II

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.

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 ‘‘Capital Formation and Job Creation Act of 1995’’.

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. 50 PERCENT CAPITAL GAINS DEDUCTION.

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

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

6 amended to read as follows:

7 ‘‘PART I—TREATMENT OF CAPITAL GAINS

‘‘Sec. 1201. Capital gains deduction.

8 ‘‘SEC. 1201. CAPITAL GAINS DEDUCTION.

9 ‘‘(a) GENERAL RULE.—If for any taxable year a tax10 payer has a net capital gain, 50 percent of such gain shall

11 be a deduction from gross income.

12 ‘‘(b) ESTATES AND TRUSTS.—In the case of an es13 tate or trust, the deduction shall be computed by excluding

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

15 sales or exchanges of capital assets which, under sections

16 652 and 662 (relating to inclusions of amounts in gross

17 income of beneficiaries of trusts), is includible by the in18 come beneficiaries as gain derived from the sale or ex19 change of capital assets.

20 ‘‘(c) COORDINATION WITH TREATMENT OF CAPITAL

21 GAIN UNDER LIMITATION ON INVESTMENT INTEREST.—

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

23 taxable year shall be reduced (but not below zero) by the
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1 amount which the taxpayer takes into account as invest2 ment income under section 163(d)(4)(B)(iii).

3 ‘‘(d) TRANSITIONAL RULE.—

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

5 year which includes January 1, 1995—

6 ‘‘(A) the amount taken into account as the

7 net capital gain under subsection (a) shall not

8 exceed the net capital gain determined by only

9 taking into account gains and losses properly

10 taken into account for the portion of the tax11 able year on or after January 1, 1995, and

12 ‘‘(B) if the net capital gain for such year

13 exceeds the amount taken into account under

14 subsection (a), the rate of tax imposed by sec15 tion 1 on such excess shall not exceed 28 per16 cent.

17 ‘‘(2) SPECIAL RULES FOR PASS-THRU ENTI18 TIES.—

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

20 (1) with respect to any pass-thru entity, the de21 termination of when gains and losses are prop22 erly taken into account shall be made at the en23 tity level.
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1 ‘‘(B) PASS-THRU ENTITY DEFINED.—For

2 purposes of subparagraph (A), the term ‘pass3 thru entity’ means—

4 ‘‘(i) a regulated investment company,

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

6 ‘‘(iii) an S corporation,

7 ‘‘(iv) a partnership,

8 ‘‘(v) an estate or trust, and

9 ‘‘(vi) a common trust fund.’’

10 (b) DEDUCTION ALLOWABLE IN COMPUTING AD11 JUSTED GROSS INCOME.—Subsection (a) of section 62 is

12 amended by inserting after paragraph (15) the following

13 new paragraph:

14 ‘‘(16) LONG-TERM CAPITAL GAINS.—The de15 duction allowed by section 1201.’’

16 (c) TECHNICAL AND CONFORMING CHANGES.—

17 (1) Section 13113 of the Revenue Reconcili18 ation Act of 1993 (relating to 50-percent exclusion

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

20 amendments made by such section, are hereby re21 pealed; and the Internal Revenue Code of 1986 shall

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

23 never been enacted.

24 (2) Section 1 is amended by striking subsection

25 (h).
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1 (3) Paragraph (1) of section 170(e) is amended

2 by striking ‘‘the amount of gain’’ in the material fol3 lowing subparagraph (B)(ii) and inserting ‘‘50 per4 cent of the amount of gain’’.

5 (4)(A) Paragraph (2) of section 172(d) is

6 amended to read as follows:

7 ‘‘(2) CAPITAL GAINS AND LOSSES.—

8 ‘‘(A) LOSSES OF TAXPAYERS OTHER THAN

9 CORPORATIONS.—In the case of a taxpayer

10 other than a corporation, the amount deductible

11 on account of losses from sales or exchanges of

12 capital assets shall not exceed the amount in13 cludible on account of gains from sales or ex14 changes of capital assets.

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

16 The deduction under section 1201 shall not be

17 allowed.’’

