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[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[S. 182 Introduced in Senate (IS)]

104th CONGRESS
  1st Session
                                 S. 182

 To amend the Internal Revenue Code of 1986 to encourage investment in 
 the United States by reforming the taxation of capital gains, and for 
                            other purposes.

_______________________________________________________________________

                   IN THE SENATE OF THE UNITED STATES

                            January 9, 1995

   Mr. Hatch introduced the following bill; which was read twice and 
                  referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL

 
 To amend the Internal Revenue Code of 1986 to encourage investment in 
 the United States by reforming the taxation of capital gains, and for 
                            other purposes.

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

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Capital Formation 
and Job Creation Act of 1995''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. 50 PERCENT CAPITAL GAINS DEDUCTION.

    (a) General Rule.--Part I of subchapter P of chapter 1 (relating to 
treatment of capital gains) is amended to read as follows:

                  ``PART I--TREATMENT OF CAPITAL GAINS

                              ``Sec. 1201. Capital gains deduction.

``SEC. 1201. CAPITAL GAINS DEDUCTION.

    ``(a) General Rule.--If for any taxable year a taxpayer has a net 
capital gain, 50 percent of such gain shall be a deduction from gross 
income.
    ``(b) Estates and Trusts.--In the case of an estate or trust, the 
deduction shall be computed by excluding the portion (if any) of the 
gains for the taxable year from sales or exchanges of capital assets 
which, under sections 652 and 662 (relating to inclusions of amounts in 
gross income of beneficiaries of trusts), is includible by the income 
beneficiaries as gain derived from the sale or exchange of capital 
assets.
    ``(c) Coordination With Treatment of Capital Gain Under Limitation 
on Investment Interest.--For purposes of this section, the net capital 
gain for any taxable year shall be reduced (but not below zero) by the 
amount which the taxpayer takes into account as investment income under 
section 163(d)(4)(B)(iii).
    ``(d) Transitional Rule.--
            ``(1) In general.--In the case of a taxable year which 
        includes January 1, 1995--
                    ``(A) the amount taken into account as the net 
                capital gain under subsection (a) shall not exceed the 
                net capital gain determined by only taking into account 
                gains and losses properly taken into account for the 
                portion of the taxable year on or after January 1, 
                1995, and
                    ``(B) if the net capital gain for such year exceeds 
                the amount taken into account under subsection (a), the 
                rate of tax imposed by section 1 on such excess shall 
                not exceed 28 percent.
            ``(2) Special rules for pass-thru entities.--
                    ``(A) In general.--In applying paragraph (1) with 
                respect to any pass-thru entity, the determination of 
                when gains and losses are properly taken into account 
                shall be made at the entity level.
                    ``(B) Pass-thru entity defined.--For purposes of 
                subparagraph (A), the term `pass-thru entity' means--
                            ``(i) a regulated investment company,
                            ``(ii) a real estate investment trust,
                            ``(iii) an S corporation,
                            ``(iv) a partnership,
                            ``(v) an estate or trust, and
                            ``(vi) a common trust fund.''
    (b) Deduction Allowable in Computing Adjusted Gross Income.--
Subsection (a) of section 62 is amended by inserting after paragraph 
(15) the following new paragraph:
            ``(16) Long-term capital gains.--The deduction allowed by 
        section 1201.''
    (c) Technical and Conforming Changes.--
            (1) Section 13113 of the Revenue Reconciliation Act of 1993 
        (relating to 50-percent exclusion for gain from certain small 
        business stock), and the amendments made by such section, are 
        hereby repealed; and the Internal Revenue Code of 1986 shall be 
        applied as if such section (and amendments) had never been 
        enacted.
            (2) Section 1 is amended by striking subsection (h).
            (3) Paragraph (1) of section 170(e) is amended by striking 
        ``the amount of gain'' in the material following subparagraph 
        (B)(ii) and inserting ``50 percent of the amount of gain''.
            (4)(A) Paragraph (2) of section 172(d) is amended to read 
        as follows:
            ``(2) Capital gains and losses.--
                    ``(A) Losses of taxpayers other than 
                corporations.--In the case of a taxpayer other than a 
                corporation, the amount deductible on account of losses 
                from sales or exchanges of capital assets shall not 
                exceed the amount includible on account of gains from 
                sales or exchanges of capital assets.
                    ``(B) Deduction under section 1201.--The deduction 
                under section 1201 shall not be allowed.''
            (B) Subparagraph (B) of section 172(d)(4) is amended by 
        striking ``paragraphs (1) and (3)'' and inserting ``paragraphs 
        (1), (2)(B), and (3)''.
            (5) Paragraph (4) of section 642(c) is amended to read as 
        follows:
            ``(4) Adjustments.--To the extent that the amount otherwise 
        allowable as a deduction under this subsection consists of gain 
        from the sale or exchange of capital assets held for more than 
        1 year, proper adjustment shall be made for any deduction 
        allowable to the estate or trust under section 1201 (relating 
        to deduction for excess of capital gains over capital losses). 
        In the case of a trust, the deduction allowed by this 
        subsection shall be subject to section 681 (relating to 
        unrelated business income).''
            (6) Paragraph (3) of section 643(a) is amended by adding at 
        the end the following new sentence: ``The deduction under 
        section 1201 (relating to deduction of excess of capital gains 
