II

104TH CONGRESS

1ST SESSION S. 924

To amend the Internal Revenue Code of 1986 to provide a reduction in

the capital gains tax for assets held more than 2 years, to impose

a surcharge on short-term capital gains, and for other purposes.

IN THE SENATE OF THE UNITED STATES

JUNE 15 (legislative day, JUNE 5), 1995

Mr. GREGG 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 provide

a reduction in the capital gains tax for assets held more

than 2 years, to impose a surcharge on short-term 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 ‘‘Long-Term Investment Incentive 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
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1 to, or repeal of, a section or other provision, the reference

2 shall be considered to be made to a section or other provi3 sion of the Internal Revenue Code of 1986.

4 SEC. 2. REDUCTION OF TAX ON LONG-TERM CAPITAL GAINS

5 ON ASSETS HELD MORE THAN 2 YEARS.

6 (a) IN GENERAL.—Part I of subchapter P of chapter

7 1 (relating to treatment of capital gains) is amended by

8 redesignating section 1202 as section 1203 and by insert9 ing after section 1201 the following new section:

10 ‘‘SEC. 1202. CAPITAL GAINS DEDUCTION FOR ASSETS HELD

11 BY NONCORPORATE TAXPAYERS MORE THAN

12 2 YEARS.

13 ‘‘(a) GENERAL RULE.—If a taxpayer other than a

14 corporation has a net capital gain for any taxable year,

15 there shall be allowed as a deduction an amount equal to

16 the sum of—

17 ‘‘(1) 20 percent of the qualified 4-year capital

18 gain,

19 ‘‘(2) 10 percent of the qualified 3-year capital

20 gain, plus

21 ‘‘(3) 5 percent of the qualified 2-year capital

22 gain.

23 ‘‘(b) DEFINITIONS.—For purposes of this title—
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1 ‘‘(1) QUALIFIED 4-YEAR CAPITAL GAIN.—The

2 term ‘qualified 4-year capital gain’ means the lesser

3 of—

4 ‘‘(A) the amount of long-term capital gain

5 which would be computed for the taxable year

6 if only gain from the sale or exchange of prop7 erty held by the taxpayer for more than 4 years

8 were taken into account, or

9 ‘‘(B) the net capital gain.

10 ‘‘(2) QUALIFIED 3-YEAR CAPITAL GAIN.—The

11 term ‘qualified 3-year capital gain’ means the lesser

12 of—

13 ‘‘(A) the amount of long-term capital gain

14 which would be computed for the taxable year

15 if only gain from the sale or exchange of prop16 erty held by the taxpayer for more than 3 years

17 but not more than 4 years were taken into ac18 count, or

19 ‘‘(B) the net capital gain, reduced by the

20 qualified 4-year capital gain.

21 ‘‘(3) QUALIFIED 2-YEAR CAPITAL GAIN.—The

22 term ‘qualified 2-year capital gain’ means the lesser

23 of—

24 ‘‘(A) the amount of long-term capital gain

25 which would be computed for the taxable year
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1 if only gain from the sale or exchange of prop2 erty held by the taxpayer for more than 2 years

3 but not more than 3 years were taken into ac4 count, or

5 ‘‘(B) the net capital gain, reduced by the

6 qualified 4-year capital gain and qualified 3-

7 year capital gain.

8 ‘‘(c) ESTATES AND TRUSTS.—In the case of an estate

9 or trust, the deduction under subsection (a) shall be com10 puted by excluding the portion (if any) of the gains for

11 the taxable year from sales or exchanges of capital assets

12 which, under sections 652 and 662 (relating to inclusions

13 of amounts in gross income of beneficiaries of trusts), is

14 includible by the income beneficiaries as gain derived from

15 the sale or exchange of capital assets.

16 ‘‘(d) COORDINATION WITH TREATMENT OF CAPITAL

17 GAIN UNDER LIMITATION ON INVESTMENT INTEREST.—

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

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

20 amount which the taxpayer takes into account as invest21 ment income under section 163(d)(4)(B)(iii).

22 ‘‘(e) TREATMENT OF COLLECTIBLES.—

23 ‘‘(1) IN GENERAL.—Solely for purposes of this

24 section, any gain or loss from the sale or exchange

25 of a collectible shall be treated as a short-term cap-
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1 ital gain or loss (as the case may be), without regard

2 to the period such asset was held. The preceding

3 sentence shall apply only to the extent the gain or

4 loss is taken into account in computing taxable in5 come.