18 (B) Subparagraph (B) of section 172(d)(4) is

19 amended by striking ‘‘paragraphs (1) and (3)’’ and

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

21 (5) Paragraph (4) of section 642(c) is amended

22 to read as follows:

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

24 amount otherwise allowable as a deduction under

25 this subsection consists of gain from the sale or ex-
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1 change of capital assets held for more than 1 year,

2 proper adjustment shall be made for any deduction

3 allowable to the estate or trust under section 1201

4 (relating to deduction for excess of capital gains over

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

6 allowed by this subsection shall be subject to section

7 681 (relating to unrelated business income).’’

8 (6) Paragraph (3) of section 643(a) is amended

9 by adding at the end the following new sentence:

10 ‘‘The deduction under section 1201 (relating to de11 duction of excess of capital gains over capital losses)

12 shall not be taken into account.’’

13 (7) Paragraph (4) of section 691(c) is amended

14 by striking ‘‘sections 1(h), 1201, and 1211’’ and in15 serting ‘‘sections 1201 and 1211’’.

16 (8) The second sentence of section 871(a)(2) is

17 amended by inserting ‘‘such gains and losses shall be

18 determined without regard to section 1201 (relating

19 to deduction for capital gains) and’’ after ‘‘except

20 that’’.

21 (9) Subsection (d) of section 1044 is amended

22 by striking the last sentence.

23 (10)(A) Paragraph (2) of section 1211(b) is

24 amended to read as follows:

25 ‘‘(2) the sum of—
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1 ‘‘(A) the excess of the net short-term cap2 ital loss over the net long-term capital gain, and

3 ‘‘(B) one-half of the excess of the net long4 term capital loss over the net short-term capital

5 gain.’’

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

7 1212(b) as precedes subparagraph (B) thereof is

8 amended to read as follows:

9 ‘‘(2) SPECIAL RULES.—

10 ‘‘(A) ADJUSTMENTS.—

11 ‘‘(i) For purposes of determining the

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

13 there shall be treated as short-term capital

14 gain in the taxable year an amount equal

15 to the lesser of—

16 ‘‘(I) the amount allowed for the

17 taxable year under paragraph (1) or

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

19 ‘‘(II) the adjusted taxable income

20 for such taxable year.

21 ‘‘(ii) For purposes of determining the

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

23 there shall be treated as short-term capital

24 gain in the taxable year an amount equal

25 to the sum of—
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1 ‘‘(I) the amount allowed for the

2 taxable year under paragraph (1) or

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

4 taxable income for such taxable year,

5 whichever is the least, plus

6 ‘‘(II) the excess of the amount

7 described in subclause (I) over the net

8 short-term capital loss (determined

9 without regard to this subsection) for

10 such year.’’

11 (11) Paragraph (1) of section 1402(i) is amend12 ed by inserting ‘‘, and the deduction provided by sec13 tion 1201 shall not apply’’ before the period at the

14 end thereof.

15 (12) Section 12 is amended by striking para16 graph (4) and redesignating the following para17 graphs accordingly.

18 (13) Paragraph (2) of section 527(b) is hereby

19 repealed.

20 (14) Subparagraph (D) of section 593(b)(2) is

21 amended by adding ‘‘and’’ at the end of clause (iii),

22 by striking ‘‘, and’’ at the end of clause (iv) and in23 serting a period, and by striking clause (v).

24 (15) Paragraph (2) of section 801(a) is hereby

25 repealed.
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1 (16) Subsection (c) of section 831 is amended

2 by striking paragraph (1) and redesignating the fol3 lowing paragraphs accordingly.

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

5 is amended by striking ‘‘, determined as provided in

6 section 1201(a), on’’ and inserting ‘‘of 17.5 percent

7 of’’.

8 (B) Clause (iii) of section 852(b)(3)(D) is

9 amended—

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

11 ‘‘82.5 percent’’, and

12 (ii) by striking ‘‘section 1201(a)’’ and in13 serting ‘‘subparagraph (A)’’.

14 (18) Clause (ii) of section 857(b)(3)(A) is

15 amended by striking ‘‘determined at the rate pro16 vided in section 1201(a) on’’ and inserting ‘‘of 17.5

17 percent of’’.