        over capital losses) shall not be taken into account.''
            (7) Paragraph (4) of section 691(c) is amended by striking 
        ``sections 1(h), 1201, and 1211'' and inserting ``sections 1201 
        and 1211''.
            (8) The second sentence of section 871(a)(2) is amended by 
        inserting ``such gains and losses shall be determined without 
        regard to section 1201 (relating to deduction for capital 
        gains) and'' after ``except that''.
            (9) Subsection (d) of section 1044 is amended by striking 
        the last sentence.
            (10)(A) Paragraph (2) of section 1211(b) is amended to read 
        as follows:
            ``(2) the sum of--
                    ``(A) the excess of the net short-term capital loss 
                over the net long-term capital gain, and
                    ``(B) one-half of the excess of the net long-term 
                capital loss over the net short-term capital gain.''
            (B) So much of paragraph (2) of section 1212(b) as precedes 
        subparagraph (B) thereof is amended to read as follows:
            ``(2) Special rules.--
                    ``(A) Adjustments.--
                            ``(i) For purposes of determining the 
                        excess referred to in paragraph (1)(A), there 
                        shall be treated as short-term capital gain in 
                        the taxable year an amount equal to the lesser 
                        of--
                                    ``(I) the amount allowed for the 
                                taxable year under paragraph (1) or (2) 
                                of section 1211(b), or
                                    ``(II) the adjusted taxable income 
                                for such taxable year.
                            ``(ii) For purposes of determining the 
                        excess referred to in paragraph (1)(B), there 
                        shall be treated as short-term capital gain in 
                        the taxable year an amount equal to the sum 
                        of--
                                    ``(I) the amount allowed for the 
                                taxable year under paragraph (1) or (2) 
                                of section 1211(b) or the adjusted 
                                taxable income for such taxable year, 
                                whichever is the least, plus
                                    ``(II) the excess of the amount 
                                described in subclause (I) over the net 
                                short-term capital loss (determined 
                                without regard to this subsection) for 
                                such year.''
            (11) Paragraph (1) of section 1402(i) is amended by 
        inserting ``, and the deduction provided by section 1201 shall 
        not apply'' before the period at the end thereof.
            (12) Section 12 is amended by striking paragraph (4) and 
        redesignating the following paragraphs accordingly.
            (13) Paragraph (2) of section 527(b) is hereby repealed.
            (14) Subparagraph (D) of section 593(b)(2) is amended by 
        adding ``and'' at the end of clause (iii), by striking ``, 
        and'' at the end of clause (iv) and inserting a period, and by 
        striking clause (v).
            (15) Paragraph (2) of section 801(a) is hereby repealed.
            (16) Subsection (c) of section 831 is amended by striking 
        paragraph (1) and redesignating the following paragraphs 
        accordingly.
            (17)(A) Subparagraph (A) of section 852(b)(3) is amended by 
        striking ``, determined as provided in section 1201(a), on'' 
        and inserting ``of 17.5 percent of''.
            (B) Clause (iii) of section 852(b)(3)(D) is amended--
                    (i) by striking ``65 percent'' and inserting ``82.5 
                percent'', and
                    (ii) by striking ``section 1201(a)'' and inserting 
                ``subparagraph (A)''.
            (18) Clause (ii) of section 857(b)(3)(A) is amended by 
        striking ``determined at the rate provided in section 1201(a) 
        on'' and inserting ``of 17.5 percent of''.
            (19) Paragraph (1) of section 882(a) is amended by striking 
        ``section 11, 55, 59A, or 1201(a)'' and inserting ``section 11, 
        55, or 59A''.
            (20) Subsection (b) of section 904 is amended by striking 
        paragraphs (2)(B), (3)(B), (3)(D), and (3)(E).
            (21) Subsection (b) of section 1374 is amended by striking 
        paragraph (4).
            (22) Subsection (b) of section 1381 is amended by striking 
        ``or 1201''.
            (23) Subsection (e) of section 1445 is amended--
                    (A) in paragraph (1) by striking ``35 percent (or, 
                to the extent provided in regulations, 28 percent)'' 
                and inserting ``17.5 percent (or, to the extent 
                provided in regulations, 19.8 percent)'', and
                    (B) in paragraph (2) by striking ``35 percent'' and 
                inserting ``17.5 percent''.
            (24) Clause (i) of section 6425(c)(1)(A) is amended by 
        striking ``or 1201(a)''.
            (25) Clause (i) of section 6655(g)(1)(A) is amended by 
        striking ``or 1201(a)''.
            (26)(A) The second sentence of section 7518(g)(6)(A) is 
        amended--
                    (i) by striking ``during a taxable year to which 
                section 1(h) or 1201(a) applies'', and
                    (ii) by striking ``28 percent (34 percent'' and 
                inserting ``19.8 percent (17.5 percent''.
            (B) The second sentence of section 607(h)(6)(A) of the 
        Merchant Marine Act, 1936 is amended--
                    (i) by striking ``during a taxable year to which 
                section 1(h) or 1201(a) of such Code applies'', and
                    (ii) by striking ``28 percent (34 percent'' and 
                inserting ``19.8 percent (17.5 percent''.
    (d) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years ending after December 31, 1994.
            (2) Contributions.--The amendment made by subsection (c)(3) 
        shall apply only to contributions on or after January 1, 1995.
            (3) Withholding.--The amendment made by subsection (c)(23) 
        shall apply only to amounts paid after the date of the 
        enactment of this Act.