6 ‘‘(2) TREATMENT OF CERTAIN SALES OF IN7 TEREST IN PARTNERSHIP, ETC.—For purposes of

8 paragraph (1), any gain from the sale or exchange

9 of an interest in a partnership, S corporation, or

10 trust which is attributable to unrealized appreciation

11 in the value of collectibles held by such entity shall

12 be treated as gain from the sale or exchange of a

13 collectible. Rules similar to the rules of section

14 751(f) shall apply for purposes of the preceding sen15 tence.

16 ‘‘(3) COLLECTIBLE.—For purposes of this sub17 section, the term ‘collectible’ means any capital asset

18 which is a collectible (as defined in section 408(m)

19 without regard to paragraph (3) thereof).

20 ‘‘(f) TRANSITIONAL RULE.—

21 ‘‘(1) IN GENERAL.—Gain may be taken into ac22 count under subsection (b)(1)(A), (b)(2)(A), or

23 (b)(3)(A) only if such gain is properly taken into ac24 count on or after July 1, 1995.
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1 ‘‘(2) SPECIAL RULES FOR PASS-THRU ENTI2 TIES.—

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

4 (1) with respect to any pass-thru entity, the de5 termination of when gains and losses are prop6 erly taken into account shall be made at the en7 tity level.

8 ‘‘(B) PASS-THRU ENTITY DEFINED.—For

9 purposes of subparagraph (A), the term ‘pass10 thru entity’ means—

11 ‘‘(i) a regulated investment company,

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

13 ‘‘(iii) an S corporation,

14 ‘‘(iv) a partnership,

15 ‘‘(v) an estate or trust, and

16 ‘‘(vi) a common trust fund.’’.

17 (b) DEDUCTION ALLOWABLE IN COMPUTING AD18 JUSTED GROSS INCOME.—Subsection (a) of section 62 is

19 amended by inserting after paragraph (15) the following

20 new paragraph:

21 ‘‘(16) LONG-TERM CAPITAL GAINS.—The de22 duction allowed by section 1202.’’.

23 (c) MAXIMUM CAPITAL GAINS RATE.—Clause (i) of

24 section 1(h)(1)(A), as amended by section 3(a), is amend25 ed by striking ‘‘the net capital gain’’ and inserting ‘‘the
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1 excess of the net capital gain over the deduction allowed

2 under section 1202’’.

3 (d) TREATMENT OF CERTAIN PASS-THRU ENTI4 TIES.—

5 (1) CAPITAL GAIN DIVIDENDS OF REGULATED

6 INVESTMENT COMPANIES.—

7 (A) Subparagraph (B) of section 852(b)(3)

8 is amended to read as follows:

9 ‘‘(B) TREATMENT OF CAPITAL GAIN DIVI10 DENDS BY SHAREHOLDERS.—A capital gain

11 dividend shall be treated by the shareholders as

12 gain from the sale or exchange of a capital

13 asset held for more than 1 year but not more

14 than 2 years; except that—

15 ‘‘(i) the portion of any such dividend

16 designated by the company as allocable to

17 qualified 4-year capital gain of the com18 pany shall be treated as gain from the sale

19 or exchange of a capital asset held for

20 more than 4 years,

21 ‘‘(ii) the portion of any such dividend

22 designated by the company as allocable to

23 qualified 3-year capital gain of the com24 pany shall be treated as gain from the sale

25 or exchange of a capital asset held for
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1 more than 3 years but not more than 4

2 years, and

3 ‘‘(iii) the portion of any such dividend

4 designated by the company as allocable to

5 qualified 2-year capital gain of the com6 pany shall be treated as gain from the sale

7 or exchange of a capital asset held for

8 more than 2 years but not more than 3

9 years.

10 Rules similar to the rules of subparagraph (C)

11 shall apply to any designation under clause (i),

12 (ii), or (iii).’’.

13 (B) Clause (i) of section 852(b)(3)(D) is

14 amended by adding at the end the following

15 new sentence: ‘‘Rules similar to the rules of

16 subparagraph (B) shall apply in determining

17 character of the amount to be so included by

18 any such shareholder.’’.

19 (2) CAPITAL GAIN DIVIDENDS OF REAL ESTATE

20 INVESTMENT TRUSTS.—Subparagraph (B) of section

21 857(b)(3) is amended to read as follows:

22 ‘‘(B) TREATMENT OF CAPITAL GAIN DIVI23 DENDS BY SHAREHOLDERS.—A capital gain

24 dividend shall be treated by the shareholders or

25 holders of beneficial interests as gain from the
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1 sale or exchange of a capital asset held for

2 more than 1 year but not more than 2 years;

3 except that—

4 ‘‘(i) the portion of any such dividend

5 designated by the real estate investment

6 trust as allocable to qualified 4-year capital

7 gain of the trust shall be treated as gain

8 from the sale or exchange of a capital

9 asset held for more than 4 years,

10 ‘‘(ii) the portion of any such dividend

11 designated by the trust as allocable to

12 qualified 3-year capital gain of the trust

13 shall be treated as gain from the sale or

14 exchange of a capital asset held for more

15 than 3 years but not more than 4 years,

16 and

17 ‘‘(iii) the portion of any such dividend

18 designated by the trust as allocable to

19 qualified 2-year capital gain of the trust

20 shall be treated as gain from the sale or

21 exchange of a capital asset held for more

22 than 2 years but not more than 3 years.