18 (19) Paragraph (1) of section 882(a) is amend19 ed by striking ‘‘section 11, 55, 59A, or 1201(a)’’

20 and inserting ‘‘section 11, 55, or 59A’’.

21 (20) Subsection (b) of section 904 is amended

22 by striking paragraphs (2)(B), (3)(B), (3)(D), and

23 (3)(E).

24 (21) Subsection (b) of section 1374 is amended

25 by striking paragraph (4).
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1 (22) Subsection (b) of section 1381 is amended

2 by striking ‘‘or 1201’’.

3 (23) Subsection (e) of section 1445 is amend4 ed—

5 (A) in paragraph (1) by striking ‘‘35 per6 cent (or, to the extent provided in regulations,

7 28 percent)’’ and inserting ‘‘17.5 percent (or, to

8 the extent provided in regulations, 19.8 per9 cent)’’, and

10 (B) in paragraph (2) by striking ‘‘35 per11 cent’’ and inserting ‘‘17.5 percent’’.

12 (24) Clause (i) of section 6425(c)(1)(A) is

13 amended by striking ‘‘or 1201(a)’’.

14 (25) Clause (i) of section 6655(g)(1)(A) is

15 amended by striking ‘‘or 1201(a)’’.

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

17 7518(g)(6)(A) is amended—

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

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

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

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

22 (B) The second sentence of section

23 607(h)(6)(A) of the Merchant Marine Act, 1936 is

24 amended—
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1 (i) by striking ‘‘during a taxable year to

2 which section 1(h) or 1201(a) of such Code ap3 plies’’, and

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

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

6 (d) EFFECTIVE DATE.—

7 (1) IN GENERAL.—Except as otherwise pro8 vided in this subsection, the amendments made by

9 this section shall apply to taxable years ending after

10 December 31, 1994.

11 (2) CONTRIBUTIONS.—The amendment made

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

13 on or after January 1, 1995.

14 (3) WITHHOLDING.—The amendment made by

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

16 after the date of the enactment of this Act.

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

18 DETERMINING GAIN OR LOSS.

19 (a) IN GENERAL.—Part II of subchapter O of chap20 ter 1 (relating to basis rules of general application) is

21 amended by inserting after section 1021 the following new

22 section:

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

24 OF DETERMINING GAIN OR LOSS.

25 ‘‘(a) GENERAL RULE.—
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1 ‘‘(1) INDEXED BASIS SUBSTITUTED FOR AD2 JUSTED BASIS.—Except as otherwise provided in

3 this subsection, if an indexed asset which has been

4 held for more than 1 year is sold or otherwise dis5 posed of, for purposes of this title the indexed basis

6 of the asset shall be substituted for its adjusted

7 basis.

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

9 The deduction for depreciation, depletion, and amor10 tization shall be determined without regard to the

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

12 other person.

13 ‘‘(b) INDEXED ASSET.—

14 ‘‘(1) IN GENERAL.—For purposes of this sec15 tion, the term ‘indexed asset’ means—

16 ‘‘(A) stock in a corporation, and

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

18 therein),

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

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

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

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

23 does not include—
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1 ‘‘(A) CREDITOR’S INTEREST.—Any interest

2 in property which is in the nature of a credi3 tor’s interest.

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

5 to acquire an interest in property.

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

7 of a lessor, net lease property (within the mean8 ing of subsection (i)(3)).

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

10 which is fixed and preferred as to dividends and

11 does not participate in corporate growth to any

12 significant extent.

13 ‘‘(E) STOCK IN FOREIGN CORPORA14 TIONS.—Stock in a foreign corporation.

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

16 in an S corporation.

17 ‘‘(3) EXCEPTION FOR STOCK IN FOREIGN COR18 PORATION WHICH IS REGULARLY TRADED ON NA19 TIONAL OR REGIONAL EXCHANGE.—Paragraph

20 (2)(E) shall not apply to stock in a foreign corpora21 tion the stock of which is listed on the New York

22 Stock Exchange, the American Stock Exchange, the

23 national market system operated by the National As24 sociation of Securities Dealers, or any domestic re-
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1 gional exchange for which quotations are published

2 on a regular basis other than—

3 ‘‘(A) stock of a foreign investment com4 pany (within the meaning of section 1246(b)),

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

6 company (as defined in section 1296), and

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

8 a United States person who meets the require9 ments of section 1248(a)(2).

