of such portion

7 is appropriate to carry out the purposes of this

8 section.

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

10 THROUGHOUT HOLDING PERIOD.—The applicable in11 flation ratio shall be appropriately reduced for peri12 ods during which the asset was not an indexed asset.

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

14 term ‘net lease property’ means leased property

15 where—

16 ‘‘(A) the term of the lease (taking into ac17 count options to renew) was 50 percent or more

18 of the useful life of the property, and

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

20 of the deductions with respect to such property

21 which are allowable to the lessor solely by rea22 son of section 162 (other than rents and reim23 bursed amounts with respect to such property)

24 is 15 percent or less of the rental income pro25 duced by such property.
21

•HR 3739 IH

1 ‘‘(4) TREATMENT OF CERTAIN DISTRIBU2 TIONS.—A distribution with respect to stock in a

3 corporation which is not a dividend shall be treated

4 as a disposition.

5 ‘‘(5) SECTION CANNOT INCREASE ORDINARY

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

7 this section would create or increase a net ordinary

8 loss to which section 1231(a)(2) applies or an ordi9 nary loss to which any other provision of this title

10 applies, such provision shall not apply. The taxpayer

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

12 an amount equal to the amount of the ordinary loss

13 to which the preceding sentence applies.

14 ‘‘(6) ACQUISITION DATE WHERE THERE HAS

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

16 WITH RESPECT TO THE TAXPAYER.—If there has

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

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

19 date of acquisition of such asset by the taxpayer

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

21 most recent such prior application.

22 ‘‘(7) COLLAPSIBLE CORPORATIONS.—The appli23 cation of section 341(a) (relating to collapsible cor24 porations) shall be determined without regard to this

25 section.
22

•HR 3739 IH

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

2 such regulations as may be necessary or appropriate to

3 carry out the purposes of this section.’’

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

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

6 is amended by inserting after the item relating to section

7 1021 the following new item:

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

gain or loss.’’

8 (c) ADJUSTMENT TO APPLY FOR PURPOSES OF DE9 TERMINING EARNINGS AND PROFITS.—Subsection (f) of

10 section 312 of such Code (relating to effect on earnings

11 and profits of gain or loss and of receipt of tax-free dis12 tributions) is amended by adding at the end thereof the

13 following new paragraph:

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

15 INDEXED BASIS.—

For substitution of indexed basis for adjusted

basis in the case of the disposition of certain assets,

see section 1022(a)(1).’’

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

17 this section shall apply to dispositions after December 31,

18 1994, in taxable years ending after such date.
23

•HR 3739 IH

1 SEC. 4. CAPITAL LOSS DEDUCTION ALLOWED WITH RE2 SPECT TO SALE OR EXCHANGE OF PRINCIPAL

3 RESIDENCE.

4 (a) IN GENERAL.—Subsection (c) of section 165 of

5 the Internal Revenue Code of 1986 (relating to limitation

6 on losses of individuals) is amended by striking ‘‘and’’ at

7 the end of paragraph (2), by striking the period at the

8 end of paragraph (3) and inserting ‘‘; and’’, and by adding

9 at the end the following new paragraph:

10 ‘‘(4) losses arising from the sale or exchange of

11 the principal residence (within the meaning of sec12 tion 1034) of the taxpayer.’’

13 (b) EFFECTIVE DATE.—The amendment made by

14 subsection (a) shall apply to sales and exchanges on or

15 after February 1, 1994, in taxable years ending after such

16 date.

Æ

HR 3739 IH——2