23 Rules similar to the rules of subparagraph (C)

24 shall apply to any designation under clause (i)

25 or (ii).’’.
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1 (3) COMMON TRUST FUNDS.—Subsection (c) of

2 section 584 is amended—

3 (A) by inserting ‘‘and not more than 2

4 years’’ after ‘‘1 year’’ each place it appears in

5 paragraph (2),

6 (B) by striking ‘‘and’’ at the end of para7 graph (2), and

8 (C) by redesignating paragraph (3) as

9 paragraph (6) and inserting after paragraph

10 (2) the following new paragraphs:

11 ‘‘(3) as part of its gains from sales or ex12 changes of capital assets held for more than 2 years

13 but less than 3 years, its proportionate share of the

14 gains of the common trust fund from sales or ex15 changes of capital assets held for more than 2 years

16 but not more than 3 years,

17 ‘‘(4) as part of its gains from sales or ex18 changes of capital assets held for more than 3 years

19 but less than 4 years, its proportionate share of the

20 gains of the common trust fund from sales or ex21 changes of capital assets held for more than 3 years

22 but less than 4 years,

23 ‘‘(5) as part of its gains from sales or ex24 changes of capital assets held more than 4 years, its

25 proportionate share of the gains of the common
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1 trust fund from sales or exchanges of capital assets

2 held for more than 4 years, and’’.

3 (e) TECHNICAL AND CONFORMING CHANGES.—

4 (1) Subparagraph (B) of section 170(e)(1) is

5 amended by inserting ‘‘(or, in the case of a taxpayer

6 other than a corporation, the percentage of such

7 gain equal to 100 percent minus the percentage ap8 plicable to such gain under section 1202(a))’’ after

9 ‘‘the amount of gain’’.

10 (2) Subparagraph (B) of section 172(d)(2) is

11 amended to read as follows:

12 ‘‘(B) the deduction under section 1202 and

13 the exclusion under section 1203 shall not be

14 allowed.’’

15 (3)(A) Section 220 (relating to cross reference)

16 is amended to read as follows:

17 ‘‘SEC. 220. CROSS REFERENCES.

18 ‘‘(1) For deduction for net capital gains in the case

19 of a taxpayer other than a corporation, see section 1202.

20 ‘‘(2) For deductions in respect of a decedent, see sec21 tion 691.’’.

22 (B) The table of sections for part VII of sub23 chapter B of chapter 1 is amended by striking ‘‘ref24 erence’’ in the item relating to section 220 and in25 serting ‘‘references’’.
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1 (4) The last sentence of section 453A(c)(3) is

2 amended by striking all that follows ‘‘long-term cap3 ital gain,’’ and inserting ‘‘the maximum rate on net

4 capital gain under section 1(h) or 1201 or the de5 duction under section 1202 (whichever is appro6 priate) shall be taken into account.’’

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

8 to read as follows:

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

10 amount otherwise allowable as a deduction under

11 this subsection consists of gain from the sale or ex12 change of capital assets held for more than 1 year,

13 proper adjustment shall be made for any deduction

14 allowable to the estate or trust under section 1202

15 or any exclusion allowable to the estate or trust

16 under section 1203(a). In the case of a trust, the de17 duction allowed by this subsection shall be subject to

18 section 681 (relating to unrelated business in19 come).’’.

20 (6) The last sentence of paragraph (3) of sec21 tion 643(a) is amended to read as follows: ‘‘The de22 duction under section 1202 and the exclusion under

23 section 1203 shall not be taken into account.’’

24 (7) Subparagraph (C) of section 643(a)(6) is

25 amended by inserting ‘‘(i)’’ before ‘‘there shall’’ and
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1 by inserting before the period ‘‘, and (ii) the deduc2 tion under section 1202 (relating to capital gains de3 duction) shall not be taken into account’’.

4 (8) Paragraph (4) of section 691(c) is amended

5 by striking ‘‘sections 1(h), 1201, and 1211’’ and in6 serting ‘‘sections 1(h), 1201, 1202, and 1211’’.

7 (9) The second sentence of section 871(a)(2) is

8 amended by inserting ‘‘or 1203’’ after ‘‘1202’’.