10 ‘‘(4) TREATMENT OF AMERICAN DEPOSITORY

11 RECEIPTS.—For purposes of this section, an Amer12 ican depository receipt for stock in a foreign cor13 poration shall be treated as stock in such corpora14 tion.

15 ‘‘(c) INDEXED BASIS.—For purposes of this sec16 tion—

17 ‘‘(1) GENERAL RULE.—The indexed basis for

18 any asset is—

19 ‘‘(A) the adjusted basis of the asset, multi20 plied by

21 ‘‘(B) the applicable inflation ratio.

22 ‘‘(2) APPLICABLE INFLATION RATIO.—The ap23 plicable inflation ratio for any asset is the percent24 age arrived at by dividing—
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1 ‘‘(A) the gross domestic product deflator

2 for the calendar quarter in which the disposi3 tion takes place, by

4 ‘‘(B) the gross domestic product deflator

5 for the calendar quarter in which the asset was

6 acquired by the taxpayer (or, if later, the cal7 endar quarter ending on December 31, 1994).

8 The applicable inflation ratio shall never be less than

9 1. The applicable inflation ratio for any asset shall

be rounded to the nearest 1 10 ⁄1000.

11 ‘‘(3) GROSS DOMESTIC PRODUCT DEFLATOR.—

12 The gross domestic product deflator for any cal13 endar quarter is the implicit price deflator for the

14 gross domestic product for such quarter (as shown

15 in the first revision thereof).

16 ‘‘(d) SHORT SALES.—

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

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

19 of 1 year, for purposes of this title, the amount real20 ized shall be an amount equal to the amount realized

21 (determined without regard to this paragraph) mul22 tiplied by the applicable inflation ratio. In applying

23 subsection (c)(2) for purposes of the preceding sen24 tence, the date on which the property is sold short

25 shall be treated as the date of acquisition and the
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1 closing date for the sale shall be treated as the date

2 of disposition.

3 ‘‘(2) SHORT SALE OF SUBSTANTIALLY IDEN4 TICAL PROPERTY.—If the taxpayer or the taxpayer’s

5 spouse sells short property substantially identical to

6 an asset held by the taxpayer, the asset held by the

7 taxpayer and the substantially identical property

8 shall not be treated as indexed assets for the short

9 sale period.

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

11 this subsection, the short sale period begins on the

12 day after property is sold and ends on the closing

13 date for the sale.

14 ‘‘(e) TREATMENT OF REGULATED INVESTMENT

15 COMPANIES AND REAL ESTATE INVESTMENT TRUSTS.—

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

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

18 provided in this paragraph, the adjustment

19 under subsection (a) shall be allowed to any

20 qualified investment entity (including for pur21 poses of determining the earnings and profits of

22 such entity).

23 ‘‘(B) EXCEPTION FOR QUALIFICATION

24 PURPOSES.—This section shall not apply for

25 purposes of sections 851(b) and 856(c).
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1 ‘‘(2) ADJUSTMENTS TO INTERESTS HELD IN

2 ENTITY.—

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

4 investment entity shall be an indexed asset for

5 any calendar month in the same ratio as the

6 fair market value of the assets held by such en7 tity at the close of such month which are in8 dexed assets bears to the fair market value of

9 all assets of such entity at the close of such

10 month.

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

12 the ratio for any calendar month determined

13 under subparagraph (A) would (but for this

14 subparagraph) be 90 percent or more, such

15 ratio for such month shall be 100 percent.

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

17 the ratio for any calendar month determined

18 under subparagraph (A) would (but for this

19 subparagraph) be 10 percent or less, such ratio

20 for such month shall be zero.