SEC. 3. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF DETERMINING GAIN OR 
              LOSS.

    (a) In General.--Part II of subchapter O of chapter 1 (relating to 
basis rules of general application) is amended by inserting after 
section 1021 the following new section:

``SEC. 1022. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF DETERMINING 
              GAIN OR LOSS.

    ``(a) General Rule.--
            ``(1) Indexed basis substituted for adjusted basis.--Except 
        as otherwise provided in this subsection, if an indexed asset 
        which has been held for more than 1 year is sold or otherwise 
        disposed of, for purposes of this title the indexed basis of 
        the asset shall be substituted for its adjusted basis.
            ``(2) Exception for depreciation, etc.--The deduction for 
        depreciation, depletion, and amortization shall be determined 
        without regard to the application of paragraph (1) to the 
        taxpayer or any other person.
    ``(b) Indexed Asset.--
            ``(1) In general.--For purposes of this section, the term 
        `indexed asset' means--
                    ``(A) stock in a corporation, and
                    ``(B) tangible property (or any interest therein),
        which is a capital asset or property used in the trade or 
        business (as defined in section 1231(b)).
            ``(2) Certain property excluded.--For purposes of this 
        section, the term `indexed asset' does not include--
                    ``(A) Creditor's interest.--Any interest in 
                property which is in the nature of a creditor's 
                interest.
                    ``(B) Options.--Any option or other right to 
                acquire an interest in property.
                    ``(C) Net lease property.--In the case of a lessor, 
                net lease property (within the meaning of subsection 
                (i)(3)).
                    ``(D) Certain preferred stock.--Stock which is 
                fixed and preferred as to dividends and does not 
                participate in corporate growth to any significant 
                extent.
                    ``(E) Stock in foreign corporations.--Stock in a 
                foreign corporation.
                    ``(F) Stock in s corporations.--Stock in an S 
                corporation.
            ``(3) Exception for stock in foreign corporation which is 
        regularly traded on national or regional exchange.--Paragraph 
        (2)(E) shall not apply to stock in a foreign corporation the 
        stock of which is listed on the New York Stock Exchange, the 
        American Stock Exchange, the national market system operated by 
        the National Association of Securities Dealers, or any domestic 
        regional exchange for which quotations are published on a 
        regular basis other than--
                    ``(A) stock of a foreign investment company (within 
                the meaning of section 1246(b)),
                    ``(B) stock in a passive foreign investment company 
                (as defined in section 1296), and
                    ``(C) stock in a foreign corporation held by a 
                United States person who meets the requirements of 
                section 1248(a)(2).
            ``(4) Treatment of american depository receipts.--For 
        purposes of this section, an American depository receipt for 
        stock in a foreign corporation shall be treated as stock in 
        such corporation.
    ``(c) Indexed Basis.--For purposes of this section--
            ``(1) General rule.--The indexed basis for any asset is--
                    ``(A) the adjusted basis of the asset, multiplied 
                by
                    ``(B) the applicable inflation ratio.
            ``(2) Applicable inflation ratio.--The applicable inflation 
        ratio for any asset is the percentage arrived at by dividing--
                    ``(A) the gross domestic product deflator for the 
                calendar quarter in which the disposition takes place, 
                by
                    ``(B) the gross domestic product deflator for the 
                calendar quarter in which the asset was acquired by the 
                taxpayer (or, if later, the calendar quarter ending on 
                December 31, 1994).
        The applicable inflation ratio shall never be less than 1. The 
        applicable inflation ratio for any asset shall be rounded to 
        the nearest \1/1000\.
            ``(3) Gross domestic product deflator.--The gross domestic 
        product deflator for any calendar quarter is the implicit price 
        deflator for the gross domestic product for such quarter (as 
        shown in the first revision thereof).
    ``(d) Short Sales.--
            ``(1) In general.--In the case of a short sale of an 
        indexed asset with a short sale period in excess of 1 year, for 
        purposes of this title, the amount realized shall be an amount 
        equal to the amount realized (determined without regard to this 
        paragraph) multiplied by the applicable inflation ratio. In 
        applying subsection (c)(2) for purposes of the preceding 
        sentence, the date on which the property is sold short shall be 
        treated as the date of acquisition and the closing date for the 
        sale shall be treated as the date of disposition.
            ``(2) Short sale of substantially identical property.--If 
        the taxpayer or the taxpayer's spouse sells short property 
        substantially identical to an asset held by the taxpayer, the 
        asset held by the taxpayer and the substantially identical 
        property shall not be treated as indexed assets for the short 
        sale period.
            ``(3) Short sale period.--For purposes of this subsection, 
        the short sale period begins on the day after property is sold 
        and ends on the closing date for the sale.
    ``(e) Treatment of Regulated Investment Companies and Real Estate 
Investment Trusts.--
            ``(1) Adjustments at entity level.--
                    ``(A) In general.--Except as otherwise provided in 
                this paragraph, the adjustment under subsection (a) 
                shall be allowed to any qualified investment entity 
                (including for purposes of determining the earnings and 
                profits of such entity).
                    ``(B) Exception for qualification purposes.--This 
                section shall not apply for purposes of sections 851(b) 
