I

103D CONGRESS

2D SESSION H. R. 4099

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

assets for purposes of determining gain.

IN THE HOUSE OF REPRESENTATIVES

MARCH 21, 1994

Mr. MORAN 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 assets for purposes of determining gain.

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

3 SECTION 1. INDEXING OF CERTAIN ASSETS FOR PURPOSES

4 OF DETERMINING GAIN.

5 (a) IN GENERAL.—Part II of subchapter O of chap6 ter 1 of the Internal Revenue Code of 1986 (relating to

7 basis rules of general application) is amended by inserting

8 after section 1021 the following new section:
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1 ‘‘SEC. 1022. INDEXING OF CERTAIN ASSETS FOR PURPOSES

2 OF DETERMINING GAIN.

3 ‘‘(a) GENERAL RULE.—

4 ‘‘(1) INDEXED BASIS SUBSTITUTED FOR AD5 JUSTED BASIS.—Solely for purposes of determining

6 gain on the sale or other disposition by an individual

7 of an indexed asset which has been held for more

8 than 1 year, the indexed basis of the asset shall be

9 substituted for its adjusted basis.

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

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

12 not apply for purposes of determining the

13 amount of recapture gain on the sale or other

14 disposition of an indexed asset, but the amount

15 of any such recapture gain shall increase the

16 adjusted basis of the asset for purposes of ap17 plying paragraph (1) to determine the amount

18 of other gain on such sale or other disposition.

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

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

21 means any gain treated as ordinary income

22 under section 1245 or 1254 or which would be

23 treated as ordinary income under section 1250

24 if such section applied to all depreciation ad25 justments instead of only additional deprecia26 tion.
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1 ‘‘(b) INDEXED ASSET.—

2 ‘‘(1) IN GENERAL.—For purposes of this sec3 tion, the term ‘indexed asset’ means—

4 ‘‘(A) any stock in a corporation, and

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

6 therein),

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

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

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

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

11 does not include—

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

13 in property which is in the nature of a credi14 tor’s interest.

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

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

17 section 408(m)(3)).

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

19 to acquire an interest in property.

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

21 of a lessor, net lease property (within the mean22 ing of subsection (i)(3)).

23 ‘‘(E) CERTAIN PREFERRED STOCK.—Stock

24 which is fixed and preferred as to dividends and
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1 does not participate in corporate growth to any

2 significant extent.

3 ‘‘(F) STOCK IN FOREIGN CORPORA4 TIONS.—Stock in a foreign corporation.

5 ‘‘(G) STOCK IN S CORPORATIONS.—Stock

6 in an S corporation.

7 ‘‘(3) EXCEPTION FOR STOCK IN FOREIGN COR8 PORATION WHICH IS REGULARLY TRADED ON NA9 TIONAL OR REGIONAL EXCHANGE.—Paragraph

10 (2)(F) shall not apply to stock in a foreign corpora11 tion the stock of which is listed on the New York

12 Stock Exchange, the American Stock Exchange, or

13 any domestic regional exchange for which quotations

14 are published on a regular basis or is authorized for

15 trading on the national market system operated by

16 the National Association of Securities Dealers other

17 than—

18 ‘‘(A) stock of a foreign investment com19 pany (within the meaning of section 1246(b)),

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

21 company (as defined in section 1296), and

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

23 a United States person who meets the require24 ments of section 1248(a)(2).
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1 ‘‘(c) INDEXED BASIS.—For purposes of this sec2 tion—

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

4 any asset is—

5 ‘‘(A) the adjusted basis of the asset, multi6 plied by

7 ‘‘(B) the applicable inflation ratio.

8 ‘‘(2) APPLICABLE INFLATION RATIO.—The ap9 plicable inflation ratio for any asset shall be deter10 mined by dividing—

11 ‘‘(A) the CPI for the calendar year preced12 ing the calendar year in which the disposition

13 takes place, by

14 ‘‘(B) the CPI for the calendar year preced15 ing the calendar year in which the taxpayer’s

16 holding period for such asset began (or, if later,

17 for calendar year 1992).

18 The applicable inflation ratio shall not be taken into

19 account unless it is greater than 1. The applicable

20 inflation ratio for any asset shall be rounded to the

21 nearest one-hundredth.