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

22 REAL ESTATE INVESTMENT TRUSTS.—Nothing

23 in this paragraph shall require a real estate in24 vestment trust to value its assets more fre25 quently than once each 36 months (except
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1 where such trust ceases to exist). The ratio

2 under subparagraph (A) for any calendar

3 month for which there is no valuation shall be

4 the trustee’s good faith judgment as to such

5 valuation.

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

7 purposes of this subsection, the term ‘qualified in8 vestment entity’ means—

9 ‘‘(A) a regulated investment company

10 (within the meaning of section 851), and

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

12 the meaning of section 856).

13 ‘‘(f) OTHER PASS-THRU ENTITIES.—

14 ‘‘(1) PARTNERSHIPS.—In the case of a partner15 ship, the adjustment made under subsection (a) at

16 the partnership level shall be passed through to the

17 partners.

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

19 corporation, the adjustment made under subsection

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

21 the shareholders.

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

23 common trust fund, the adjustment made under sub24 section (a) at the trust level shall be passed through

25 to the participants.
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1 ‘‘(g) DISPOSITIONS BETWEEN RELATED PERSONS.—

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

3 to any sale or other disposition of property between

4 related persons except to the extent that the basis

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

6 substituted basis.

7 ‘‘(2) RELATED PERSONS DEFINED.—For pur8 poses of this section, the term ‘related persons’

9 means—

10 ‘‘(A) persons bearing a relationship set

11 forth in section 267(b), and

12 ‘‘(B) persons treated as single employer

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

14 ‘‘(h) TRANSFERS TO INCREASE INDEXING ADJUST15 MENT.—If any person transfers cash, debt, or any other

16 property to another person and the principal purpose of

17 such transfer is to secure or increase an adjustment under

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

19 such adjustment or increase.

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

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

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

23 a separate asset:

24 ‘‘(A) A substantial improvement to prop25 erty.
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1 ‘‘(B) In the case of stock of a corporation,

2 a substantial contribution to capital.

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

4 extent that separate treatment of such portion

5 is appropriate to carry out the purposes of this

6 section.

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

8 THROUGHOUT HOLDING PERIOD.—The applicable in9 flation ratio shall be appropriately reduced for peri10 ods during which the asset was not an indexed asset.

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

12 term ‘net lease property’ means leased property

13 where—

14 ‘‘(A) the term of the lease (taking into ac15 count options to renew) was 50 percent or more

16 of the useful life of the property, and

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

18 of the deductions with respect to such property

19 which are allowable to the lessor solely by rea20 son of section 162 (other than rents and reim21 bursed amounts with respect to such property)

22 is 15 percent or less of the rental income pro23 duced by such property.

24 ‘‘(4) TREATMENT OF CERTAIN DISTRIBU25 TIONS.—A distribution with respect to stock in a
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1 corporation which is not a dividend shall be treated

2 as a disposition.

3 ‘‘(5) SECTION CANNOT INCREASE ORDINARY

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

5 this section would create or increase a net ordinary

6 loss to which section 1231(a)(2) applies or an ordi7 nary loss to which any other provision of this title

8 applies, such provision shall not apply. The taxpayer

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

10 an amount equal to the amount of the ordinary loss

11 to which the preceding sentence applies.

12 ‘‘(6) ACQUISITION DATE WHERE THERE HAS

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

14 WITH RESPECT TO THE TAXPAYER.—If there has

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

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

17 date of acquisition of such asset by the taxpayer

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

19 most recent such prior application.

20 ‘‘(7) COLLAPSIBLE CORPORATIONS.—The appli21 cation of section 341(a) (relating to collapsible cor22 porations) shall be determined without regard to this

23 section.
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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 is amended by

6 inserting after the item relating to section 1021 the follow7 ing 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 (relating to effect on earnings and profits of

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

12 amended by adding at the end thereof the following new

13 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.
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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 (re5 lating to limitation on losses of individuals) is amended

6 by striking ‘‘and’’ at the end of paragraph (2), by striking

7 the period at the end of paragraph (3) and inserting ‘‘;

8 and’’, and by adding at the end the following new para9 graph:

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 after De15 cember 31, 1994, in taxable years ending after such date.

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