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

10 by striking ‘‘1202’’ and inserting ‘‘1203’’.

11 (11) Paragraph (1) of section 1402(i) is amend12 ed by inserting ‘‘, and the deduction provided by sec13 tion 1202 shall not apply’’ before the period at the

14 end thereof.

15 (f) CLERICAL AMENDMENT.—The table of sections

16 for part I of subchapter P of chapter 1 is amended by

17 inserting after the item relating to section 1201 the follow18 ing new item:

‘‘Sec. 1202. Capital gains deduction for assets held by

noncorporate taxpayers more than 2 years.’’

19 (g) 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 June 30, 1995.
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1 (2) CONTRIBUTIONS.—The amendment made

2 by subsection (e)(1) shall apply to contributions on

3 or after July 1, 1995.

4 SEC. 3. SURCHARGE ON CAPITAL GAINS ON ASSETS HELD

5 1 YEAR OR LESS.

6 (a) IN GENERAL.—Subsection (h) of section 1 (relat7 ing to maximum capital gains rate) is amended to read

8 as follows:

9 ‘‘(h) MAXIMUM CAPITAL GAINS TAXES.—

10 ‘‘(1) IN GENERAL.—If a taxpayer has a net

11 capital gain for any taxable year, then the tax im12 posed by this section shall not exceed the sum of—

13 ‘‘(A) a tax computed at the rates and in

14 the same manner as if this subsection had not

15 been enacted on the greater of—

16 ‘‘(i) taxable income reduced by the

17 amount of net capital gain, or

18 ‘‘(ii) the amount of taxable income

19 taxed at a rate below 28 percent, plus

20 ‘‘(B) a tax of 28 percent of the amount of

21 taxable income in excess of the amount deter22 mined under subparagraph (A).

23 For purposes of the preceding sentence, the net cap24 ital gain for any taxable year shall be reduced (but

25 not below zero) by the amount which the taxpayer
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1 elects to take into account as investment income for

2 the taxable year under section 163(d)(4)(B)(iii).

3 ‘‘(2) SURCHARGE ON NET SHORT-TERM CAP4 ITAL GAIN.—

5 ‘‘(A) IN GENERAL.—If a taxpayer has a

6 net short-term capital gain for any taxable year,

7 the tax imposed by this section (without regard

8 to this paragraph) shall be increased by an

9 amount equal to the sum of—

10 ‘‘(i) 5.6 percent of the taxpayer’s 6-

11 month short-term capital gain, plus

12 ‘‘(ii) 2.8 percent of the taxpayer’s 12-

13 month short-term capital gain.

14 ‘‘(B) MAXIMUM RATE.—

15 ‘‘(i) IN GENERAL.—Subparagraph (A)

16 shall not be applied to the extent it would

17 result in—

18 ‘‘(I) 6-month short-term capital

19 gain being taxed at a rate greater

20 than 33.6 percent, or

21 ‘‘(II) 12-month short-term cap22 ital gain being taxed at a rate greater

23 than 30.8 percent.

24 ‘‘(ii) ORDERING RULE.—For purposes

25 of clause (i), the rate or rates at which 6-
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1 month or 12-month short-term capital gain

2 is being taxed shall be determined as if—

3 ‘‘(I) such gain were taxed after

4 all other taxable income, and

5 ‘‘(II) 12-month short-term cap6 ital gain were taxed after 6-month

7 short-term capital gain.

8 ‘‘(C) DEFINITIONS.—For purposes of this

9 paragraph—

10 ‘‘(i) 6-MONTH SHORT-TERM CAPITAL

11 GAIN.—The term ‘6-month short-term cap12 ital gain’ means the lesser of—

13 ‘‘(I) the amount of short-term

14 capital gain which would be computed

15 for the taxable year if only gain from

16 the sale or exchange of property held

17 by the taxpayer for 6 months or less

18 were taken into account, or

19 ‘‘(II) net short-term capital gain.

20 ‘‘(ii) 12-MONTH SHORT-TERM CAPITAL

21 GAIN.—The term ‘12-month short-term

22 capital gain’ means the lesser of—

23 ‘‘(I) the amount of short-term

24 capital gain which would be computed

25 for the taxable year if only gain from
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1 the sale or exchange of property held

2 by the taxpayer for more than 6

3 months but not more than 12 months

4 were taken into account, or

5 ‘‘(II) net short-term capital gain,

6 reduced by 6-month short-term capital

7 gain.

8 For purposes of clause (i)(I) or (ii)(I), gain

9 may be taken into account only if such gain is

10 properly taken into account on or after July 1,

11 1995.’’.

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

13 this section shall apply to taxable years ending after June

14 30, 1995.

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