22 ‘‘(3) CONVENTIONS.—For purposes of para23 graph (2), if any asset is disposed of during any cal24 endar year—
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1 ‘‘(A) such disposition shall be treated as

2 occurring on the last day of such calendar year,

3 and

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

5 asset shall be treated as beginning in the same

6 calendar year as would be determined for an

7 asset actually disposed of on such last day with

8 a holding period of the same length as the ac9 tual holding period of the asset involved.

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

11 CPI for any calendar year shall be determined under

12 section 1(f)(4).

13 ‘‘(d) SHORT SALES.—

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

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

16 of 1 year, for purposes of this title, the amount real17 ized shall be an amount equal to the amount realized

18 (determined without regard to this paragraph) mul19 tiplied by the applicable inflation ratio. In applying

20 subsection (c)(2) for purposes of the preceding sen21 tence, the date on which the property is sold short

22 shall be treated as the date on which the holding pe23 riod for the asset begins and the closing date for the

24 sale shall be treated as the date of disposition.
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1 ‘‘(2) SHORT SALE OF SUBSTANTIALLY IDEN2 TICAL PROPERTY.—If the taxpayer or the taxpayer’s

3 spouse sells short property substantially identical to

4 an asset held by the taxpayer, the asset held by the

5 taxpayer and the substantially identical property

6 shall not be treated as indexed assets for the short

7 sale period.

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

9 this subsection, the short sale period begins on the

10 day after property is sold and ends on the closing

11 date for the sale.

12 ‘‘(e) TREATMENT OF REGULATED INVESTMENT

13 COMPANIES AND REAL ESTATE INVESTMENT TRUSTS.—

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

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

16 provided in this paragraph, the adjustment

17 under subsection (a) shall be allowed to any

18 qualified investment entity (including for pur19 poses of determining the earnings and profits of

20 such entity).

21 ‘‘(B) EXCEPTION FOR CORPORATE SHARE22 HOLDERS.—Under regulations—

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

24 qualified investment entity (directly or in25 directly) to a corporation—
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1 ‘‘(I) the determination of whether

2 such distribution is a dividend shall be

3 made without regard to this section,

4 and

5 ‘‘(II) the amount treated as gain

6 by reason of the receipt of any capital

7 gain dividend shall be increased by the

8 percentage by which the entity’s net

9 capital gain for the taxable year deter10 mined without regard to this section

11 exceeds the entity’s net capital gain

12 for such year determined with regard

13 to this section, and

14 ‘‘(ii) there shall be other appropriate

15 adjustments (including deemed distribu16 tions) so as to ensure that the benefits of

17 this section are not allowed (directly or in18 directly) to corporate shareholders of quali19 fied investment entities.

20 For purposes of the preceding sentence, any

21 amount includible in gross income under section

22 852(b)(3)(D) shall be treated as a capital gain

23 dividend and an S corporation shall not be

24 treated as a corporation.
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1 ‘‘(C) EXCEPTION FOR QUALIFICATION

2 PURPOSES.—This section shall not apply for

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

4 ‘‘(D) EXCEPTION FOR CERTAIN TAXES IM5 POSED AT ENTITY LEVEL.—

6 ‘‘(i) TAX ON FAILURE TO DISTRIBUTE

7 ENTIRE GAIN.—If any amount is subject to

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

9 taxable year, the amount on which tax is

10 imposed under such section shall be in11 creased by the percentage determined

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

13 rule shall apply in the case of any amount

14 subject to tax under paragraph (2) or (3)

15 of section 857(b) to the extent attributable

16 to the excess of the net capital gain over

17 the deduction for dividends paid deter18 mined with reference to capital gain divi19 dends only. The first sentence of this

20 clause shall not apply to so much of the

21 amount subject to tax under section

22 852(b)(3)(A) as is designated by the com23 pany under section 852(b)(3)(D).

24 ‘‘(ii) OTHER TAXES.—This section

25 shall not apply for purposes of determining
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1 the amount of any tax imposed by para2 graph (4), (5), or (6) of section 857(b).

3 ‘‘(2) ADJUSTMENTS TO INTERESTS HELD IN

4 ENTITY.—

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

6 investment entity shall be an indexed asset for

7 any calendar month in the same ratio as the

8 fair market value of the assets held by such en9 tity at the close of such month which are in10 dexed assets bears to the fair market value of

11 all assets of such entity at the close of such

12 month.