                and 856(c).
            ``(2) Adjustments to interests held in entity.--
                    ``(A) In general.--Stock in a qualified investment 
                entity shall be an indexed asset for any calendar month 
                in the same ratio as the fair market value of the 
                assets held by such entity at the close of such month 
                which are indexed assets bears to the fair market value 
                of all assets of such entity at the close of such 
                month.
                    ``(B) Ratio of 90 percent or more.--If the ratio 
                for any calendar month determined under subparagraph 
                (A) would (but for this subparagraph) be 90 percent or 
                more, such ratio for such month shall be 100 percent.
                    ``(C) Ratio of 10 percent or less.--If the ratio 
                for any calendar month determined under subparagraph 
                (A) would (but for this subparagraph) be 10 percent or 
                less, such ratio for such month shall be zero.
                    ``(D) Valuation of assets in case of real estate 
                investment trusts.--Nothing in this paragraph shall 
                require a real estate investment trust to value its 
                assets more frequently than once each 36 months (except 
                where such trust ceases to exist). The ratio under 
                subparagraph (A) for any calendar month for which there 
                is no valuation shall be the trustee's good faith 
                judgment as to such valuation.
            ``(3) Qualified investment entity.--For purposes of this 
        subsection, the term `qualified investment entity' means--
                    ``(A) a regulated investment company (within the 
                meaning of section 851), and
                    ``(B) a real estate investment trust (within the 
                meaning of section 856).
    ``(f) Other Pass-Thru Entities.--
            ``(1) Partnerships.--In the case of a partnership, the 
        adjustment made under subsection (a) at the partnership level 
        shall be passed through to the partners.
            ``(2) S corporations.--In the case of an S corporation, the 
        adjustment made under subsection (a) at the corporate level 
        shall be passed through to the shareholders.
            ``(3) Common trust funds.--In the case of a common trust 
        fund, the adjustment made under subsection (a) at the trust 
        level shall be passed through to the participants.
    ``(g) Dispositions Between Related Persons.--
            ``(1) In general.--This section shall not apply to any sale 
        or other disposition of property between related persons except 
        to the extent that the basis of such property in the hands of 
        the transferee is a substituted basis.
            ``(2) Related persons defined.--For purposes of this 
        section, the term `related persons' means--
                    ``(A) persons bearing a relationship set forth in 
                section 267(b), and
                    ``(B) persons treated as single employer under 
                subsection (b) or (c) of section 414.
    ``(h) Transfers To Increase Indexing Adjustment.--If any person 
transfers cash, debt, or any other property to another person and the 
principal purpose of such transfer is to secure or increase an 
adjustment under subsection (a), the Secretary may disallow part or all 
of such adjustment or increase.
    ``(i) Special Rules.--For purposes of this section:
            ``(1) Treatment as separate asset.--In the case of any 
        asset, the following shall be treated as a separate asset:
                    ``(A) A substantial improvement to property.
                    ``(B) In the case of stock of a corporation, a 
                substantial contribution to capital.
                    ``(C) Any other portion of an asset to the extent 
                that separate treatment of such portion is appropriate 
                to carry out the purposes of this section.
            ``(2) Assets which are not indexed assets throughout 
        holding period.--The applicable inflation ratio shall be 
        appropriately reduced for periods during which the asset was 
        not an indexed asset.
            ``(3) Net lease property defined.--The term `net lease 
        property' means leased property where--
                    ``(A) the term of the lease (taking into account 
                options to renew) was 50 percent or more of the useful 
                life of the property, and
                    ``(B) for the period of the lease, the sum of the 
                deductions with respect to such property which are 
                allowable to the lessor solely by reason of section 162 
                (other than rents and reimbursed amounts with respect 
                to such property) is 15 percent or less of the rental 
                income produced by such property.
            ``(4) Treatment of certain distributions.--A distribution 
        with respect to stock in a corporation which is not a dividend 
        shall be treated as a disposition.
            ``(5) Section cannot increase ordinary loss.--To the extent 
        that (but for this paragraph) this section would create or 
        increase a net ordinary loss to which section 1231(a)(2) 
        applies or an ordinary loss to which any other provision of 
        this title applies, such provision shall not apply. The 
        taxpayer shall be treated as having a long-term capital loss in 
        an amount equal to the amount of the ordinary loss to which the 
        preceding sentence applies.
            ``(6) Acquisition date where there has been prior 
        application of subsection (a)(1) with respect to the 
        taxpayer.--If there has been a prior application of subsection 
        (a)(1) to an asset while such asset was held by the taxpayer, 
        the date of acquisition of such asset by the taxpayer shall be 
        treated as not earlier than the date of the most recent such 
        prior application.
            ``(7) Collapsible corporations.--The application of section 
        341(a) (relating to collapsible corporations) shall be 
        determined without regard to this section.
    ``(j) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''
    (b) Clerical Amendment.--The table of sections for part II of 
subchapter O of chapter 1 is amended by inserting after the item 
relating to section 1021 the following new item:

                              ``Sec. 1022. Indexing of certain assets 
                                        for purposes of determining 
                                        gain or loss.''
    (c) Adjustment To Apply for Purposes of Determining Earnings and 
Profits.--Subsection (f) of section 312 (relating to effect on earnings 
and profits of gain or loss and of receipt of tax-free distributions) 
is amended by adding at the end thereof the following new paragraph:
            ``(3) Effect on earnings and profits of indexed basis.--

                                ``For substitution of indexed basis for 
adjusted basis in the case of the disposition of certain assets, see 
section 1022(a)(1).''
    (d) Effective Date.--The amendments made by this section shall 
apply to dispositions after December 31, 1994, in taxable years ending 
after such date.

SEC. 4. CAPITAL LOSS DEDUCTION ALLOWED WITH RESPECT TO SALE OR EXCHANGE 
              OF PRINCIPAL RESIDENCE.

    (a) In General.--Subsection (c) of section 165 (relating to 
limitation on losses of individuals) is amended by striking ``and'' at 
the end of paragraph (2), by striking the period at the end of 
paragraph (3) and inserting ``; and'', and by adding at the end the 
following new paragraph:
            ``(4) losses arising from the sale or exchange of the 
        principal residence (within the meaning of section 1034) of the 
        taxpayer.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to sales and exchanges after December 31, 1994, in taxable years 
ending after such date.
                                 <all>
S 182 IS----2
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