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

14 the ratio for any calendar month determined

15 under subparagraph (A) would (but for this

16 subparagraph) be 90 percent or more, such

17 ratio for such month shall be 100 percent.

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

19 the ratio for any calendar month determined

20 under subparagraph (A) would (but for this

21 subparagraph) be 10 percent or less, such ratio

22 for such month shall be zero.

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

24 REAL ESTATE INVESTMENT TRUSTS.—Nothing

25 in this paragraph shall require a real estate in-
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1 vestment trust to value its assets more fre2 quently than once each 36 months (except

3 where such trust ceases to exist). The ratio

4 under subparagraph (A) for any calendar

5 month for which there is no valuation shall be

6 the trustee’s good faith judgment as to such

7 valuation.

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

9 purposes of this subsection, the term ‘qualified in10 vestment entity’ means—

11 ‘‘(A) a regulated investment company

12 (within the meaning of section 851), and

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

14 the meaning of section 856).

15 ‘‘(f) OTHER PASS-THRU ENTITIES.—

16 ‘‘(1) PARTNERSHIPS.—

17 ‘‘(A) IN GENERAL.—In the case of a part18 nership, the adjustment made under subsection

19 (a) at the partnership level shall be passed

20 through to the partners (but only for purposes

21 of determining the income of partners who are

22 individuals).

23 ‘‘(B) SPECIAL RULE IN THE CASE OF SEC24 TION 754 ELECTIONS.—In the case of a transfer

25 of an interest in a partnership with respect to
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1 which the election provided in section 754 is in

2 effect—

3 ‘‘(i) the adjustment under section

4 743(b)(1) shall, with respect to the trans5 feror partner, be treated as a sale of the

6 partnership assets for purposes of applying

7 this section, and

8 ‘‘(ii) with respect to the transferee

9 partner, the partnership’s holding period

10 for purposes of this section in such assets

11 shall be treated as beginning on the date

12 of such adjustment.

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

14 corporation, the adjustment made under subsection

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

16 the shareholders. This section shall not apply for

17 purposes of determining the amount of any tax im18 posed by section 1374 or 1375.

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

20 common trust fund, the adjustment made under sub21 section (a) at the trust level shall be passed through

22 to the participants (but only for purposes of deter23 mining the income of participants who are individ24 uals).
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1 ‘‘(g) DISPOSITIONS BETWEEN RELATED PERSONS.—

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

3 of property between related persons (within the meaning

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

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

6 for depreciation provided in section 167.

7 ‘‘(h) TRANSFERS TO INCREASE INDEXING ADJUST8 MENT.—If any person transfers cash, debt, or any other

9 property to another person and the principal purpose of

10 such transfer is to secure or increase an adjustment under

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

12 such adjustment or increase.

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

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

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

16 a separate asset:

17 ‘‘(A) A substantial improvement to prop18 erty.

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

20 a substantial contribution to capital.

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

22 extent that separate treatment of such portion

23 is appropriate to carry out the purposes of this

24 section.
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1 ‘‘(2) ASSETS WHICH ARE NOT INDEXED ASSETS

2 THROUGHOUT HOLDING PERIOD.—The applicable in3 flation ratio shall be appropriately reduced for peri4 ods during which the asset was not an indexed asset.

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

6 term ‘net lease property’ means leased property

7 where—

8 ‘‘(A) the term of the lease (taking into ac9 count options to renew) was 50 percent or more

10 of the useful life of the property, and

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

12 of the deductions with respect to such property

13 which are allowable to the lessor solely by rea14 son of section 162 (other than rents and reim15 bursed amounts with respect to such property)

16 is 15 percent or less of the rental income pro17 duced by such property.

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

19 such regulations as may be necessary or appropriate to

20 carry out the purposes of this section.’’

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

22 for part II of subchapter O of chapter 1 is amended by

23 inserting after the item relating to section 1021 the follow24 ing new item:

‘‘Sec. 1022. Indexing of certain assets acquired after 1991 for

purposes of determining gain.’’
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1 (c) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to dispositions of any property

3 after the date of the enactment of this Act.

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